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.