The Taxation of Sovereign Wealth Funds

The Yale Law Journal Pocket Part has published a Sovereign Wealth Funds Symposium.  Here are the two tax-related articles:

• Victor Fleischer (Illinois), Should We Tax Sovereign Sovereign Wealth Funds?, 118 Yale L.J. Pocket Part 93 (2008):

Important characteristics distinguish sovereign wealth fund investment, which is often troubling, from private foreign investment, which is generally beneficial. Allowing sovereign wealth funds to own equity stakes in American companies encroaches on the autonomy of U.S. industrial and foreign policy in a way that private investment does not. Moreover, because some sovereign wealth fund investment is politically motivated, this new form of investment impairs the efficient allocation of economic resources. Given these effects, one might expect U.S. tax policy to discourage state-controlled investment and encourage private investment. Instead, tax policy does just the opposite, subsidizing sovereign wealth funds that invest in the equity of U.S. companies.

In this Essay, I sketch out a few tax reform alternatives that could complement other regulatory proposals regarding sovereign wealth. First, and most modestly, the U.S. could strive for sovereign tax neutrality, eliminating the unwarranted tax subsidy that sovereign wealth funds enjoy under current law. A second, more aggressive, alternative would impose an excise tax on sovereign wealth. Additional reform alternatives are more fine tuned, linking the tax rate to a fund’s compliance with best practices or other measures of transparency, accountability, and professionalization.I fully develop the case for taxing sovereign wealth elsewhere in a longer paper. For present purposes, I merely wish to convince the reader that regardless of how one feels about regulating sovereign wealth funds, the tax exemption under current law deserves reconsideration.

• Mihir A. Desai (Harvard Business School) & Dhammika Dharmapala (UConn, Department of Economics), Taxing the Bandit Kings, 118 Yale L.J. Pocket Part 98 (2008):

The rise of significant inbound capital flows originating from sovereign wealth funds (SWFs) has occasioned a debate over the appropriate regulatory and tax treatment of these funds. In particular, it has been argued that the tax exemption currently enjoyed by SWFs confers an advantage on these entities as providers of capital to U.S. firms relative to private foreign investors, and that a tax should be imposed on SWFs to restore fairness. This essay argues that the distinctive nature of the portfolio choices facing SWFs negates this fairness argument. Indeed, changing the tax treatment of SWFs as has been proposed would distort choices that are otherwise efficient and would handicap U.S. firms and workers.