With increasing integration of world economies, international tax competition has taken greater importance in the formation of domestic and international policy. This conference will evaluate the evidence regarding international tax competition and the implications for taxpayers and governments. Panelists will consider the latest developments in tax rate-setting among nations, particularly the extent to which governments may have shifted their reliance on different types of taxes in response to competitive international pressures. New evidence on the responsiveness of foreign direct investment to international tax rate differences will be reviewed. Recent multilateral tax initiatives, including those adopted by the European Union and others advanced by the Organization for Economic Cooperation and Development, will be discussed in the light of this evidence and analysis.
|Registration and Continental Breakfast|
|Opening remarks:||John Samuels, General Electric|
International Tax Competition: What Are the Issues?
Barbara Angus, U.S. Treasury Department
R. Glenn Hubbard, AEI and Columbia University
Michael Keen, International Monetary Fund
James Hines, University of Michigan
What Has Been the Tax Competition Experience of the
Last Twenty Years?
|Speaker:||Rachel Griffith, Institute for Fiscal Studies|
and University College, London
|10:30||Commentary:||Eric M. Engen, AEI|
|11:15||How Do Taxpayers Respond to Competitive Tax Policies?|
Would Things Look Different in the Absence of Tax Competition?
|Rosanne Altshuler, Rutgers University|
|Harry Grubert, U.S. Treasury Department|
|11:45||Commentary:||Mihir Desai, Harvard University|
|Keynote address:||R. Glenn Hubbard, AEI and Columbia University|
|1:15||Coordinating Corporation Taxes in the European Union|
|Speaker:||Sijbren Cnossen, Erasmus University|
|2:00||Appropriate Responses to International Tax Competition|
|Panelists:||Austan Goolsbee, University of Chicago|
|Joseph Guttentag, former senior adviser, |
U.S. Treasury Department
|Dan Mitchell, Heritage Foundation|
|Stephen Shay, Ropes & Gray|
|Moderator:||Michael Graetz, Yale Law School|
Competition versus Cooperation in Global Tax Policy
With increasing integration of world economies, international tax competition has taken greater importance in the formation of domestic and international policy. At a December 9 AEI conference, experts evaluated the evidence regarding international tax competition and the implications for taxpayers and governments. Panelists considered the latest developments in tax-rate setting among nations, particularly the extent to which governments may have shifted their reliance on different types of taxes in response to competitive international pressures. New evidence on the responsiveness of foreign direct investment to international tax rate differences was reviewed. Recent multilateral tax initiatives, including those adopted by the European Union and others advanced by the Organization for Economic Cooperation and Development, were discussed in the light of this evidence and analysis.
The International Tax Policy Forum (ITPF) is a multinational group that focuses on the research of international tax policy. The ITPF is not a lobbying group with a legislative agenda, but rather a group founded by fourteen companies fourteen years ago. The main goal of ITPF is to remove the two major barriers that prevent open and educated discussion about international tax policy. The first barrier is the sheer complexity of the rules; to solve this, the ITPF has an educational arm. The second major barrier is the lack of academic underpinnings to support different theories and to provide "evidence" of certain trends. In response to the lack of economic research, ITPF has created a research arm that is completely independent from the scholars, who are then permitted total freedom to choose their projects and encouraged to let the results speak for themselves.
International Tax Competition: What are the Issues?
R. Glenn Hubbard
AEI and Columbia University
The three major issues of international tax competition all involve the global economy and the growing power of multinational companies. Multinational companies have played a large role in the global boom due to their effective allocation of goods and flexibility, while tax codes within each country have not gained the same flexibility. The issues are whether there is tax competition, the relation between empirical evidence and our current underlying economic models for companies and their relation to tax policy, and the degree to which we should care.
As to whether there is tax competition, the answer is yes for an economic and political view. The issue here is to determine whether tax competition is occurring or simply more fluid capital flow.
The second issue is to compare our empirical data with economic models and see how they relate to tax codes and the multinational corporations. This may be an issue because multinational corporations do not usually fit the "successful" business model, instead relying on things like brand names and products with history.
Lastly, why we should care? We need to see if models like the T-boot make sense, and if so, whether such models can offer policy guidance.
