In the old days, international trade was mostly about the exchange of commodities, and the trade battles were over tariffs and quotas. Today, tariff rates for most goods are fairly low, and a new battlefront has opened: Rents.
In our modern economy an increasing portion of value added is associated with intellectual property, which is hard to measure. Here’s a recent example:
European authorities have clamped down on a special deal between Apple (AAPL) and Irish tax authorities, saying the arrangement uniquely favors Apple and is unavailable to other companies. Nixing the deal—which lowered taxes on much of Apple’s foreign income to virtually nothing—will force Apple to pay taxes in Ireland at the higher rate other companies pay. The bill: about $14.5 billion.
But Apple may get reimbursed for all of that by an unlikely benefactor: the US taxpayer. “It’s extremely possible the US taxpayer will have to pay this bill,” says Stuart Gibson, a former government tax official who’s now editor of Tax Notes International. “For every dollar in tax Apple has to repay in Ireland, they may get to reduce their US tax bill by $1.”
This is what happens when you try to tax income instead of consumption. As I’ve argued before, “income” in the tax sense is a pretty meaningless concept. (BTW, that doesn’t mean NGDP is meaningless, as NGDP is completely different from income as defined by tax authorities.)
I see three looming fronts in the war over rents:
1. The allocation of multinational profits for purposes of taxation.
2. Intellectual property rights.
3. Anti-trust laws.
Because the US is the dominant producer of intellectual property, the US government (both liberal and conservative administrations) will argue for low overseas taxes on multinational earnings, weak anti-trust laws to preserve the profits of US companies with patents, copyrights and/or large network externalities, and strong intellectual property rights, to extract money from non-American consumers of stuff developed in California.
You might wonder why even liberal American politicians would defend the robber barons of California. The answer is simple; these firms produce lots of tax revenue for the US, and for California. They don’t want to kill the goose that lays the golden eggs. Nor do they want to share eggs with Europe and Asia. It doesn’t matter if our firms exploit consumers in Asia or taxpayers in Europe, as long as they share 30% of the loot with public employees in the US.