Below are some obvious questions that occur to me. Before getting at the issue about what should be done, we need a much better picture of what is going on.
- What is the annual outflow of corporate profit abroad? What is the time pattern of this outflow? over the last 5 years? over the last 10 years? over the last 20 years? How far back does it go where the volume of outflow was significant? Can we identify a time when the practice started?
- How much corporate profit is retained domestically? Can we likewise do a time pattern of that? How does that ratio of retained profit to expatriated profit vary over time?
- Can we break this down on a company by company basis? Are there some large corporations which don't expatriate profits or do all of them do it? Are there some that do it to a greater extent than others?
- Can we estimate that amount of tax avoided by this expatriation of profits? As above, a time pattern would be useful, as would the aggregate amount of avoidance.
- This one might be harder to get at. Does the expatriation of profit matter for the stock price of shares in the company? (If expatriation produces a capital gain on the order of magnitude of the tax avoided divided by the number of shares, then since there is a capital gains tax on individuals, some of this tax avoidance might be recaptured that way. Can that amount be estimated?)
- What do small business owners, who don't have this pipeline to expatriate profits, feel about this practice by large corporations? Do they think it is just the way the system works or, on the contrary, do they view it as fundamentally unfair creating a bias in the system in favor of the large corporations?
- And, likewise, what do ordinary taxpayers feel about the practice? Does the practice contribute to the view that the system is rigged?
The first is about the potential anti-competitive effects from large amounts of retained earnings held by major corporations. One could write a book on this subject. Instead, here I will content myself with recounting a bit of history, as my campus played a formative role in it. Netscape was the startup offering a new product, a graphical Web browser. Microsoft was the big, and by Internet measures, lumbering corporation with pockets so deep they might as well have been limitless. In 1995 Netscape Navigator was clearly the best browser on the market. By 1998 Internet Explorer had the larger market share. Netscape had one revenue stream. Microsoft offered its browser for free, plus it bundled the browser with the operating system so when you bought a new PC, IE was already on the machine. You had to download Netscape Navigator, and for people who had only dial up access, this was well before broadband became the standard, that download was an impediment. So a big cash war chest beat out a better product technically in this case. We should ask how often a similar story has played out since, even if those similar stories are not as well popularized as the Netscape case. We might then ask, tying this back to the expatriation of profit issue, whether taxation of corporate profit has pro-competitive effects, by reducing the size or the war chest, or if the magnitude of the corporate profits tax is not sufficient to matter this way.
The second is based on an Op-Ed from yesterday by Senator Chuck Schumer, A Better Deal for American Workers. In it there is a list of policies that the Democrats will advocate for as part of this better deal. One of those is a trillion dollar infrastructure plan. (In some future post I will take up the magnitude of such a proposal - too much or not enough? - as well as the time horizon under which the spending is meant to occur. In Schumer's piece there was not enough detail about the proposal to react in this way.) There was no mention in the piece about how we'll pay for that. Expatriated profits may end up being a big part of the answer. Supposedly, there is about two trillion dollars of such assets currently overseas. While everyone is good at spending other people's money, if a good ethical case can be made that a chunk of this rightfully should be viewed as taxes owed as a result of previous tax avoidance, then it rightfully could be used to finance the infrastructure investment.
Third, from the health care debacle, it is evident that many of the uber rich don't like paying taxes. We need to dissect this motive. From afar, here I mean from my own perspective and from some other academics I know who are similarly situated financially, once you are comfortable in your personal finances satiation with regards to wealth doesn't seem an unreasonable hypothesis. Those uber rich who dislike taxes are giving evidence that they are not satiated with their current wealth, not even close. They desire to accumulate still more. We need to understand why. Is there some way where the public is served by this motive? In my mind, an up and coming entrepreneur of modest means, who is successful and brings new product to market, benefits privately from that and accumulates wealth in the process, while the public also benefits in the process. The potential for wealth accumulation presumably then serves as an incentive to innovate, in what is the veritable win-win situation. If satiation with wealth eventually set in, after the entrepreneur had experienced repeated success of this sort, the financial incentive to innovate further would be lost. Is it fear of losing that incentive that drives the uber rich? This is the most benign explanation I can come up with. It's easy enough to produce a more nefarious story. Which story is right matters as to whether a collaborative or a combative approach would be best to address the matter of expatriated profit and the magnitude of the corporate profit tax.
It is amusing to me as an economist about how much of our discourse is spent talking about restricting labor mobility (i.e., immigration) without much if any discussion on restricting capital mobility. Perhaps by making this contradiction overt we might be able to bring the issue of expatriated corporate profit to the fore, where it rightfully belongs. It needs our attention before a sensible solution can be found. We need for that to happen soon.