Popular in Social Sciences

Political Science

V-Dem’s Conceptions of Democracy and Their Consequences

University of Notre Dame Michael Coppedge

Central Monetary Authorities

Macroeconomic modelling of CBDC: a critical review

European Central Bank Ulrich Bindseil

Social Identities and Divisions

A new explanation of antisemitism: Jew hatred as a civilisational phenomenon

Boston University Liah Greenfeld

Central Monetary Authorities

Financing Private Credit

Federal Reserve Bank of New York Nina Boyarchenko

Economics

Failing Banks

Massachusetts Institute of Technology Emil Verner

Culture and Society

The City as a Growth Machine: Toward a Political Economy of Place

New York University Harvey Moltoch

American Politics

International tax competition with rising intangible capital and financial globalization

View more insights in Social Sciences - Economics - Macroeconomics

View more figures from University of Southern California

View the page of Vincenzo Quadrini

Read the Study

Next in Economics

Fiscal policy volatility and capital misallocation

Shengyu Li | UNSW Sydney

Effects of monetary policy on household expectations: The role of homeownership

Shihan Xie | University of Illinois at Urbana-Champaign

Are global economic trends influencing government decisions on profit taxation?

Image courtesy of interviewee. December 17, 2024

Log-in or Sign-up to Faculti
Currently viewing this subject insight as a guest. You have insight(s) remaining for this month. Login to view 8000+ figures on the platform.

Generating Workspace...

Export as PDF

This video discusses the complexities of taxation on corporate profits in a globalized economy, focusing on two significant trends: the increasing importance of intangible capital and the globalization of financial markets.

1. **Intangible Capital**: Intangible assets, such as patents and knowledge, are becoming more prevalent in corporations, especially multinationals. Unlike tangible capital, which is used domestically, intangible capital can be utilized across borders. This video creates challenges in allocating costs for tax purposes, as companies may shift profits to lower-tax jurisdictions by manipulating the allocation of these intangible assets, which could raise their effective global tax burden.

2. **Globalized Financial Markets**: The globalization of financial markets implies that more domestic corporations are owned by foreign investors. Consequently, a significant share of profits generated in one country is owned by individuals or corporations from another, which may create a stronger incentive for local governments to tax these profits, as taxing foreigners can be politically more appealing than taxing residents.

This video contrasts these two dynamics: while the rise of intangible capital reduces the incentive for governments to impose higher taxes (due to the risk of profit shifting), the increase in foreign ownership can incentivize governments to tax more profusely since a larger portion of profits is no longer tied to domestic taxpayers.

The discussion also touches on the implications of taxation policy on investment decisions. High corporate taxes might deter investment, affecting future economic growth and worker wages. The author argues that while there are concerns about equity and taxation fairness, high taxation might discourage the long-term investment necessary for economic development.

Moreover, there is also a lack of commitment in taxation policies, which could lead to uncertain future tax rates, making it difficult for companies to make long-term investment decisions. The risks of political cycles influencing taxes can ultimately lead to a less favorable investment climate.

Overall, the text suggests that while government responses to globalization and the changing nature of capital are complex, it is crucial for policymakers to consider both immediate consequences and long-term effects when formulating tax policies.

Language:

Export as PDF

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

1
00:00:00.025 --> 00:00:01.685
The taxation profits in general.

2
00:00:01.985 --> 00:00:03.565
Income generated by,

3
00:00:03.605 --> 00:00:06.965
corporations has always been at the center of,

4
00:00:07.025 --> 00:00:10.645
public finance, and in particular, the environment that,

5
00:00:10.945 --> 00:00:12.245
is very globalized.

6
00:00:12.865 --> 00:00:16.085
And, of course, the, economy environment,

7
00:00:16.265 --> 00:00:17.445
changes over time.

8
00:00:17.665 --> 00:00:21.405
And as the economy environment, changes,

9
00:00:21.705 --> 00:00:26.125
the incentive from government to tax, profits

10
00:00:26.185 --> 00:00:28.045
or other sources of income,

11
00:00:28.045 --> 00:00:29.565
is also likely, to change.

12
00:00:30.265 --> 00:00:34.645
And, in this study, we, focus on two,

13
00:00:34.945 --> 00:00:36.605
we think important changes.

14
00:00:37.225 --> 00:00:41.685
One is the fact that, intangible capital has become,

15
00:00:41.795 --> 00:00:44.805
more, prevalent for, corporation

16
00:00:44.905 --> 00:00:46.445
and multinational in particular.

