Saturday, August 23, 2014

Mankiw v. Kleinbard on Corporate Inversions

Greg Mankiw discusses the corporate inversion issue:
If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses. The most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe ... A main feature of the modern multinational corporation is that it is, truly, multinational. It has employees, customers and shareholders around the world. Its place of legal domicile is almost irrelevant. A good tax system would focus more on the economic fundamentals and less on the legal determination of a company’s headquarters. Most nations recognize this principle by adopting a territorial corporate tax.
I find this an incredibly naïve discussion. I’ll be the first to admit that the U.S. tax code insistence on a repatriation tax is a bit weird as U.S. based multinationals are incredibly adept at not paying it. So we have an effective territorial system anyway as Eric Kleinbard notes:
Corporate executives have argued that inversions are explained by an "anti-competitive" U.S. tax environment, as evidenced by the federal corporate tax statutory rate, which is high by international standards, and by its "worldwide" tax base. This paper explains why this competitiveness narrative is largely fact-free, in part by using one recent articulation of that narrative (by Emerson Electric Co.’s former vice-chairman) as a case study. The recent surge in interest in inversion transactions is explained primarily by U.S. based multinational firms’ increasingly desperate efforts to find a use for their stockpiles of offshore cash (now totaling around $1 trillion), and by a desire to "strip" income from the U.S. domestic tax base through intragroup interest payments to a new parent company located in a lower-taxed foreign jurisdiction.
When Mankiw talks about a good tax system focusing on economic fundamentals, he is assuming there is no transfer pricing abuse. Kleinbard and many others have noted how incredibly abusive the transfer pricing practices of highly profitable multinationals has become. In fact, this concern is why the OECD is so concerned about Base Erosion and Profit Shifting. Is Greg Mankiw another Rip van Winkle being asleep for the last 20 years and missing this key portion of the discussion? Then again, he later notes his real agenda here:
So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption.
I see – ignore transfer pricing abuse entirely as you are writing another op-ed for Team Republican where the real agenda is to shift the tax burden away from capital income entirely.


Gordon said...

So what is your suggestion? You some how decided to leave that out.

Daniel Bright said...

Sir thomas moore... a man for all seasons gets to be put to death and the nobles who did the kings bidding got title, power and wealth

But who do we remember?

Bud Meyers said...

At this post for the Harvard Business Review, Bill George says:

"You’re now getting into a much broader and more complex issue. With global corporations, they have to insure that they can be competitive around the world, and still be responsible to the national governments they serve. And there’s no such thing as global laws in many, many cases, including tax law. So you get a great deal of dysfunctionality, and I think this is why we need international bodies to help us work our way through these issues and sort them out."

Where I comment:

"Yes, and these “international bodies” could also mandate an International Maximum Wage for their multinational corporate board-of-directors — as well as an International Minimum Wage for all their employees who work for those same multinational corporations. This would help level the playing field among competitors -- generating business competition based on real merit, corporate governance and new innovation, rather than on who can screw their workers the most, dodge the most taxes, and avoid the most worker-safety and environmental laws."

ProGrowthLiberal said...

Gordon - fair question. And timely given that Burger King is now doing the corporate inversion game. As I read BK's 10-K, 80% of their income is sourced abroad even though half of their franchises are here and one would think their intangibles were originally created here. On their foreign sourced income, they pay an effective tax rate near 15%. So why isn't their overall effective tax rate not less than 20%? Because they get hit with this repatriation tax, which now disappears with the inversion. My suggestion is to get rid of this repatriation tax as it really is ineffective but to beef up substantially the enforcement of our transfer pricing rules.

ProGrowthLiberal said...

Bud - the HBR discussion was interesting in large part because it does discuss transfer pricing. Kleinbard talks about this issue under "stateless income". Since Mankiw linked to the Kleinbard discussion, he had to see it. But he can't mention it? Quite frankly, that makes Greg's oped rather dishonest in my opinion.