Back To The Future: Megatrends In Global Tax Policy

Robert Goulder of Tax Notes and professor Daniel N. Shaviro of New York University School of Law discuss generational swings in the U.S. appetite for residence-based taxation of multinationals’ foreign profits. 

This transcript has been edited for length and clarity.

Robert Goulder: Hello everyone. I’m Bob Goulder with Tax Notes. Welcome to the November edition of “In the Pages.” Our featured article critiques the recent calls for increased taxation of multinationals. It does so by examining the prevailing trends in tax policy over the course of multiple generations.

The title of the piece is “Bittker’s Pendulum and the Taxation of Multinationals.” It was written by an author who will be familiar to most of you: Daniel Shaviro, professor of taxation at NYU Law School. Professor, welcome to “In the Pages.”

Daniel N. Shaviro: Thanks for having me. I’m looking forward to enjoying this.

Robert Goulder: Your title refers to Boris Bittker and the metaphor of a pendulum. Can you elaborate?

Daniel N. Shaviro: When I was younger there was this post-New-Deal consensus. It was relatively liberal and redistributive and pro-regulatory. Then, the Reagan-era came. When I started teaching around 1987, I went to the University of Chicago and the Chicago heyday was happening — meaning not just at that particular school, but that attitude towards things. The idea was that you really can’t tax corporations very well — certainly not on a source basis, probably not on a residence basis either. Then things turned around.

Without guessing what’s going on in the United States Congress over the next few weeks, clearly there’s an impetus for expanded taxation of multinationals on both a source and residence basis. And of course, there’s all the OECD stuff that’s going on.

It’s funny how there was a standard way of thinking about things early in my career, then that view became mocked and discredited, and now it’s back again. It’s like a pendulum in that it goes back and forth. I call it Bittker’s pendulum because he spotted it.

Robert Goulder: I’m curious about the frequency of these swings. Are they a generational occurrence?

Daniel N. Shaviro: Probably. I can think of three waves within my experience, and Bittker refers to the wave before that. The first wave was already receding by the time I entered teaching. It manifests throughout public and private law, not just international tax policy.

What I call the Chicago-era was the type of thinking that you can’t really tax corporations on a residence or on a source basis. Now it’s a “back to the future” wave, which was already starting to turn probably 10 years ago. Today there’s more respectability for things like tough corporate taxes — or for that matter, income taxes instead of consumption taxes.

I wrote a piece more than a decade ago, called it “Beyond the Pro-Consumption Tax Consensus.” I asserted that within sophisticated tax policy circles the income tax had been replaced by the consumption tax as the better thing. But already you could see problems with the consumption tax.

I wouldn’t say that I forecast it, perhaps quasi-forecast it, that people would return to favoring the income tax. That’s where we are now. The income tax has more intellectual respectability as people like Emmanuel Saez and Gabriel Zucman talk about it. That’s the same pendulum in a way.

Robert Goulder: You make it sound as though the swings are rooted in intellectual thinking, but I wonder if they’re not triggered by the electoral cycle?

Daniel N. Shaviro: I think it’s even broader than elections. It’s intellectual trends in the country. It’s what people are talking about and thinking about.

When I had an early draft of my paper, I realized that I was tiptoeing into history without really being historical, so I sent it to my friend Ajay Mehrotra at Northwestern University, because he is a historian. He suggested that I embed it a little more in broader trends. 

Obviously, the election returns matter. The Trump presidency was kind of a shock that affected a lot of people in their thinking. More generally there are things like the Enron era, the great recession, and the pandemic.

A lot of it has to do with how concerned we are about distributional issues, and linked with that, how well we think markets are working. Are markets working great, or are markets are working horribly?

We’ve had each of those views prevailing in different eras.

Robert Goulder: Viewers will be familiar with the concepts of Young Turk and old fogeys. In channeling Bittker, however, you flip those associations. Can you explain?

Daniel N. Shaviro: That was Bitter’s joke, which he attributed to a professor I once had named Leon Lipson. I think he was referring to the faculty of Yale Law School in the 1970s. There were these older guys who looked at the Great Depression and said that markets will fail, so rent control is good and we should mandate health care for people, and all those types of things.

