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Comment by m12k | Hacker News Reader

Here's another possibility: The highly increased value of intellectual property that comes from IT has made transfer pricing a much more efficient means of tax avoidance for companies, who are free to move almost all their profits to the Cayman Islands and other tax havens. Expecting our tax authorities to judge whether a trade between two subsidiaries of a multinational is at 'fair market value' makes sense if they're trading steel bars, not so much if they're trading e.g. a 'license for the Google search algorithm'. Intellectual property, pretty much by definition, is unique rather than a commodity.

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The authors of the paper identify a trend of "growth that began in the 1970's", and say that correlates with the emergence of IT firms being able to erect barriers to competition. It might be coincidence, but the late 1970s is also when:

1. The US Copyright Act of 1976 extended copyright from a fixed term of 28 years (with opt-in 28 year extension) to the life of the author plus 70 years.

2. The Patent Cooperation Treaty became active in 1978, making it much easier to obtain patents in multiple countries.

It would seem that IP was strengthened (both as a method of avoiding tax and suppressing competition) in the late 1970s. The deregulation of the banking industry which happened in the early 1980s seems like it would have helped also.

I'm just going to throw this out there as well, but 1973 was when the Great Stagnation began (http://macromarketmusings.blogspot.com/2011/02/great-stagnat...), and it coincides quite closely to when Richard Nixon ended the Bretton Woods system and allows the value of the American dollar to float relative to other currencies.

In other words, globalization is a huge factor that the authors of the paper don't seem to be accounting for.

In fact, after Ctrl+F'ing "foreign", I get:

>By December 2015 holdings of liquid assets by foreign subsidiaries rose to $2.4 Trillion (see Whalen and McCoy (2016)) while domestic holdings of liquid assets rose since 2008 by about $1.9 Trillion. These foreign assets increased due to a legal provision that allows Indefinitely Reinvested Foreign Earnings to be free of US income tax. Hence, $2.4 Trillion are kept abroad not out of productive needs but rather as a device to save income tax hence not necessary for productive capacity

...so maybe American companies are using IT to store wealth abroad, but maybe American companies are being taken over by foreign entities? That would explain how our trade deficit has persisted for several decades.

I'd like to see corporation tax replaced with a Border Adjustment Tax [1]. The tax would be paid on the result of USA Revenue - USA Costs. If you were to move intellectual property offshore and licence it from that subsidiary then that would not be a USA Cost and therefore would not be deductible. If you brought it back onshore then it would only be deductible if there was a cost. If you moved into another company within the US, then it would be a cost but that company would then need to pay tax on that revenue minus the minimal costs that it would incur to store IP.

1. http://www.investopedia.com/terms/b/border-adjustment-tax.as...

Okay sounds good in this case but what if a company really needs to buy a licence from an offshore company, let's say a critical technical part in your manufacturing process. Then you can't deduct it but in reality these are your costs.

Remember that the problem is caused by companies abusing the system but the rules are there because honest companies need to operate.

The real solution would fix the issue while allowing honest companies to work just like they did before. The problem is that software companies are composed almost purely out of intellectual property, that is intangible and hard to really track.

Then they would need to raise your prices to afford the tax, or select a more expensive locally made alternative.

> Then you can't deduct it but in reality these are your costs.

The tax wasn't collected to begin with. The reason you can deduct it when buying from a local company is that they paid it. If you buy from a foreign company that hasn't paid it then you have to because they didn't. It isn't an unfairness, it's the reinstitution of fairness.

Hadn't heard of that before. Personally, I'm rooting for https://en.wikipedia.org/wiki/Formulary_apportionment

Anything like that which results in a huge financial incentive for outsourcing is not going to be popular.

Tax avoidance might be a factor sure, but can it be enough on it's own? If IT wasn't increasing the value of intellectual property, taxing it would be an economy-distorting issue. So I see the tax issue as being the cherry on the top, but not the core issue.

Tax manipulation doesn't change the fundamental value of labour, but IT does. It enables vastly more value to be created using less and less labour and materials, sometimes by many orders of magnitude. That's the game changing trend.

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