17
00:00:46.835 --> 00:00:48.445
Okay. The second is

18
00:00:48.445 --> 00:00:51.645
that financial markets become more globalized.

19
00:00:51.835 --> 00:00:54.485
What does it mean? Uh, globalization, financial markets,

20
00:00:54.875 --> 00:00:56.685
essentially that,

21
00:00:56.715 --> 00:01:00.845
portfolio are more internationally diversified, even though

22
00:01:00.945 --> 00:01:03.965
as a single investor, we don't realize

23
00:01:04.195 --> 00:01:06.805
that our investment are diversified,

24
00:01:07.225 --> 00:01:08.765
but through institutional investors

25
00:01:09.075 --> 00:01:12.285
that could be mutual funds, hedge funds

26
00:01:12.465 --> 00:01:14.325
or other type of investor,

27
00:01:14.325 --> 00:01:19.285
clearly there is a larger component of, foreign,

28
00:01:19.285 --> 00:01:20.525
foreign, ownership.

29
00:01:20.985 --> 00:01:25.245
So we wanted to understand how the, these two changes, which

30
00:01:25.245 --> 00:01:26.485
of course are not the only one,

31
00:01:26.545 --> 00:01:30.005
but the two we focus, could affect the incentive garment

32
00:01:30.025 --> 00:01:32.085
to, tax, profits.

33
00:01:32.085 --> 00:01:35.165
What I would like to emphasize, what are the feature

34
00:01:35.545 --> 00:01:38.645
of those two changes that could be important

35
00:01:38.785 --> 00:01:42.285
and relevant for understanding the incentive to tax,

36
00:01:42.285 --> 00:01:46.205
profits as opposed to other sources of, of income?

37
00:01:46.625 --> 00:01:48.725
Uh, let's think about intangible capital.

38
00:01:48.725 --> 00:01:50.925
First of all, what is intangible capital?

39
00:01:51.345 --> 00:01:55.045
Uh, it represents knowledge, knowledge that, companies,

40
00:01:55.225 --> 00:02:00.085
have, include, copyright patents,

41
00:02:00.305 --> 00:02:03.885
royalties and things, and, things like that.

42
00:02:04.265 --> 00:02:06.765
But one feature that is very important is

43
00:02:06.765 --> 00:02:10.005
that intangible capital is nor rival.

44
00:02:10.915 --> 00:02:15.125
What does it mean? Means that if I spend $1,

45
00:02:15.305 --> 00:02:18.605
for investing in tangible capita, what I produce

46
00:02:18.605 --> 00:02:21.645
as capita can be used not only domestically,

47
00:02:21.945 --> 00:02:25.085
but also in other countries to produce, essentially.

48
00:02:25.705 --> 00:02:30.275
Okay? Well, tangible capita is, tends to be rival, meaning

49
00:02:30.275 --> 00:02:33.315
that if I spend $1 in the US I can use

50
00:02:33.315 --> 00:02:34.835
that dollar only in the us.

51
00:02:35.475 --> 00:02:39.635
I cannot use the, the tangible cab, capital also in,

52
00:02:39.855 --> 00:02:40.995
in other country.

53
00:02:41.655 --> 00:02:44.715
But then this raises the, the issue of how

54
00:02:44.715 --> 00:02:49.595
to allocate the cost of tangible intangible in cab

55
00:02:49.595 --> 00:02:53.795
capital, in domestic operation versus foreign operations.

56
00:02:54.215 --> 00:02:56.235
And here is where,

57
00:02:56.375 --> 00:02:58.875
the tax should become relevant from

58
00:02:59.065 --> 00:03:00.245
the perspective of a company.

59
00:03:00.505 --> 00:03:03.445
Of course, I would like to allocate the cost

60
00:03:03.705 --> 00:03:06.565
of the intangible in locations

61
00:03:07.015 --> 00:03:09.125
where taxes are higher,

62
00:03:10.735 --> 00:03:15.205
which basically is a way to reduce, the, global,

63
00:03:15.585 --> 00:03:19.525
tax bill for, for, for, for the company.

64
00:03:20.105 --> 00:03:24.285
The problem is that it is very difficult to establish

65
00:03:24.515 --> 00:03:27.005
with certainty what should be the allocation

66
00:03:27.185 --> 00:03:28.725
of the cost of in inte.

67
00:03:29.455 --> 00:03:32.475
And that gives a lot of flexibility to companies

68
00:03:32.615 --> 00:03:36.515
or subjectivity to company to allocate those costs in order

69
00:03:36.515 --> 00:03:37.635
to reduce the tax bill.