Then there was a younger crowd which includes some of the “law and economics” people. They say the New Deal stuff won’t work. If you make employers give workers benefits, it only means the workers will receive less cash, so they’re not gaining something. They say efficiency is everything, et cetera.

That’s a comic reversal in that you have the younger crowd as the fogeys and the older ones as the Turks.

Robert Goulder: Regarding the forces that cause the pendulum to shift, are they global or local in nature?

Daniel N. Shaviro: I think global trends are important. Obviously, the U.S. is a very big country, which has a lot of market power and can go its own way to a degree. But we can also be insular. People who are interested in international tax are probably less so than everyone else, but we Americans often only listen to other Americans.

Clearly there was concern about global trends. You can see camps of either pro-government or pro-company people. Oddly, even among reputable academics. This was a cudgel for the pro-company people to say, “Look, we have no choice — we have to consider what’s happening internationally.”

Still, there are those who think the U.S. can go it alone. I was recently at a conference for the greatly mourned Ed Kleinbard, who proposed a tough international tax system. In it, the U.S. was going to damn well stick to residence. It was going to tax companies on a worldwide basis, and maybe make corporate residence rules more expansive. His thinking was that we could do it because we have enough clout. There’s still a lot of that.

For both sides it’s almost pretextual. I’m not insulting people’s sincerity, but if you’re on a certain side then you’re happy to say, “Look at the pressures we’re under. We’re not that strong anymore.” On the other side, you say, “We can cooperate with other countries. We can make international agreements.”

There’s something pretextual in the sense that we all believe our beliefs. Everyone one of us will look for confirmatory evidence and mainstream it more readily than evidence which suggests we are wrong. Both sides do a bit of that.

Robert Goulder: Let’s talk about the Tax Cuts and Jobs Act. It’s acquiring a complicated legacy. How does it fit into your analysis?

Daniel N. Shaviro: I think it starts on the “end of history” side of the story. They wanted to go purely territorial, they wanted to lower the corporate rate, and all that. But by the time it gets enacted, there’s a whole lot of the base erosion and antiabuse tax and the global intangible low-taxed income.

The powerful U.S. multinationals did not do as well as they thought they would. Obviously, they loved the rate cut and they were glad not to have to deal with repatriation anymore. But they got hit harder than they expected in other ways.

I wrote an article about TCJA in Tax Notes back in 2018, where I used the line about Willy Loman from Death of a Salesman. “He is liked, but he is not well liked.” The multinationals were liked by the Republicans who were running the show and the time, but they were not as well liked as the passthroughs who they were friendly with.

As you know, passthrough businesses are big operators in all 435 congressional districts — or most of them — whereas international companies didn’t have the sort of regional influence commensurate with how much money they have.

The multinationals were disappointed relative to what they expected. That reflects how the pendulum has started to swing back. The Republicans in Congress in 2017 didn’t want to let all the income go to tax havens and have the multinationals pay no U.S. tax. They were nervous about that, and the arguments about job losses.

Robert Goulder: The investment response to TCJA has been lackluster. Is that a fair description?

Daniel N. Shaviro: This a matter of interpretation.

For the economists, there was some increase in investment. For example, Kevin Hassett would probably still try to hang his hat on that.

I think the predominant view is that there were some investment increases going on for other reasons and, in fact, the investment response to the act — the lower rates, et cetera — was close to nil. There’s been a lot of discussion, some of which I recount in my piece, about what would explain that. There are a bunch of different reasons for it.

Robert Goulder: The whole reason you do something like TCJA is for growth and investment, so if the outcome is nil, or close to nil, then that undercuts the premise. Correct?

Daniel N. Shaviro: There are two reasons for the disappointing response. They are opposite explanations, or they could both be true.

One is that companies are earning economic rents, and when they are they’ll keep doing it, meaning they won’t be scared away for quite a while by higher taxes. The other reason is that source is such a sham concept you don’t really have to worry so much about local taxes.

