Yoram Margalioth (Tel Aviv University, Buchanan Faculty of Law) presents A Suggested International Tax Reform with a Focus on Technology at the the University of Toronto today as part of the James Hausman Tax Law and Policy Workshop Series. Here is the abstract:

Technology (innovation) is widely considered to be the engine of sustained economic growth. Multinational enterprises are primary carriers of technologies, especially know-how. Multinationals have become much more responsive to taxes as the significance of other barriers such as tariffs and transportation costs has declined. This increased the economic costs (mostly tax planning, compliance and administrative costs) of an outdated international tax system, leading to a series of tax reform proposals all over the world, including in the US. On the other hand, the responsiveness provides policymakers with an effective tool to intervene in the economy where warranted. Current policy and reform proposals are stated as aimed for neutrality (not intervention) and focus on cross-border capital movement, ignoring knowledge transfer, as they continue on a path founded in the works of Peggy Musgrave in the 1960s, when the importance of innovation and our ability to influence it were not yet understood.

Increasing the level of knowledge transfer would clearly promote global welfare because the more people use an idea, the greater the social return. It is also likely to be in the national interest of the US for the following two reasons. First, at least so far, the US has only gained from such transfers as they were either reciprocal, or increased the foreign production of goods and services that the US imports, thereby improving its terms of trade. Second, path-breaking innovations are often developed on top of existing ones. If a non-American inventor would use the knowledge to make such a breakthrough, the entire world, including residents of the US, would benefit. The importance of the latter factor is not captured by standard measures of economic growth, but should not be ignored as it accounts for much of the increase in wellbeing throughout human history.