NYU’s Tax Law Review featured the work of two of our colleagues in the fall 2008 issue. Ruth Mason, Walter Hellerstein of Georgia and Georg Kofler of the Johannes Kepler University of Linz co-authored the lead article, Constitutional Restraints on Corporate Tax Integration, 62 Tax L. Rev. 1-66 (2008). Stephen Utz contributed a commentary, The European CCCTB as the Outcome of a Virtual Game, 62 Tax L. Rev. 135-42 (2008), which responds to an article by Jack Mintz and Joann Weiner that appears in the same issue.
Ruth’s article details numerous doctrinal issues that arise when the same economic transaction is subject to multiple forms of taxation. The simplest example is the double taxation that occurs when income is taxed first at the corporate level and then a second time as income to the shareholder who receives dividends. The article centers on what Ruth and her co-authors call “juridical double taxation,” the taxing of the same income by more than one sovereign. Consider dividends paid by a German corporation to a shareholder located in France; or those paid by a Delaware corporation to a shareholder in New York. The mechanics of such transactions are daunting, as the tax lawyer must decipher multiple possibilities. Income can be taxed at the corporate level by the state where the income-earning corporation is located. If the firm then pays dividends to a shareholder located elsewhere, the corporation's home jurisdiction may seek to withhold tax revenue before the dividend payment goes out. In addition, the shareholder’s jurisdiction may also assess a tax on the dividend recipient. Ruth and her colleagues take us through these mechanics with admirable skill, but the article is far more ambitious.
Consider next the problems created when a particular jurisdiction provides relief to taxpayers from some sorts of arguably duplicative taxes. Suppose a European country or an American state decides to give its residents a credit against the tax owing on dividend income to reflect the fact that the income has already been taxed at the corporate level. Jurisdictions offering relief might be inclined only to award credit when the corporation is a domestic one. Only in these cases will the jurisdiction offering relief itself be guilty of double taxation. But offering relief only to shareholders of domestic corporations arguably runs afoul of the principle of free flow of goods and services that governs common markets such as the EU or the U.S. Providing relief only to shareholders of domestic corporations creates an economic incentive to locate corporations in the jurisdiction providing relief. The ECJ and the U.S. Supreme Court have dealt with this problem extensively. Ruth and her co-authors detail these decisions and seem largely comfortable with many of the outcomes that limit the options of states to afford "selective" relief.
Beyond the doctrine, of course, the authors tackle the ultimately insoluble problem of using terms such as “equality” (in this case framed in terms of “a level playing field”) without an underlying theory of equal for what purposes. For those constitutional lawyers among us, it’s a treat to see the issue litigated in cases where the large sums at stake mean no loss is taken lying down. Ruth and her colleagues are entirely convincing is demonstrating the flaws in the parochial attitudes some states advance. If Connecticut offers relief only to resident shareholders of Connecticut companies on the theory that only those companies have paid corporate taxes to Connecticut, then Connecticut is ignoring taxes that out-of-state companies may have paid to their home states before sending dividends here to Connecticut residents. Courts are thus correct to force states (and European nations) to take a broader frame.
Yet there’s a certain conceit to the entire area that refuses even to admit the riddles that arise from a still broader frame. If my state or country is rich and yours is poor, policies that permit me to charge a lower tax rate may produce enough revenue and allow my country to serve as a magnet for investment in comparison to places with higher rates such as your country. This continued “inequality” is, of course, built into a structure with separate “sovereignties” controlling tax rates encompassed by a larger multi-sovereign unified market. Understandably, Ruth and her co-authors leave such riddles for another day. What they have done is provide a roadmap through this doctrinal thicket that will serve as an indispensable starting point for anyone brave enough to venture into this topic in the future.
Steve’s commentary provides a useful cautionary and corrective note to the points made by Mintz and Weiner. As best as I can tell, the EU is moving towards a new approach to taxation of multinational corporations. The new idea is to develop a Common Consolidated Corporate Tax Base (“CCCTB”) so that income within this base can then be apportioned to the member states for taxation. According to Steve, Mintz and Weiner productively introduce the idea of game theory into the discussion of how the European member states might negotiate their way toward agreement on the calculation of the CCCTB. But having introduced this useful lens, the authors, again according to Steve, fall short in two ways. First, their article lacks sufficient description concerning what the negotiation of the members states would actually look like. Second, Steve argues that the authors lump together various features of cooperative games such as Pareto optimality, coalition stability, side payments and state-level egoism. Steve patiently takes us through a cogent analysis of why these various attributes of cooperative games might not be equally applicable to the situation faced by the member states. I have no doubt that our authors would be well-advised to take Steve’s carefully elaborated points to heart.
It is wonderful to see Connecticut scholars in the nation’s premier academic journal on taxation. Bravo!