To say, “OK let’s put a factory in the U.S. because the tax rate is now lower,” that seems like 1950s thinking. Now, when you have intangibles and so forth, it’s a different world.

Today it’s no longer about where you place a factory, although it could be in a particular case. But even then, if you can strip out all the profits through royalties or interest payments or whatever, then you don’t care so much if the country lowers its rate. It’s a more complex calculation.

Robert Goulder: You use this term in your article: Econ 101-ism. Is it fair to say you have of a dim view of the concept? Or perhaps, that you see it as having a ceiling in its practicality?

Daniel N. Shaviro: Yeah, I didn’t invent that phase — and I would say it’s more the natural ceiling. To this day, there are still people who think you can draw a simple supply and demand chart on the blackboard and it will show you inevitably what happens, because they’re assuming perfectly efficient markets and assuming people are rational. You get smoothly rising and smoothly falling curves.

When an Econ 101-ism is used, like a very simple price theory, it can be useful to ask is that really correct, and if not then why not. You have to come up with the reasons. You can compare it to the Coase theorem. It’s not that there are zero transaction costs, but if you’re finding something that doesn’t fit it, it must mean that is a transaction cost, so it tells you where to look. But Econ 101-ish dogma is not something I’m fond of.

Robert Goulder: You compare the industrial titans of yesteryear, the Carnegies and Rockefellers, to the billionaires of today like Elon Musk, Mark Zuckerberg, and so forth. When you have something that feels like a gilded age, does that necessarily tilt the pendulum in the direction of equity as opposed to efficiency?

Daniel N. Shaviro: Well, it creates enormous stress, but unfortunately I don’t think it necessarily is going to be resolved the same way every time. Back then, we got the progressive era. It was like democracy fights backs. Then we had the global tragedies of the two world wars with the Great Depression in between. Those events greatly lowered high-end inequality, albeit at the huge cost of global destruction.

When people today are worried, as I am, about whether the U.S. is headed towards fascism and autocracy, this is also a product of that. Last time it was resolved positively, but this time there is no guarantee.

A 100-plus years ago, people thought the danger would be a left revolution — more so in Europe than the U.S. They thought the IWW, the Wobblies, would lead the revolution. Here, rightist violence seems to be the danger.

Something I’ve been thinking about subsequently has to do with race. Back in the old progressive era, there was severe unchallenged racial injustice in this country. Today we’re in better shape because those issues are on the table. But a consequence is that it energizes and angers the right. It could be that one reason they were able to obtain economic justice 100-plus years ago is that they were so savagely imposing racial injustice.

It would be a sad irony if, because race is on the table this time, it ends up worsening the economic outcome. The reason it could is that some people are so upset by the challenge to racial supremacy that they throw in their hand with the extreme right.

So, a movement that’s entirely welcomed could have a dangerous backlash, where race and class work together in strange ways. But that’s well beyond my expertise as a tax person, for sure.

Robert Goulder: Your article mentions Arnold Harberger, who studied the incidence of the corporate tax. The issue there is whether the corporate income tax is a suitable mechanism for addressing progressivity. What’s your thinking on that?

Daniel N. Shaviro: Harberger was an economist’s economist. I mention early in the article how some scholars thought, “Oh, you can tax corporations — double tax them even — and it won’t lead to the corporate stock being less valuable.” To Harberger, however, it was self-evident that you couldn’t tax corporate and non-corporate capital differently without equalizing an after-tax return. He was a scientist, not some guy on a soapbox.

Around 1962 he seems to think taxing all capital is extremely feasible. He was criticizing the idea that we’d only tax corporations, because capital will leave and go into the noncorporate sector. He made a bunch of assumptions about which businesses incorporate, and about how much they use labor and so forth.

Under his assumptions, it turned out that the corporate tax was born by capital. To him, it had the unfortunate cost of driving capital to the noncorporate sector, which is inefficient and wasteful. His early work affirms that you can tax capital and redistribute in that way because he had the savings rate being inelastic. He didn’t adopt that position for ideological reasons. It was what he saw in the data.

