Diana Iercosan
Evaluating International Taxation: Structuring taxation to promote national and
global welfare
Grade B+
Well done, Diana: The range of your research and the topic-oriented way that you integrated it into your paper were excellent. Your organization by sections was strong, and your writing was clear (recurrent mechanical errors were a bit distracting but did not impede reader understanding). Your analysis was strong, but there were some residual mistakes in the basic model, and sometimes your coverage of research analysis could have benefited from additional elaboration and commentary--that would have put a bit more of "you" into your analysis of the literature. Overall, a comprehensive and solid presentation on a complex and important issue.
General suggestions:
Highlight key points and present them early. Go ahead and
frontload where the reader will end up after reading the analysis and evidence
you present in each section. Also state key definitions early. You usually ended
up defining key terms clearly, but often after you had been discussing them for
awhile. You had some great data about how sensitive capital migration is to tax
rates. The data didn't seem tied to any particular model, so you could have
presented it earlier in order so show how large the effects are and therefore
how important tax considerations are as a topic.
Be sure to include an intuitive explanation of key results
along with the other details you present. I remained confused about why National
Ownership Neutrality maximized welfare if foreign income was untaxed. Ditto for
some of the conclusions about Nash equilibria in the tax competition section.
At the detail level: Include page citations along with source
citations whenever the information comes from a specific point in the paper. And
even though your prose was understandable, run your final draft by a writing
advisor as an editor to help polish it up. For a capstone project, it is a nice
finishing touch to showcase it with professional-caliber phrasing, word choices,
and mechanics.
These would have topped off an already strong effort. You assembled a very large amount of relevant research, including some very interesting recent perspectives on FDI and capital taxation. I learned about several new ideas that I plan to include in my class coverage of foreign investment in my International Economics class. It's been a pleasure working with you this semester. Good luck in your graduate studies!
Best, Jim Whitney
Page specific comments:
p3: "marginal profitability > marginal tax
rate" is unclear. The key would be to equate marginal after-tax
profitability across countries. The marginal tax rate simply factors into the
marginal after-tax profitability. Also, governments should act to maximize
national welfare, not just tax revenues. Inward investments also add to worker
productivity and wages--that adds to national welfare too.
p4: Careful with HO model. HO addresses trade only. Lack of
free trade does not necessarily imply lack of capital mobility. It is the case
though, that if there is free trade in an HO world, then there would be no need
for factor migration, since trade alone would equalize relative factor prices
globally.
p7: You keep referring to free trade when the model deals
with free capital migration
p8: This part is confusing. Your diagram illustrates no
capital migration. Without capital migration, the global price of capital does
not influence capital allocation. Capital outflow can't occur. You should
reconcile your text, diagrams and equations here.
p12: Klumar isn't listed in references. Chen is a book, I
see. The best sources for firm analysis are refereed professional journal
articles. In this case, balance of payments is a poor indicator of whether or
not foreign investment is worthwhile. BoP applies only for countries with fixed
exchange rates. Countries receive huge capital inflows when the investment and
can experience outflows as foreign investors remit profits. But the
overall impact on national welfare is typically still positive. The host country
gains due to higher productivity and wages of its labor. Ideally, FDI is a
positive sum, win-win situation.
p13: Regarding taxation in the source (host) country. The MNE
pays for the resources it hires, so why should that justify taxation? A better
argument would be that the host provides public goods too, just as the home
country does. MNEs should pay for benefits received in both countries. These
would be, in principle, efficient taxes--the payer gets corresponding benefits
from the governments.
p14: I like how you set up section 4--clear, succinct lists
of tax options and tax outcomes.
pp14-15: CEN = capital export neutrality => overall tax
rates are the same across host countries, so equal pre-tax returns => equal
post-tax returns
p15: I am confused by the Rouslang argument. t=0 =>
optimal allocation of capital. But if t=50% everywhere, then aftertax returns
are still equalized at the same allocation as pretax returns. I can see how
taxing capital more heavily where demand is more inelastic can raise total tax
revenues, but I can't see how it could raise global efficiency.
p16: How does the credit work if the foreign tax rate is
higher than the domestic rate. Don't many countries limit the credit to the rate
that the country charges. For example, if the US has a 50% corporate tax rate,
and the host country has a 60% tax rate, doesn't the foreign tax credit apply
only for the first 50%? If so, then the foreign tax credit wouldn't lead to full
neutrality.
p17: Your summary of the 3 methods of avoiding double
taxation is clear, but be sure that the actual preceding coverage is organized
along the same lines.
p18: good, concrete information about the response of import
source to foreign tax rates (evidence of transfer pricing).
p19: I like the specifics about US tax law on p19 too.
p20: consider greater risk of foreign investments instead of
investors being "skeptical."
p20: CIN = capital import neutrality => overall tax rates
are the same for all investors within a country (i.e., all residences of
investors).
p22: I'm confused by harmonization. You say at one point that
it means equal rates across countries but at another that it means equal rates
for all investors within a country.
p23: Your table seems to show CEN, not both CEN and CIN (?)
p26: CON = capital ownership neutrality (change in t does not
affect ownership)
NON = national ownership neutrality (exempts foreign income
from t)
NON does not seem to match NN since under NN, foreign taxes
are a deduction.
p27: efficiency under the management productivity model =>
can't raise productivity by further reallocating ownership. The key implication
is that FDI is not fundamentally a migration of capital but a reallocation of
ownership to promote better management. Very interesting take on what FDI could
be about.
p28: The data here are very interesting. But it's not clear
how these relate to the new benchmarks. They seem to show in general that tax
rates matter quite a bit. It might be better to present the data sooner to
motivate the paper--tax differentials and tax changes have a major impact on
capital allocation, so questions about tax structures address an important
international phenomenon.
p30: effective t = (ror,gross - ror,net)/ror,gross
Interesting finding: lower elasticity of I wrt t for
countries w/more restrictive trade.
p31: This point would benefit from further elaboration. It's
not clear why there is no domestic effect of NON.
p33: Interesting concept: tax competition can be good by
eliminating wasteful public-choice based government spending. However, it would
seem to make redistributive policies hard to carry out.
p34: Interesting point: tax competition can be usefully
viewed not as a simple perfect competition situation but a game theory
situation.
p40: Interesting point that higher K --> lower K-mobility
in response to t. Describe "agglomeration economies," although it
seems to be somewhat intuitive
pp44-5: Many game-theory results here. Consider how to
present them in a way that provides intuition (why does a Nash equilibrium fail
to exist) and what, if any, general conclusions we can draw.