Multinational enterprises (MNEs) based in the United States have been lobbying vigorously over the past few years to convince Congress to change our international tax regime. They'd like zero taxation on their foreign source income--a "territorial" system rather than a "worldwide" income taxation system. The tax panel at the AALS meeting considered whether a income tax system can survive at all with the globalization pressures and the claims that a corporate income tax puts US MNEs at an economic disadvantage in comparison to their global competitors.
Of course, one response to claims from MNEs that the US tax system should be loosened up to help them be globally competitive is to ask--for what purpose? MNEs treat aid for their competitiveness as an unquestioned good. Yet that is clearly not the way Congress should address the issue. If we relax tax on a US MNE and thereby permit it to open a manufacturing plant in a country where it pays inferior wages to workers, pollutes the world's air and water at a rate higher than that permitted in the US, all to manufacture products that it charges its US affiliate dearly to import into this country, we have done little of benefit to the US or, in fact, to anyone other than the owners (sometimes US based and sometimes not) of the US MNE. Aiding MNEs in their game of pulling tax rates across the world down to the bottom so that their owners (and top executives) can reap even higher profits and control even more of the world's wealth is not an inherent good. In that situation, US workers lose out because their jobs are outsourced, aided by tax provisions undertaken to aid MNEs' economic competitiveness.
Even if there are some situations in which the US should be deeply concerned about the global competitiveness of its home-based MNEs, the next question is whether the precipitous race to the bottom in corporate tax rates is necessary to lure corporations into a particular country (or keep them where they are already located). There has been considerable commentary of late that assumes that taxation is a major factor in MNE location decisions. So it is interesting to see some new empirical research based on OECD data about the relative importance of taxation and other policies (openness to foreign firms, labor rules, etc.). A new OCED Economics Department working paper by Hajkova, Nicoletti, Vartia and Yoo, Taxation, Business Environment, and FDI Location in OECD Countries, examines just these areas, to determine how important is the impact of tax regimes on multinational corporations' location decisions.
They conclude that taxation matters, of course, but perhaps not as much as everyone has assumed.
The results indicate that omission of other policies that shape the business environment of host countries may lead to serious upward bias in tax elasticity estimates. Moving from a simple model specification including only tax policies to a wider one covering also other factors and policies affecting rates of return on FDI significantly lowers the estimated tax elasticities. As a result, the elasticity estimates are on the low side of the range covered by recent surveys of the empirical literature. Moreover, the impact of tax regimes on bilateral FDI appears to be quantitatively limited. On the whole, taxation would seem to be a relatively minor factor affecting the location choices of MNE as compared to policies affecting the ease of entry for foreign firms, their labour costs and the functioning of product markets in the host country. These results appear to be robust to changes in model specification and estimation methods as well as to accounting for the possibility of FDI diversion from third countries. (emphasis added)
Recent Comments