Weekly SSRN Tax Article Review And Roundup

This week, Daniel Hemel (Chicago) reviews a new paper by Eric J. Allen (Southern California) and Susan C. Morse (Texas), The Effective Income Tax Experience of U.S. and Non-U.S. Multinationals.

As our incoming President likes to remind us, the United States has the highest corporate tax rate in the world. Well, not quite the highest—the United Arab Emirates beats us with a 55% rate. But according to data from the Organisation for Economic Co-operation and Development, the U.S. corporate income tax rate is approximately 15 percentage points above the average among other OECD member countries.

Yet as readers of this blog no doubt know, statutory rates can be misleading measures of true tax burdens. In a newly posted paper, Eric Allen and Susan Morse seek to determine whether U.S. multinational corporations actually pay more than their foreign counterparts—and if so, how much more. Allen and Morse focus on multinational firms that have a “material U.S. presence” (e.g., more than a quarter of sales in the United States). Allen and Morse ask: Controlling for the location of sales (among other factors), what is the effect of having a non-U.S. parent on the multinational firm’s effective tax rate? They separately analyze firms in profit years and firms in loss years.

Allen and Morse’s main result is that having a non-U.S. parent is associated with a book effective tax rate that is approximately 5 percentage points lower in profit years and 2 percentage points higher in loss years, even after controlling for the location of sales. The gap is widest with respect to firms whose parents are incorporated in tax havens: their effective rate is 8 percentage points lower in profit years and 5 percentage points higher in loss years than U.S. multinationals. Moreover, Allen and Morse find no statistically significant differences between former U.S. firms that have undergone an inversion and other foreign multinationals, suggesting that inversion firms successfully shed the tax consequences of their historical U.S. parentage.

What should we make of these results? One takeaway is that the tax disadvantage of having a U.S. parent in profit years is partly offset by the advantage in loss years. That alone should not be so surprising: loss carryforwards are more valuable when rates are higher. Perhaps the more striking result is that Allen and Morse’s estimate of the tax disadvantage of having a U.S. parent (5 percentage points in profit years) is much smaller than recent estimates from the European Commission and the World Bank, both of which found a double-digit percentage-point gap between effective corporate tax rates in the United States and other industrialized nations.

Allen and Morse’s study comes as House Republican leaders are pushing a plan that would cut the corporate rate by 15 percentage points and allow for expensing of new investments, ostensibly with the objective of “global competitiveness.” Meanwhile, Donald Trump has proposed a rate cut of 20 percentage points, again with the goal of making America “more competitive.” The relatively modest gap in effective tax rates that Allen and Morse report might suggest that the rate cuts called for by the House Republicans and President-elect Trump are far beyond what “competitiveness” plausibly requires.

One final note: Amidst all of the discussion of differences in corporate tax rates across countries, it’s important to remember that the U.S.-to-foreign multinational comparison is only one of several comparisons that should be relevant to U.S. corporate tax policy. A system that imposed the same tax rate on U.S. and foreign multinationals—but a different rate on U.S. multinationals than on U.S. firms with only domestic operations—would distort the choice of U.S. corporations whether to invest at home or abroad. A system that imposed the same tax rate on U.S. and foreign multinationals as well as U.S. corporations with only domestic operations—but a different rate on U.S. corporations than on U.S. passthroughs—would distort choice of business form. A system that imposed the same tax rate on U.S. corporations and U.S. passthroughs—but a different rate on labor income—would encourage individuals to reclassify labor income as investment income (or vice versa). As David Weisbach has emphasized, distortions along some margin are inevitable under any system that taxes capital income in a globalized world. The optimal regime would not necessarily narrow the gap between U.S. and foreign multinationals to zero.

None of this is meant as a criticism of Allen and Morse, whose project is positive rather than normative. Their study is a valuable addition to the literature on tax rate differences between U.S. and foreign multinationals. And while the authors do not put any particular spin on their results, these findings should—I think—allay some of our worst fears about U.S. firms being placed at a tremendous disadvantage by the U.S. corporate income tax.

Here’s the rest of this week’s SSRN Tax Roundup::

• Jeffrey L. Hoopes (UNC), Leslie A. Robinson (Dartmouth), and Joel B. Slemrod (Michigan), Public Tax-Return Disclosure
• George Joseph (UMass Lowell), Theoretical Perspectives on Ethical Dilemmas in Globalization and International Taxation, 17 J. Accounting, Ethics and Public Policy 683 (2016)
• Omri Y. Marian (UC-Irvine), The Other Eighty Percent: Private Investment Funds, International Tax Avoidance, and Tax-Exempt Investors, 2017 BYU L. Rev. (forthcoming)