The trend of differing tax patterns of tax competition between developed and developing nations needs to be examined. Since 1990, the decline of the Corporate Income Tax (CIT) in developing countries has been much more rapid than the decline in developed countries, and the debate is whether the trend should be seen as a positive or a negative. On the positive side, developing countries could be moving towards a more efficient tax system through a zero source-based METR (Marginal Effective Tax Rate) that is efficient in small economies open to capital. On the negative side, we have to weigh the value added to the country from higher tax revenues, weighing the trade-off between wasteful corrupt governments in developing nations and the fact that the portion that does get spent on public spending will increase. On the whole, tax competition is much more important for developing countries, rather than developed countries, to attract companies.
When talking about international trade, globalization and competition are usually used in opposition to international cooperation. While the term of international cooperation brings up the connotation of "under the table deals" with artificially high prices, in reality, international cooperation and globalization need each other to minimize world trade barriers. In a perfect world without trade barriers, the most successful companies would be the fastest, smartest and most efficient companies. But with different resident and source countries, and different multinational corporations, the biggest obstacles to trade are resident-imposed taxes that greatly add costs to companies and limit their production options. With cooperation, bilateral tax treaties can eliminate tax barriers and alleviate uncertainties for companies and investors. With the bilateral use of agreements, the biggest deterrents of excessive, double, or discriminatory taxes can be eliminated.
What Has Been the Tax Competition Experience of the Last Twenty Years?
Institute for Fiscal Studies and University College, London
Globalization along with capital mobility has lead to the concerns that this will produce a "race to the bottom" and zero rates of tax. But by examining the tax rates of OECD countries over the past two decades, this assumption is proven to be incorrect. To measure the tax rates, statutory tax rates, the tax base, effective tax rates, and tax revenue are all examined. For OECD countries the overall average statutory tax rate (weighted by GDP) has declined steadily by a small rate per year and almost evens out in the latter part of the 1990s into the 2000s. The tax base affects the amount of taxes paid, and can vary through allowances in the system, financial structure, rate profitability and the size of incorporated sector. Here, the OECD average of the value of investment allowances (weighted by GDP) has declined sharply at 1985, but has remained constant past 1988.
The effective tax rates combine information on the tax rate and tax base, giving a forward-looking measure that indicates the impact of the tax on returns (in the future) of a current investment. This indicates the impact of tax on a firm's incentives to invest and the location of the investment. The effective tax rates have moved very differently depending on whether the project earns the minimum required rate of return (breaks even), or is highly profitable. For those projects that "break even", the effective tax rate (weighted by GDP) has remained constant at around 28 percent for the last two decades. The highly profitable (20 percent over minimum) mobile investment projects are more common, and effective tax rates have declined from around 48 percent to 34 percent in the past two decades.
The tax revenue is a more sensitive indicator of moving tax rates for corporations since it can reflect all the complexities of the tax systems. Though more sensitive, it is backward looking because it can only reflect the investment choices made in the past and the impact of past tax regimes. Tax revenue as an indicator is affected by the profitability and size of the corporate sector. Total taxes as a share of GDP have risen in step with the cyclical pattern. This stands despite the fact that as a percentage of total tax revenue, the percentage from corporations has fallen from 14 percent to 9 percent in 2000.
So while there is no evidence of a race to the bottom, there has been some downward movement in tax rates, which has been largely offset by other changes (reduction of capital allowances, for example).
Eric M. Engen
The most important thing to focus on is the decline in statutory corporate income tax rates over the past two decades. Though a total decrease has resulted, the experiences vary a great deal.
Would Things Look Different in the Absence of Tax Competition?
U.S. Treasury Department
The focus is on the response between taxpayers (multinational corporations) to competitive tax policies, and vice versa. In terms of background, the average effective tax rate (AETR) faced by U.S. MNCs on income earned abroad has fallen. Due to this, the location decisions of U.S. MNCs have become more sensitive to differences in host country effective tax rates. There is further evidence that countries do engage in tax competition to attract certain types of companies.
The decreases in country AETR from 1992 to 1998 can be attributed to a variety of factors. With the results suggesting there is tax competition, it supports the idea that countries losing market share relative to neighbors will cut their effective tax rates the most. Those countries (usually small) with the most elastic supply of capital cut their rates more than the average. Lastly, countries are responding to pressure from their competitors in the market for capital rather than increases in capital mobility.
