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.