70
00:03:39.095 --> 00:03:43.155
So that is the important component for,

71
00:03:43.165 --> 00:03:44.235
intangible capital.

72
00:03:44.535 --> 00:03:47.955
Let me, emphasize what, what is really important

73
00:03:48.015 --> 00:03:51.075
for financial globalization in terms of, incentive to,

74
00:03:51.075 --> 00:03:53.115
to tax, incomes.

75
00:03:53.855 --> 00:03:57.035
Um, so, with the financial globalization,

76
00:03:57.205 --> 00:04:01.555
there is a more, diversification portfolio, meaning

77
00:04:01.625 --> 00:04:05.435
that the company that operate in the United States,

78
00:04:05.685 --> 00:04:07.955
let's say a larger fraction

79
00:04:08.015 --> 00:04:11.035
of those companies are held by foreigners.

80
00:04:11.735 --> 00:04:15.515
So effectively what this means is that a larger fraction

81
00:04:15.535 --> 00:04:18.675
of the profits that are generated by this company belong

82
00:04:18.675 --> 00:04:22.385
to foreigners because they belong to foreigners.

83
00:04:22.565 --> 00:04:25.105
Of course, the incentive of the local government to tax

84
00:04:25.615 --> 00:04:26.985
becomes stronger.

85
00:04:27.295 --> 00:04:29.385
Obviously, it's always a politically is,

86
00:04:29.605 --> 00:04:32.425
is is very convenient to tax the foreigners, right?

87
00:04:32.425 --> 00:04:35.625
Rather than the, the, the, the local who are the borders.

88
00:04:35.805 --> 00:04:39.545
Um, essentially, okay, so

89
00:04:40.285 --> 00:04:43.665
you have, two opposite trend in terms

90
00:04:43.925 --> 00:04:45.305
of incentive to tax.

91
00:04:45.965 --> 00:04:49.265
The increase in intangible means that,

92
00:04:49.325 --> 00:04:51.185
it reduces the incentive to tax

93
00:04:51.185 --> 00:04:54.385
because if you tax more company are going

94
00:04:54.385 --> 00:04:56.105
to shift profits abroad.

95
00:04:56.245 --> 00:04:58.865
So in other words, what they do, they allocate more cost

96
00:04:58.865 --> 00:05:01.745
of the intangible at home so that the profits are lower

97
00:05:01.965 --> 00:05:04.345
and they tends to increase the profits abroad.

98
00:05:04.445 --> 00:05:06.745
So you don't want to tax because if you tax too

99
00:05:06.745 --> 00:05:07.785
much, what happens?

100
00:05:08.005 --> 00:05:11.945
You end up with, with, with very little tax base,

101
00:05:12.245 --> 00:05:15.425
you won't be able to raise much ma many taxes, okay?

102
00:05:15.725 --> 00:05:18.625
But on the other end, the financial globalization,

103
00:05:18.885 --> 00:05:20.025
act in the opposite.

104
00:05:20.445 --> 00:05:21.785
So what it means is that

105
00:05:21.785 --> 00:05:25.385
because now a larger share of the profits

106
00:05:25.385 --> 00:05:29.225
that are generated domestically, are, are taxed,

107
00:05:29.325 --> 00:05:31.945
are, is basically are owned by foreigners.

108
00:05:32.045 --> 00:05:33.625
So there is more incentive to tax.

109
00:05:33.845 --> 00:05:36.145
So you get those two contrasting effort.

110
00:05:36.905 --> 00:05:39.515
What we wanted to understand is which

111
00:05:39.815 --> 00:05:41.955
of those two efforts dominate.

112
00:05:42.105 --> 00:05:46.835
What is going to happen is that, if, larger share

113
00:05:47.135 --> 00:05:51.715
of the profits that are earned in the United States, okay,

114
00:05:52.025 --> 00:05:56.155
belongs to foreigners through the ownership of, of

115
00:05:56.675 --> 00:05:58.285
domestic, domestic company.

116
00:05:58.675 --> 00:06:00.165
From the perspective of the government,

117
00:06:00.375 --> 00:06:02.725
there is more incentive to tax those profits

118
00:06:02.755 --> 00:06:05.965
because a larger share belongs to foreigners rather than,

119
00:06:06.305 --> 00:06:09.805
domestic, domestic citizen,

120
00:06:10.005 --> 00:06:11.635
domestic residents, okay?

