Thursday, February 17, 2022
Mitchell Kane (NYU) presents The Use and Abuse of Location-Specific Rents (with Adam Kern (Covington & Burling, Washington, D.C.)) today as part of the OMG Transatlantic Tax Talks Series (OMG = Oxford-Michigan-MIT-Munich-Georgetown):
A central question in international tax law is how best to allocate taxing rights across countries. Most scholars and many policymakers agree that the current international tax regime is broken, and they are considering ambitious new reforms. An ideal conceptual basis for allocating taxing rights across states would (i) enable countries to raise large amounts of revenue; (ii) allowthem to do this efficiently; and (iii) allocate rights fairly. This concept would be the holy grail of international taxation.
Many tax scholars believe that they have found the grail. They say that every country ought to have the right to tax its location-specific rents. Roughly, a location-specific rent is an economic rent that is tied to a particular location. It is a return to a factor of production that exceeds what that factor’s owner requires in order to deploy that factor in its current location, a return that could not have been earned elsewhere. Location-specific rents likely exist in large quantities. Moreover, since taxes imposed on location-specific rents tend not to cause taxpayers to shift their activities, they are efficient. Finally, since location-specific rents can only be earned in one location, it strikes many scholars as fair for each location to be able to tax its own location-specific rents. The rents that are specific to any given location, so it is thought, represent an unambiguous, exclusive contribution of that society to global economic activity.
In this article, we push back on this emerging consensus. We clarify what location-specific rents are, providing the first rigorous definition of location-specific rent to appear in either the legal or the economic literature. We then show that location-specific rents often are difficult to measure. And we show that, even if a firm’s rents that are specific to a particular location were measured, they would not represent the exclusive contribution of that location to the firm’s profit.
We then identify a more limited role for location-specific rents in international tax policy. In some specific contexts, the hurdles to measuring location-specific rents are surmountable. Moreover, since location-specific rents can be taxed efficiently, all else being equal, it is good to increase countries’ aggregate capacity to tax them. Frequently, however, all else is not equal: often, increasing one country’s capacity to tax location-specific rents will come at the expense of people who live in another country, or we must choose which country ought to have the right to tax some location-specific rents. To address those situations, we need to rely on a general theory of global distributive justice. Such a theory probably would not imply that each country ought to have the right to tax its own location-specific rents.