tax notes international - Tuck School of Business - Dartmouth College

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to the dividend repatriation tax — a cost to the competitiveness of U.S. companies. Two of the United States’ major trading partners, Japan and the United Kingdom, are moving away from taxing dividend repatriations, while a third major partner, the Netherlands, has few restrictions on income repatriations. The evidence is overwhelming that the U.S. international tax system badly needs reform. I believe it is time for Congress to add the financial reporting and the competitiveness costs when it considers changing the tax treatment of the foreign profits of U.S. multinational corporations. Cross-Country Differences in Tax Systems Slemrod, along with coauthor Leslie Robinson of the Tuck School of Business at Dartmouth College, took a global view of tax systems. They took advantage of new OECD information to analyze how variations in tax systems beyond the tax rate and the tax base affect real economic behavior. Their study, ‘‘Measuring the Impact of Tax Systems on Economic Behavior Using New Cross-Country Data,’’ examined how variations in tax administration, enforcement, withholding, and corruption, for example, help explain variations in economic behavior across countries. ‘‘Tax systems are multidimensional,’’ Robinson explained. ‘‘Ignoring these differences may skew our view of how tax rates affect economic behavior. Leaving out important aspects of tax systems may bias estimated partial effects of tax rates, and/or miss entirely the effects of other tax system features.’’ For example, while prior research has shown that countries with high tax rates tend to have a smaller informal sector, Robinson noted that the tax rate impact largely disappears once tax administration is taken into account. Somewhat counterintuitively, she found that although countries with high penalty rates have a smaller informal economy, countries that use extensive withholding systems have larger informal sectors. The reason, she suggests, is that withholding systems make it less attractive to work in the formal sector, because withholding makes it difficult to avoid paying taxes. Given that more corrupt countries exhibit greater use of withholding, that may partially explain why prior research has found a strong positive association between corruption and the informal sector. One main benefit of Slemrod and Robinson’s paper is that it references a 2006 OECD report 11 that provides internationally comparable data on the aspects of tax systems in 30 OECD countries and 14 non-OECD countries. 11 For the report Tax Administration in OECD and Selected Non- OECD Countries: Comparative Information Series, see Doc 2006-22140 or 2006 WTD 210-10; for related coverage, see Tax Notes Int’l, Sept. 25, 2006, p. 1046, Doc 2006-19457, or2006 WTD 180-2. HIGHLIGHTS It’s no surprise that tax systems vary significantly across countries — some countries have effective tax administrations, while others have weak administrations; some countries tend to rely on withholding, while others rely on self-assessment; some countries have strong debt collection powers, while others have low ratios of tax administrators per worker. Until the OECD published its data, researchers had no comparable cross-country information on how tax systems varied, other than in their rates and their bases, and so could not examine the factors that explained why tax systems varied across countries. Slemrod and Robinson used the OECD data to show that tax system differences affect real economic behavior, because they affect how the taxpayer perceives the expected tax burden triggered by its actions. The authors also explore a well-known tax fact: Rich countries levy more taxes per capita than poor countries. The OECD data confirm that, but also show that tax systems in high-income countries tend to share some characteristics and that there may be underlying factors about those countries that explain the tax burden. Relative to low-income countries, high-income countries impose withholding and reporting on fewer types of income, have fewer powers to facilitate debt collection, impose lower penalties, are less likely to use selfassessment principles, and hire more tax administrators, but they do not spend significantly more on administrative costs as a share of income. For example, Luxembourg, Iceland, and the Netherlands are in the top per capita income quartile but tend to fall in the lowest quartiles for penalty rates, withholding taxes, and information reporting. Chile, China, and South Africa fall in the lowest income bracket but tend to fall in the highest brackets for imposing penalties, levying withholding taxes, and relying on information reporting. Those correlations suggest that high-income countries tend to design their tax systems in ways that explain why those countries have a relatively high tax burden. As Robinson noted, an analysis that considers only tax rates will miss the effect of other factors that may affect the size of the informal economy and may bias the estimates of how tax rates affect tax burdens. Robinson said it might be a variation in tax system design that is correlated with national income, rather than national income itself, that affects a country’s tax burden. In conclusion, Slemrod emphasized: ‘‘Leaving out consideration of administrative issues can lead to severely biased measures of the role of tax rates in the economy.’’ ♦ Joann M. Weiner is a contributing editor to Tax Analysts. E-mail: jweiner@tax.org TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 375 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
HIGHLIGHTS NEWS ANALYSIS Multinationals Accumulate to Repatriate by Lee A. Sheppard and Martin A. Sullivan Printing lots of unsecured money is bad enough. Frittering it away on courtiers is worse. That was historian Paul Kennedy writing in The Wall Street Journal about the coming stimulus bill and the dismal prospects for gargantuan U.S. budget deficits stretching into the future (The Wall Street Journal, Jan. 14, 2008, p. A13). Elsewhere in his piece, Kennedy compared the U.S. budget to that of ‘‘Iceland or some poorly run Third World economy.’’ He could have mentioned Italy, which routinely incurs government debt equal to GDP, but has the luxury of selling its debt to its own citizens. The United States does not have that luxury, and Kennedy predicts that the Chinese purchasers of U.S. government debt will demand higher interest. Our subject today, however, is the courtiers asking that money be frittered away on them in the stimulus bill. Big pharma, software companies, and financial intermediaries have accumulated vast amounts of foreign profits that some of them are lobbying to repatri- Billions $800 $700 $600 $500 $400 $300 $200 $100 $0 ate at very low tax rates. Since 2005, they have accumulated foreign profits at a greater rate than historically. Well, so what, don’t they just have very profitable foreign operations? Data examined in this article strongly suggest that section 965 may have encouraged more shifting of profits offshore than usual in preparation for another repatriation tax holiday. Of course, multinationals have always had ample incentives to shift profits offshore. Section 965 enlarged their incentives to do so. This phenomenon argues that repatriation tax holidays have the effect of encouraging the very behaviors they were intended to reverse. In short, another repatriation tax holiday would constitute frittering of stimulus of a high order. After their last repatriation tax holiday, U.S. multinationals went back to work building up earnings in foreign jurisdictions. Here we show the increase in undistributed foreign earnings of 40 of the largest U.S. corporations since the American Jobs Creation Act of 2004 allowed them ‘‘one-time’’ dividend relief. Although these 40 multinationals account for less than 5 percent of the 832 multinationals that repatriated earnings under the Jobs Act provision, they received 44 percent of the total $362 billion of repatriated earnings, as reported by the IRS. (Melissa Redmiles, ‘‘The One-Time Received Dividend Deduction,’’ IRS Statistics of Income Bulletin, spring 2008.) Figure 1. Accumulated Foreign Earnings of 40 U.S. Multinationals, 2002-2007 $261.7 $321.8 $389.4 $484.4 $300.3 $580.7 $395.9 2002 2003 2004 2005 2006 2007 Fiscal Years Source: Company annual reports as shown in table. Simulated Assuming No Jobs Act Actual Accumulated Foreign Earnings 376 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL $702.8 $518.0 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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