121
00:06:11.945 --> 00:06:15.075
Similarly, for the foreign country, the foreign country, if,

122
00:06:15.135 --> 00:06:18.115
a, a, a larger share of the profits

123
00:06:18.115 --> 00:06:21.105
that are generated, let's say Europe, okay,

124
00:06:21.485 --> 00:06:25.665
are actually profits that belong to US residents.

125
00:06:25.835 --> 00:06:29.305
There is a large incentives for European government

126
00:06:29.365 --> 00:06:31.305
to tax those, those profits.

127
00:06:31.535 --> 00:06:36.305
That is the, the, the mechanism that,

128
00:06:36.325 --> 00:06:38.865
global financial globalization affects the incentive

129
00:06:38.865 --> 00:06:40.345
government to, to tax.

130
00:06:40.565 --> 00:06:42.385
Now, I would like to emphasize one thing though,

131
00:06:42.925 --> 00:06:47.655
because the common view in some sense is the

132
00:06:48.255 --> 00:06:49.295
opposite, is

133
00:06:49.295 --> 00:06:52.655
that when there is more financial globalization,

134
00:06:53.735 --> 00:06:58.495
actually the incentive, to, to, to tax,

135
00:06:58.495 --> 00:07:01.815
profits in general, tends to, arise, okay?

136
00:07:02.355 --> 00:07:06.575
But they, mostly is based on the idea that,

137
00:07:06.645 --> 00:07:11.615
company can reallocate their investment, allocate, okay?

138
00:07:12.115 --> 00:07:16.295
But little attention has been placed to the fact, that,

139
00:07:16.435 --> 00:07:20.795
globalization also means ownership of, of,

140
00:07:21.015 --> 00:07:22.195
of, of investment.

141
00:07:22.555 --> 00:07:27.075
I have my savings. So let's say that, 20% of my,

142
00:07:27.495 --> 00:07:31.595
my savings are in, shares

143
00:07:31.595 --> 00:07:34.255
of company located abroad, okay?

144
00:07:34.715 --> 00:07:39.295
So, indirectly on the, the,

145
00:07:39.295 --> 00:07:43.455
ownership of this foreign company, I, I,

146
00:07:43.515 --> 00:07:46.805
pay taxes on dividends I pay, right?

147
00:07:47.385 --> 00:07:51.925
So now in those, foreign countries, when they decide

148
00:07:51.985 --> 00:07:53.405
how much to tax, they know

149
00:07:53.405 --> 00:07:56.165
that if they raise the taxation profits in their country,

150
00:07:56.635 --> 00:07:59.525
they're going to tax the dividends that I receive.

151
00:08:00.225 --> 00:08:03.565
I'm not a resident of the foreign country, so obviously

152
00:08:03.635 --> 00:08:06.245
that is a good way to raise money, right?

153
00:08:06.245 --> 00:08:08.925
Because I don't vote basically in the foreign country.

154
00:08:09.245 --> 00:08:14.125
I think about the tax shift in the, for the case of,

155
00:08:14.125 --> 00:08:15.685
intangible capital, right?

156
00:08:16.305 --> 00:08:20.575
So obviously if all country in the world coordinate

157
00:08:20.995 --> 00:08:24.455
to increase taxes, then obviously there is no way

158
00:08:24.515 --> 00:08:28.495
for any company to shift those, those profits,

159
00:08:28.635 --> 00:08:31.055
unless they can of course invest

160
00:08:31.055 --> 00:08:32.935
and generate profits in the moon.

161
00:08:33.435 --> 00:08:35.735
So not in the, you know, in the, in the,

162
00:08:35.835 --> 00:08:37.135
in the earth.

163
00:08:37.795 --> 00:08:39.095
Um,

164
00:08:39.395 --> 00:08:43.135
but so this is why competition among garments

165
00:08:43.825 --> 00:08:47.255
might be relevant, because what happens is that,

166
00:08:47.495 --> 00:08:50.655
I don't want to increase my own taxation, because

167
00:08:50.655 --> 00:08:53.895
otherwise a company will shift the taxation

168
00:08:53.895 --> 00:08:55.755
to Europe, okay?

169
00:08:55.945 --> 00:08:59.715
Similarly, Europe, I I it considers that,

170
00:09:00.635 --> 00:09:03.155
increase taxes will shift the profits to the us.

171
00:09:04.605 --> 00:09:06.505
So both at the end will choose

172
00:09:06.565 --> 00:09:09.505
to have very low taxation will choose.

