Rosanne Altshuler

Follow the Leader? Evidence on European and US Tax Competition

This article breaks from the previous empirical literature that estimates Nash tax reaction functions of national governments competing with other national governments assuming that competitors play a Nash game and adjust to a Nash equilibrium in every year. We question this assumption and explore whether one country plays a leadership role in tax competition using data from 1968 to 2008. We test the leadership role of the United States, the United Kingdom, and Germany, and find support for a US leadership role. We also investigate whether countries react differently immediately after watershed tax reforms such as the 1986 US Tax Reform Act or the 1984 UK tax reform. We find some support for a different reaction to the United States following the 1986 US reform, but not for the United Kingdom or Germany.

U.S. Interest-Allocation Rules: Effects and Policy

In 1986, the U.S. government undertook a significant reform of its income tax system. One important change for U.S. multinational corporations is related to the allocation of interest expense. This work analyzes the impact of the new U.S. interest allocation rules on the investment and financial decisions of U.S. multinationals. We test the effect of these rules on financing behavior using data from a survey of multinationals assembled by Price Waterhouse for this project. We also calculate effective tax rates for investments at home and abroad, taking the interest allocation rules into account.

Understanding U.S. Corporate Tax Losses

Recent data on corporate tax losses present a puzzle this paper attempts to explain: the ratio of losses to positive income was much higher around the recession of 2001 than in earlier recessions, even those of greater severity. Using a comprehensive sample of U.S. corporation tax returns for the period 1982–2005, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income. We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and corporate profits as measured by the national income accounts. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited a different pattern of losses in recent years. However, we can identify no simple explanation for the differing experience of C and S corporations. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade, and why has the incidence of losses among C and S corporations diverged?

Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax

We evaluate proposals for the reform of the U.S. system of taxing cross-border income including dividend exemption, full current inclusion, a Japanese type version of dividend exemption with an effective tax rate test subject to an exception for an active business, dividend exemption combined with a minimum tax, and repeal of check-the-box. We consider two versions of dividend exemption with a minimum tax: one in which the minimum tax is imposed on a country by country basis and another in which the minimum tax is based on overall foreign income. In addition we evaluate versions of minimum taxes that allow current deductions for tangible investment against the minimum tax base. To compare these schemes with current law, we reevaluate the efficiency cost of the dividend repatriation tax using evidence from the response to the 2005 repatriation tax holiday. We find that the burden of avoiding repatriations is higher than found in previous estimates, particularly for high tech profitable foreign businesses, and rises as deferrals accumulate. We simulate the effect of the various alternatives on effective tax rates for investment in high and low tax countries with inclusion of the importance of parent developed intangibles and their role in shifting income from the United States. Our analysis demonstrates that it is possible to make improvements to the system across many dimensions including the lockout effect, income shifting, the choice of location and complexity. The goals are not necessarily in conflict. Compared to the other schemes, we find the per country minimum tax with expensing for real investment has many advantages with respect to these margins. The per country minimum tax offsets (at least in part) the increased incentives for income shifting under pure dividend exemption and is better than full inclusion in tailoring companies’ effective tax rates to their competitive position abroad. No U.S. tax burden will fall on companies that earn just a normal return abroad. The minimum tax is basically a tax on large excess returns in low tax locations, cases in which the company probably has less intense foreign competition. The investment will still be made. Unlike the Japanese type dividend exemption alternative considered, there is no cliff in which the income is subject to the full home country rate if it fails the minimum effective tax rate and active business test. Under the minimum tax with no cliff the company has more of an incentive to lower foreign taxes and will often prefer paying the U.S. minimum tax to paying a higher foreign tax. Finally, the minimum tax with expensing is more effective in discouraging income shifting than repeal of check-the-box. In summary, the per country minimum tax with expensing combines the advantages of the extreme alternatives, dividend exemption and full inclusion, and reduces their shortcomings. Our comparison of the overall and per country minimum tax suggests that the overall version deserves serious consideration. While it is not as thorough as the per country minimum tax in targeting tax haven income, it is a substantial move in that direction and is much simpler.

The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap between Theory and Practice

This paper discusses several issues that arise in the process of analyzing the macroeconomic effects of tax policy proposals in a way that is of practical use to legislators. In the current federal legislative process, much of the economic analysis of tax legislation boils down to a single set of numbers: an estimate of the effects of the proposal on projected federal revenues over the ten-year period following the current fiscal year. We discuss some of the practical aspects of developing a methodology for “dynamic scoring,” or accounting for potential macroeconomic effects in the estimate of the revenue effects of a specific tax proposal. While there are many areas of theoretical debate and uncertainty in modeling the macroeconomic effects of tax policy, we discuss three often-overlooked practical issues in incorporating those effects in a revenue estimate: (1) translation of the tax proposal into inputs to a macroeconomic model that capture all the features of the proposal that are likely to have an impact on the economy; (2) adjustment of the tax and revenue related equations in the macroeconomic model to account for the difference between the actual present-law Internal Revenue Code and the specifics of the tax proposal being analyzed; and (3) reconciliation of differences in definitions of income between National Income and Product Account (“NIPA”) data that macroeconomic models are typically calibrated to replicate, and the cash-basis income flows on which the present-law tax code is based. We show how the effects of proposed tax changes on GDP and revenues can vary depending on the methodologies chosen to address each of these issues.

THE SPILLOVER EFFECTS OF OUTWARD FOREIGN DIRECT INVESTMENT ON HOME COUNTRIES: EVIDENCE FROM THE UNITED STATES

Most studies of foreign direct investment (FDI) spillovers focus on externalities of inward FDI to host country firms. However, spillovers may also be generated from outward FDI and flow to home country firms. We test for the presence of spillovers from U.S. multinational corporations to domestic U.S. firms in the same industry, downstream industries and upstream industries using firm level information from Standard and Poor’s Compustat data and industry level data on U.S. outward FDI from the U.S. Bureau of Economic Analysis. We find evidence of positive and significant spillovers flowing from multinational customers to their domestic suppliers. This is consistent with most previous studies of spillovers from inward FDI and may suggest a role for domestic policies that subsidize outward FDI. We also find that the presence of beneficial spillovers depends on several firm characteristics including exporting status, size and absorptive capacity.