Harnessing the Costs of International Tax Arbitrage‪.‬

Despite attention from governments, international organizations, and academics, the issue of international tax arbitrage, or private tax benefits arising from the conflict of tax laws between countries, has proven a difficult and at times intractable one. Rather than try to minimize the costs of such arbitrage or prevent "abuse" of the laws of a particular regime, the United States should consider affirmatively bearing some of the costs of international tax arbitrage, both as a means to further exogenous policy choices and to transform the current incentive structure that led to the worldwide equilibrium permitting the rise of international tax arbitrage in the first place, by unilaterally and explicitly permitting the benefits of such transactions to the extent they are undertaken in developing countries. This "harnessing" of the costs of international tax arbitrage will not always be the appropriate response to every particular arbitrage transaction, but it should be considered when other, more traditional responses prove inadequate. At a minimum, in adopting such an approach, the United States would provide some level of subsidy for investment in developing countries at little to no cost to the current international tax regime. At best, harnessing the costs of international tax arbitrage could place the issue back on the international scene, restart stalled international tax discussions, and move the worldwide tax regime towards greater consensus, not only on the role of international tax arbitrage, but also on the larger issue of international vertical equity in the global tax regime. In a second-best world, unilateral action by the United States to harness the costs of international tax arbitrage may be the first step towards a first-best solution.