173
00:09:09.685 --> 00:09:11.905
So that is why competition is important.

174
00:09:12.405 --> 00:09:14.705
On the other end, if they will sit in a table

175
00:09:14.845 --> 00:09:18.625
and agree together to raise corporate, corporate taxes,

176
00:09:18.625 --> 00:09:20.945
perfect taxes, they will be able to do

177
00:09:20.945 --> 00:09:22.465
that without losing tax base.

178
00:09:22.665 --> 00:09:25.065
I think when I talk about tax competition,

179
00:09:25.495 --> 00:09:29.265
what I'm referring is a situation in which a country

180
00:09:29.835 --> 00:09:34.145
don't try to agree together on what should be the, the,

181
00:09:34.245 --> 00:09:35.465
the common tax rate.

182
00:09:35.775 --> 00:09:39.545
Each one chooses their own tax, okay? Independently.

183
00:09:39.765 --> 00:09:44.465
So that is, is competition against the concept of instead,

184
00:09:45.055 --> 00:09:48.865
cooperation in general, the fact that there is a race

185
00:09:49.045 --> 00:09:52.145
to the bottom, meaning that, at the end,

186
00:09:52.165 --> 00:09:56.505
the old country lower the taxation of, profit happens

187
00:09:56.565 --> 00:10:00.385
to be considered a negative outcome, okay?

188
00:10:00.575 --> 00:10:05.065
Because, mostly from a redistributing point of view,

189
00:10:05.365 --> 00:10:09.865
the, the idea is that, profits tends to be earned

190
00:10:10.205 --> 00:10:14.585
by certain categories of the population versus other source.

191
00:10:14.585 --> 00:10:18.785
So incomes which are wages, so in our oversimplify,

192
00:10:19.245 --> 00:10:22.025
the reach are earnings, dividends.

193
00:10:22.025 --> 00:10:23.945
They are earning incomes generated by,

194
00:10:24.085 --> 00:10:26.865
by companies while they no reach

195
00:10:27.085 --> 00:10:29.665
or let's say the poor, they are earning,

196
00:10:29.665 --> 00:10:30.785
income from their level.

197
00:10:31.685 --> 00:10:35.215
Okay? So there is a concern that if we don't tax profits

198
00:10:35.815 --> 00:10:38.135
sufficiently, we have to tax wages more,

199
00:10:38.395 --> 00:10:40.655
but by taxing wages more we are going

200
00:10:40.655 --> 00:10:43.015
to tax the poor rather than the rich.

201
00:10:43.165 --> 00:10:46.015
Okay? So that is the, is the main concern.

202
00:10:46.885 --> 00:10:51.815
However, this argument doesn't take into consideration

203
00:10:52.035 --> 00:10:55.345
the long-term effect, okay?

204
00:10:55.645 --> 00:10:59.145
So if we live in an environment where,

205
00:10:59.155 --> 00:11:03.465
taxes are very high, the consequences that,

206
00:11:04.025 --> 00:11:08.165
companies are going to invest less in the future,

207
00:11:08.935 --> 00:11:12.765
lower investment also, will be,

208
00:11:12.815 --> 00:11:16.405
lower investment will have a negative impact also for wages.

209
00:11:17.585 --> 00:11:19.685
So when a company don't invest,

210
00:11:19.915 --> 00:11:21.805
much company will not be able

211
00:11:21.805 --> 00:11:23.805
to pay better wages to workers.

212
00:11:24.625 --> 00:11:29.605
So ultimately, the point that, I would like to make is

213
00:11:29.605 --> 00:11:33.845
that yes, it is true that there are some,

214
00:11:34.025 --> 00:11:35.165
equity concerns,

215
00:11:36.385 --> 00:11:38.685
but should, we should also take into account

216
00:11:38.795 --> 00:11:41.965
that high taxation of profits

217
00:11:42.145 --> 00:11:45.845
and, corporate income at the end discourage investment,

218
00:11:45.975 --> 00:11:50.325
which ultimately will be damaging for workers or commitment.

219
00:11:50.715 --> 00:11:54.645
What I mean is that we can choose,

220
00:11:54.795 --> 00:11:56.845
what should be the tax rate now,

221
00:11:57.225 --> 00:11:58.925
and we guarantee that

222
00:11:58.995 --> 00:12:01.765
that tax rate will always be the same in the future.

223
00:12:02.595 --> 00:12:04.485
That what I mean for commitment.