Then, about 30 years later, he writes another work which is not as ground-breaking but it shows he’s watching what’s going on. He says that because of capital mobility, the incidence is reversed. Now labor is going to bear the corporate income tax, because if you tax me too high in this country, I’m going to another country. The pushback after that has been the notion of economic rents.

Robert Goulder: You have Harberger asking more or less the same questions, 30 years apart, but reaching a different conclusion — and that’s because you introduce the element of enhanced capital mobility?

Daniel N. Shaviro: Yes. It puts Harberger in a good light. It makes him look like a guy who is not ideologically driven. He’s looking at where his understanding of the world takes him. Absolutely, he reverses himself. He doesn’t say that he was wrong before; he says the world around him has changed. Of course, that’s quite right. I don’t know if it’s reversed again, but as a matter of intellectual logic if you believe in location-specific rents, then it would reverse again.

Robert Goulder: Another highlight was where you reference the character Humpty Dumpty in regard to source and residence. You write that source has become something of a sham concept due to the artificiality surrounding it. Do I have that right?

Daniel N. Shaviro: There’s moment in Alice in Wonderland where Humpty says, “When I use words, they mean exactly what I want them to; neither more, nor less.” Then Alice says, “You can’t do that because words have fixed meanings.” And Humpty responds, “I do it anyway.” The notion is that source can mean whatever you bloody well want it to mean. I think that’s true up to a point.

I wrote an earlier article, I think it came out in a Singapore law journal, where I said there are two coherent source concepts that are in dispute. One kind is the source of where production occurs, or where value is added. The other kind of source is where consumption occurs.

The core problem is that neither one is canonically right. We may think of income as a source of production concept, but there are plenty of rules that find sources elsewhere. Either rule could be logical, but there’s no general basis for choosing between them.

Robert Goulder: Digital services taxes are one way around the source concept, but there’s a lot of criticism of them. DST is a gross receipts tax, which makes it a crude instrument, no?

Daniel N. Shaviro: There’s an argument that the gross receipts character isn’t so terrible because there’s not much marginal costs to a company like Facebook being in a given country, say in the United Kingdom. There’s probably some minor cost, if they tailor things to the local market, but not much. If the company has no major business expenses related to gaining users in a country, then the gross becomes closer to the net.

But then, we can think of something like Starbucks. Weirdly, Starbucks is a company with actual coffee shops on the ground, yet in some ways it’s just like Facebook or Google. Now, of course, if you taxed Starbucks on their U.K. gross receipts, that would be a bad instrument. But I think the only income that’s really produced in England by Starbucks is from the poor slumps who are working as baristas and site managers. They’re not making a ton of money.

So, Starbucks makes a ton of money in the U.K. and they must, because you can’t go a block in London without seeing three of them — this is pre-pandemic. In a production sense, that money is created in the U.S. But in a consumption sense it’s being earned in the U.K.

The idea is that Starbucks, a brick-and-mortar business, could be in some ways be just like Google and Facebook because of their super valuable intellectual property It’s the same problem, except that you can’t use a gross receipts tax for Starbucks because it would be ludicrous.

Robert Goulder: What are your thoughts on pillar 1 and pillar 2 as they relate to Bittker’s pendulum?

Daniel N. Shaviro: I certainly don’t claim to have a crystal ball about whether it’ll work or not. One scenario is that it kind of works, but that’s a relatively benign view because it could also fail. I’m sort of pessimistic because I see it as having enormous obstacles. But I’m certainly rooting for it to be decently effective.

Robert Goulder: Final thoughts on equity versus efficiency. We could come back in 20 years and somebody will still be doing podcasts and videos about what the ideal corporate income tax should look like. This discussion never goes away, right?

Daniel N. Shaviro: Well, attitudes change as our perceptions of markets change. Do they work well, or work poorly? And our perceptions of income or wealth distribution being decent, or not. You could have a world where we moved toward greater equality. Another world is where things get worse and worse, with the equity side kind of suppressed. What’s the old saying, “I can predict anything except the future.”

Robert Goulder: We’ll leave it at that. Professor, thank you for joining us.

Daniel N. Shaviro: Thanks so much for having me. It was a real pleasure.