Ownership Neutrality, Ownership Distortions, And International Tax Welfare Benchmarks‪.‬

The literature analyzing the efficiency consequences of international tax policy has for many years emphasized the impact of a nation's tax laws on the location of capital (either in saving or in investment). By contrast, Mihir Desai and James Hines have recently suggested that policy analysis should take greater account of the efficiency consequences of ownership. Desai and Hines have put forward capital ownership neutrality (CON), as a benchmark that promotes global efficiency (from an ownership perspective), and national ownership neutrality (NON), as a benchmark that promotes national welfare (from an ownership perspective). This paper analyzes the empirical and theoretical arguments for adopting international tax welfare benchmarks that are keyed to ownership distortions. It concludes that existing empirical evidence does not provide a good indication of the magnitude of ownership distortions, as compared to locational distortions. The paper's chief theoretical contribution is to describe the many tax and non-tax features of the global economy that can lead to ownership distortions. Because distortions arise in many ways that have nothing to do with the manner of double tax relief, it is not possible to make theoretical efficiency claims (at either the global or national level) based merely on modification to methods of double tax relief. Thus CON and NON do not necessarily promote global and national welfare (from an ownership perspective). Ownership distortions should play an important role in the setting of international tax policy. Determining actual policy prescriptions, however, requires further theoretical and empirical investigation of the complicated interaction of locational and ownership distortions. I. INTRODUCTION