224
00:12:04.665 --> 00:12:08.965
So once we, we pro we establish certain tax rate,

225
00:12:08.995 --> 00:12:12.165
that tax rate will not be changing the future, okay?

226
00:12:12.465 --> 00:12:16.085
But we know that the political cycle does allow for that.

227
00:12:16.345 --> 00:12:18.965
In other words, yes, there could be some consensus,

228
00:12:18.965 --> 00:12:21.725
political consensus to introduce a certain level

229
00:12:21.865 --> 00:12:22.925
of taxation now,

230
00:12:23.305 --> 00:12:26.525
but we don't know what the future, future garment,

231
00:12:26.785 --> 00:12:29.005
future constituency will choose.

232
00:12:29.395 --> 00:12:32.485
Okay? So that is the lack of commitment.

233
00:12:32.785 --> 00:12:34.685
Now, if you realize

234
00:12:34.995 --> 00:12:38.085
that when you choose taxes from the government point

235
00:12:38.085 --> 00:12:41.205
of view, okay, you are choosing taxes only

236
00:12:41.265 --> 00:12:42.325
for a short period of time.

237
00:12:43.675 --> 00:12:46.285
What you are focusing in your decision

238
00:12:46.985 --> 00:12:49.365
is on the short term impact,

239
00:12:50.325 --> 00:12:52.345
the shortterm impact might not be

240
00:12:52.345 --> 00:12:53.865
so damaging for the economy.

241
00:12:54.605 --> 00:12:59.025
You simply ready higher taxation of, of profits

242
00:12:59.545 --> 00:13:03.145
redistribute from in general the reach to the poor.

243
00:13:03.205 --> 00:13:07.005
And that could be, a good thing to do, okay?

244
00:13:07.545 --> 00:13:10.605
But then you don't take into consideration the long term

245
00:13:10.825 --> 00:13:14.525
effect because the policy that you choose now, you know,

246
00:13:14.525 --> 00:13:16.645
that, is not going to be the policy

247
00:13:16.675 --> 00:13:18.005
that will be chosen in the future.

248
00:13:18.225 --> 00:13:20.005
And this is why in the long run could

249
00:13:20.005 --> 00:13:21.285
be, could be damaging.

250
00:13:21.545 --> 00:13:23.645
Why, why, why in the long run is it damaging?

251
00:13:23.645 --> 00:13:24.925
Is it because of the volatility of,

252
00:13:24.925 --> 00:13:27.205
obviously political parties come in every four years

253
00:13:27.305 --> 00:13:28.885
and they do the opposite from each other,

254
00:13:29.065 --> 00:13:31.245
but why does that impact in the long run?

255
00:13:32.355 --> 00:13:35.695
Yes, because, as you know, company,

256
00:13:35.845 --> 00:13:40.055
when they make investment for them, what is relevant is not

257
00:13:40.325 --> 00:13:43.775
what, what, what we are now, what is happening now

258
00:13:44.035 --> 00:13:45.055
for them is the future.

259
00:13:45.535 --> 00:13:49.655
Remember, if you, if a corporation decides to invest in Asia

260
00:13:49.755 --> 00:13:53.855
or wherever, of course they have a horizon that is a 10,

261
00:13:53.875 --> 00:13:57.295
20 years is not one or two years, okay?

262
00:13:57.355 --> 00:13:59.575
So that is why, why it's important.

263
00:13:59.675 --> 00:14:03.375
And if they realize that through this,

264
00:14:03.645 --> 00:14:04.895
political mechanism,

265
00:14:05.305 --> 00:14:08.535
eventually taxes in the future will be very high,

266
00:14:09.525 --> 00:14:11.335
then data will discourage invest.

267
00:14:11.445 --> 00:14:15.295
Regulations is also another important, important element

268
00:14:15.365 --> 00:14:19.135
with data contributes to create the business environment.

269
00:14:19.765 --> 00:14:24.655
Okay? And so sometimes whether a certain, whether,

270
00:14:25.215 --> 00:14:26.735
companies have an incentive to invest

271
00:14:27.075 --> 00:14:30.455
or not, depends in part on taxes,

272
00:14:30.875 --> 00:14:33.375
but also on the institutional framework.

