Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax
We evaluate proposals for the reform of the U.S. system of taxing cross-border income including dividend exemption, full current inclusion, a Japanese type version of dividend exemption with an effective tax rate test subject to an exception for an active business, dividend exemption combined with a minimum tax, and repeal of check-the-box. We consider two versions of dividend exemption with a minimum tax: one in which the minimum tax is imposed on a country by country basis and another in which the minimum tax is based on overall foreign income. In addition we evaluate versions of minimum taxes that allow current deductions for tangible investment against the minimum tax base. To compare these schemes with current law, we reevaluate the efficiency cost of the dividend repatriation tax using evidence from the response to the 2005 repatriation tax holiday. We find that the burden of avoiding repatriations is higher than found in previous estimates, particularly for high tech profitable foreign businesses, and rises as deferrals accumulate. We simulate the effect of the various alternatives on effective tax rates for investment in high and low tax countries with inclusion of the importance of parent developed intangibles and their role in shifting income from the United States. Our analysis demonstrates that it is possible to make improvements to the system across many dimensions including the lockout effect, income shifting, the choice of location and complexity. The goals are not necessarily in conflict. Compared to the other schemes, we find the per country minimum tax with expensing for real investment has many advantages with respect to these margins. The per country minimum tax offsets (at least in part) the increased incentives for income shifting under pure dividend exemption and is better than full inclusion in tailoring companies’ effective tax rates to their competitive position abroad. No U.S. tax burden will fall on companies that earn just a normal return abroad. The minimum tax is basically a tax on large excess returns in low tax locations, cases in which the company probably has less intense foreign competition. The investment will still be made. Unlike the Japanese type dividend exemption alternative considered, there is no cliff in which the income is subject to the full home country rate if it fails the minimum effective tax rate and active business test. Under the minimum tax with no cliff the company has more of an incentive to lower foreign taxes and will often prefer paying the U.S. minimum tax to paying a higher foreign tax. Finally, the minimum tax with expensing is more effective in discouraging income shifting than repeal of check-the-box. In summary, the per country minimum tax with expensing combines the advantages of the extreme alternatives, dividend exemption and full inclusion, and reduces their shortcomings. Our comparison of the overall and per country minimum tax suggests that the overall version deserves serious consideration. While it is not as thorough as the per country minimum tax in targeting tax haven income, it is a substantial move in that direction and is much simpler.
|Date of creation:||04 Apr 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (732) 932-7482
Fax: (732) 932-7416
Web page: http://snde.rutgers.edu/Rutgers/wp/rutgers-wplist.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Altshuler, Rosanne & Grubert, Harry, 2010.
"Formula Apportionment: Is It Better Than The Current System And Are There Better Alternatives?,"
National Tax Journal,
National Tax Association, vol. 63(4), pages 1145-1184, December.
- Rosanne Altshuler & Harry Grubert, 2009. "Formula Apportionment: Is it better than the current system and are there better alternatives?," Working Papers 0901, Oxford University Centre for Business Taxation.
- Rosanne Altshuler & Benjamin Harris & Eric Toder, 2011. "Capital Income Taxation and Progressivity in a Global Economy," Departmental Working Papers 201122, Rutgers University, Department of Economics.
- Harry Grubert & Joel Slemrod, 1994.
"The Effect of Taxes on Investment and Income Shifting to Puerto Rico,"
NBER Working Papers
4869, National Bureau of Economic Research, Inc.
- Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August.
- Rosanne Altshuler & Harry Grubert, 2001.
"Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy,"
NBER Working Papers
8144, National Bureau of Economic Research, Inc.
- Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
- Rosanne Altshuler & Harry Grubert, 2002. "Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy," Departmental Working Papers 200009, Rutgers University, Department of Economics.
- Grubert, Harry, 2012. "Foreign Taxes And The Growing Share Of U.S. Multinational Company Income Abroad: Profits, Not Sales, Are Being Globalized," National Tax Journal, National Tax Association, vol. 65(2), pages 247-81, June.
- Wiji Arulampalam & Michael P. Devereux & Federica Liberini, 2012. "Taxes and the Location of Targets," Working Papers 1213, Oxford University Centre for Business Taxation.
- Voget, Johannes, 2011. "Relocation of headquarters and international taxation," Journal of Public Economics, Elsevier, vol. 95(9), pages 1067-1081.
- Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association, vol. 62(4), pages 703-25, December.
- Voget, Johannes, 2011. "Relocation of headquarters and international taxation," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1067-1081, October.
- Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer, vol. 3(1), pages 67-81, January.
When requesting a correction, please mention this item's handle: RePEc:rut:rutres:201305. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.