Preliminary conclusions demonstrate that the evolution of countries' effective tax rates between 1992 and 1998 are driven by tax competition. But countries may not need to use tax competition, because the movement of AETRs between 1998 and 2000 suggest it can be driven by company responses. Before the globalization boom, countries were already rewarding more mobile companies and those seen to be more beneficial to the local economy. Lastly, U.S. manufacturers have become more sensitive to differences in host- country taxes, and low-tax countries have become more frequent destinations for U.S.- produced intangible assets.
R. Glenn Hubbard
AEI and Columbia University
Why don't multinational corporations move to Des Moines? Over the past decade, the advantages of operating a corporation in the United States has been decreasing while its disadvantages have remained the same. The result of the diminishing advantages and stagnant disadvantages in U.S. tax laws have made the multinational corporations move elsewhere, and this movement abroad has caused many to question the positive domestic and global effects of multi-national corporations.
While the United States still has the advantages of region and flexibility (from free markets), it has the strong disadvantage of an outdated and ineffective corporate tax regulation system. The high U.S. corporate tax rates weaken U.S. competitiveness with high corporate tax rates and double tax rules on equity capital. While our marginal corporation tax rates have steadily increased, the EU has done the same but in the opposite direction. Despite popular belief, the majority of plants for multinational corporations that have relocated from the United States have gone not to developing countries but to other high-income countries with less tax hurdles.
With multinationals looking elsewhere, people have begun to believe that multinational corporations are bad for the U.S. economy and U.S. job creation. But what is not commonly known is that multinational corporations, both on domestic and foreign soil, improve the world and U.S. domestic economy. So if our corporation tax policies can be reformed, why not Des Moines?
Coordinating Corporation Taxes in the European Union
The corporation tax is examined within the different countries in the EU. Some of the many discrepancies include different statutory corporate tax (CT) rates, distributions, retentions, and differences in tax base definitions. The proposed EU commission proposals try to target remedial measures to promote cross-border business cooperation such as a parent-subsidiary, merger, and an interest/royalty directive. Further more general proposals include home-state taxation, common-base taxation, and formula apportionment.
When choosing a CT rate, there are economic and political considerations. Some of the economic considerations are making the CT low enough to mitigate distortions but high enough for revenue purposes and low enough to attract investment. For political considerations, the CT must have low compliance and administrative costs, be reversible, and satisfy subsidiary criterion. With these considerations as a starting point, the EU can hopefully move forward in unifying their CT.
Appropriate Responses to International Tax Competition
University of Chicago
Before discussing any details, the difference between economic models and reality must be focused on. In the case of tax policy and the EU, this is even more apparent. The tax theories that are all proposed to guide the EU tax policy were created without any thought to the political realities of the area. Since the political realities negate the theories, the theories should be looked at broadly. For example, tax rates do not vary depending on the elasticity for goods (e.g., natural resources) in practice despite what economic theories say.
Former senior advisor, U.S. Treasury
The OECD project was created to examine harmful tax practices both within the OECD and among its members. While the project acknowledges that a large amount of progress has already been made, countries need to adopt the same policies for competition to rise to the next level. The OECD project supports competition because of the incentives it gives to governments to have efficient organizational structure and appropriate spending, and hopes its findings will further future progress.
The decision between tax harmonization and tax competition should be a simple one. Tax harmonization exists when taxpayers incur similar tax rates regardless of where they work, shop, save, or invest, and it can be explicit or implicit. The major proponents argue that harmonization reduces distortions caused by differential tax rates. Tax competition exists when jobs, capital, and entrepreneurial talent are able to move from high-tax jurisdictions. This mobility pressures politicians to lower tax rates and reduce tax burdens on capital. Proponents argue that tax competition creates a race towards pro-growth tax policy from countries.
Two major points to remember when debating this issue are that the French and Germans are the biggest advocates of harmonization and hold to the notion that harmonization does not lead to higher tax rates. The same group of proponents also say that national differences in tax rates will cause profound differences in behavior, but also say that lower tax rates have no impact on behavior-notions that are not widely supported.
Ropes and Gray
The biggest problem facing international trade is not corporation taxes, rather, it is the more basic and traditional notion of taxing income. The income tax is economically inefficient. This "ability to pay" notion gets even more complicated when trying to cross international lines. While most will agree domestically what the purposes of the distributional effects are, this consensus is much less clear on the international stage. The idea of fair distribution becomes increasingly blurry put across multiple countries, each with different domestic distribution goals. While the task of reforming income-based taxes is daunting, it is a task that must be done to effectively look at the international tax competition debate.
AEI intern Adam King prepared this summary.