273
00:14:33.795 --> 00:14:36.735
So is, how,

274
00:14:36.915 --> 00:14:40.055
how company are protected from, property rights,

275
00:14:40.515 --> 00:14:43.255
for instance, okay, contract enforcement

276
00:14:43.715 --> 00:14:47.975
and the other type of institutional, aspects,

277
00:14:47.975 --> 00:14:52.225
aspects, of the economy in, in the i,

278
00:14:52.645 --> 00:14:54.185
aspect that,

279
00:14:54.205 --> 00:14:58.985
the professor will also investigate this kind of decisions,

280
00:14:59.075 --> 00:15:02.305
which are also, the made by the, by,

281
00:15:02.325 --> 00:15:06.465
the government in effective the incentive of, company

282
00:15:06.565 --> 00:15:10.705
to invest and potentially, generate benefits, for,

283
00:15:10.965 --> 00:15:12.225
the economy into the future.

00:00:00 - The taxation profits in general. Income generated by, corporations has always been at the center of, public finance, and in particular, the environment that, is very globalized. And, of course, the, economy environment, changes over time. And as the economy environment, changes, the incentive from government to tax, profits or other sources of income, is also likely, to change.

00:00:34 - we think important changes. One is the fact that, intangible capital has become, more, prevalent for, corporation and multinational in particular. Okay. The second is that financial markets become more globalized. What does it mean? globalization, financial markets, essentially that, portfolio are more internationally diversified, even though

00:01:04 - that our investment are diversified, but through institutional investors that could be mutual funds, hedge funds or other type of investor, clearly there is a larger component of, foreign, foreign, ownership. So we wanted to understand how the, these two changes, which of course are not the only one, but the two we focus, could affect the incentive garment to, tax, profits.

00:01:35 - of those two changes that could be important and relevant for understanding the incentive to tax, profits as opposed to other sources of, of income? let's think about intangible capital. First of all, what is intangible capital? it represents knowledge, knowledge that, companies, have, include, copyright patents, royalties and things, and, things like that.

00:02:06 - that intangible capital is nor rival. What does it mean? Means that if I spend $1, for investing in tangible capita, what I produce as capita can be used not only domestically, but also in other countries to produce, essentially. Okay? Well, tangible capita is, tends to be rival, meaning that if I spend $1 in the US I can use that dollar only in the us.

00:02:39 - in other country. But then this raises the, the issue of how to allocate the cost of tangible intangible in cab capital, in domestic operation versus foreign operations. And here is where, the tax should become relevant from the perspective of a company. Of course, I would like to allocate the cost of the intangible in locations

00:03:10 - which basically is a way to reduce, the, global, tax bill for, for, for, for the company. The problem is that it is very difficult to establish with certainty what should be the allocation of the cost of in inte. And that gives a lot of flexibility to companies or subjectivity to company to allocate those costs in order to reduce the tax bill.

00:03:43 - intangible capital. Let me, emphasize what, what is really important for financial globalization in terms of, incentive to, to tax, incomes. so, with the financial globalization, there is a more, diversification portfolio, meaning that the company that operate in the United States, let's say a larger fraction of those companies are held by foreigners.

00:04:15 - of the profits that are generated by this company belong to foreigners because they belong to foreigners. Of course, the incentive of the local government to tax becomes stronger. Obviously, it's always a politically is, is is very convenient to tax the foreigners, right? Rather than the, the, the, the local who are the borders. essentially, okay, so you have, two opposite trend in terms

00:04:45 - The increase in intangible means that, it reduces the incentive to tax because if you tax more company are going to shift profits abroad. So in other words, what they do, they allocate more cost of the intangible at home so that the profits are lower and they tends to increase the profits abroad. So you don't want to tax because if you tax too much, what happens? You end up with, with, with very little tax base, you won't be able to raise much ma many taxes, okay?

00:05:18 - act in the opposite. So what it means is that because now a larger share of the profits that are generated domestically, are, are taxed, are, is basically are owned by foreigners. So there is more incentive to tax. So you get those two contrasting effort. What we wanted to understand is which of those two efforts dominate. What is going to happen is that, if, larger share

00:05:52 - belongs to foreigners through the ownership of, of domestic, domestic company. From the perspective of the government, there is more incentive to tax those profits because a larger share belongs to foreigners rather than, domestic, domestic citizen, domestic residents, okay? Similarly, for the foreign country, the foreign country, if, a, a, a larger share of the profits

00:06:21 - are actually profits that belong to US residents. There is a large incentives for European government to tax those, those profits. That is the, the, the mechanism that, global financial globalization affects the incentive government to, to tax. Now, I would like to emphasize one thing though, because the common view in some sense is the

00:06:49 - that when there is more financial globalization, actually the incentive, to, to, to tax, profits in general, tends to, arise, okay? But they, mostly is based on the idea that, company can reallocate their investment, allocate, okay? But little attention has been placed to the fact, that, globalization also means ownership of, of,

00:07:22 - I have my savings. So let's say that, 20% of my, my savings are in, shares of company located abroad, okay? So, indirectly on the, the, ownership of this foreign company, I, I, pay taxes on dividends I pay, right? So now in those, foreign countries, when they decide

00:07:53 - that if they raise the taxation profits in their country, they're going to tax the dividends that I receive. I'm not a resident of the foreign country, so obviously that is a good way to raise money, right? Because I don't vote basically in the foreign country. I think about the tax shift in the, for the case of, intangible capital, right? So obviously if all country in the world coordinate to increase taxes, then obviously there is no way

00:08:28 - unless they can of course invest and generate profits in the moon. So not in the, you know, in the, in the, in the earth. but so this is why competition among garments might be relevant, because what happens is that, I don't want to increase my own taxation, because otherwise a company will shift the taxation to Europe, okay?

00:09:00 - increase taxes will shift the profits to the us. So both at the end will choose to have very low taxation will choose. So that is why competition is important. On the other end, if they will sit in a table and agree together to raise corporate, corporate taxes, perfect taxes, they will be able to do that without losing tax base. I think when I talk about tax competition, what I'm referring is a situation in which a country

00:09:34 - the common tax rate. Each one chooses their own tax, okay? Independently. So that is, is competition against the concept of instead, cooperation in general, the fact that there is a race to the bottom, meaning that, at the end, the old country lower the taxation of, profit happens to be considered a negative outcome, okay?

00:10:05 - the, the idea is that, profits tends to be earned by certain categories of the population versus other source. So incomes which are wages, so in our oversimplify, the reach are earnings, dividends. They are earning incomes generated by, by companies while they no reach or let's say the poor, they are earning, income from their level.

00:10:35 - sufficiently, we have to tax wages more, but by taxing wages more we are going to tax the poor rather than the rich. Okay? So that is the, is the main concern. However, this argument doesn't take into consideration the long-term effect, okay? So if we live in an environment where, taxes are very high, the consequences that,

00:11:08 - lower investment also, will be, lower investment will have a negative impact also for wages. So when a company don't invest, much company will not be able to pay better wages to workers. So ultimately, the point that, I would like to make is that yes, it is true that there are some,

00:11:36 - but should, we should also take into account that high taxation of profits and, corporate income at the end discourage investment, which ultimately will be damaging for workers or commitment. What I mean is that we can choose, what should be the tax rate now, and we guarantee that that tax rate will always be the same in the future. That what I mean for commitment.

00:12:08 - that tax rate will not be changing the future, okay? But we know that the political cycle does allow for that. In other words, yes, there could be some consensus, political consensus to introduce a certain level of taxation now, but we don't know what the future, future garment, future constituency will choose. Okay? So that is the lack of commitment. Now, if you realize

00:12:38 - of view, okay, you are choosing taxes only for a short period of time. What you are focusing in your decision is on the short term impact, the shortterm impact might not be so damaging for the economy. You simply ready higher taxation of, of profits redistribute from in general the reach to the poor. And that could be, a good thing to do, okay?

00:13:10 - effect because the policy that you choose now, you know, that, is not going to be the policy that will be chosen in the future. And this is why in the long run could be, could be damaging. Why, why, why in the long run is it damaging? Is it because of the volatility of, obviously political parties come in every four years and they do the opposite from each other, but why does that impact in the long run? Yes, because, as you know, company, when they make investment for them, what is relevant is not

00:13:44 - for them is the future. Remember, if you, if a corporation decides to invest in Asia or wherever, of course they have a horizon that is a 10, 20 years is not one or two years, okay? So that is why, why it's important. And if they realize that through this, political mechanism, eventually taxes in the future will be very high, then data will discourage invest.

00:14:15 - with data contributes to create the business environment. Okay? And so sometimes whether a certain, whether, companies have an incentive to invest or not, depends in part on taxes, but also on the institutional framework. So is, how, how company are protected from, property rights, for instance, okay, contract enforcement

00:15:10 - aspects, of the economy in, in the i, aspect that, the professor will also investigate this kind of decisions, which are also, the made by the, by, the government in effective the incentive of, company to invest and potentially, generate benefits, for, the economy into the future.

Faculti AI can make mistakes

Research

Policy

Analysis