Trade wars of the 21st century: The battle for rents

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.



26 Responses to “Trade wars of the 21st century: The battle for rents”

  1. Gravatar of foosion foosion
    30. August 2016 at 13:34

    “You might wonder why even liberal American politicians would defend the robber barons of California.”

    Because the rich and powerful have a disproportionate voice in politics.

    Intellectual property laws may also exploit American consumers. Look at how much patent protection increases the price of pharma. In a free market, how long would patents last? Remind me why we have to extend copyright protection every time there’s a danger Micky Mouse might go into the public domain.

    US antitrust enforcement is not exactly strong. Somehow competition is not necessary for a classical free market.

  2. Gravatar of ssumner ssumner
    30. August 2016 at 13:44

    Foosion, I mostly agree, but I think it has more to do with the political power of public employee unions than Disney or Apple. Progressive politicians are quite willing to put higher income taxes on the rich, what they object to is policies that will reduce the incomes of the rich through increased competitiveness, if it means less tax revenue to be spent on favored public employees.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. August 2016 at 13:50

    Here’s irony for you; The Deirdre in ‘Bourgeois Equality’ (p.209);

    ‘The property developer, TV personality, and Republican politician Donald Trump, to take an extreme example, offends. But for all the criticism he has provoked, and for all his unusual opinions about Barack Obama’s nationality and Mexican immigrants and numerous other matters, he is not a thief. He did not get his millions from aristocratic cattle raids, acclaimed in bardic glory. He artfully made, as he put it in his first book, deals, all of them voluntary….Trump did not use a .38 or a broadsword to get people to agree. In his account he bought the Commodore Hotel low and sold it high because Penn Central, Hyatt Hotels, and the New York City Board of Estimate–and behind them the voters and hotel guests and politicians–put the old place at a low value. An omniscient and benevolent central planner would have ordered the identical move. Even a Trump, in other words, does good by doing well.’

    Of course, judging by his campaign, Trump doesn’t even realize it!

    The Deirdre’s point in her latest book is that something changed about 1675-1800, the intellectual climate in Northwest Europe that made The Donalds of the world respectable. Thus the Great Expansion of incomes and well-being we enjoy today.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. August 2016 at 13:53

    Oops, that’s p.229 in ‘BE’, not 209. I also love this from page 218;

    ‘The best question one can ask of a scientific proposition–or for that matter, of an ethical or aesthetic one–is How Do You Know? (Milton Friedman used to ask it regularly in the Money Workshop at the University of Chicago during the 1970s, striking terror into the hearts of students and colleagues.) Clive James, though a literary chap, admires it in the form of “the scientist’s unsleeping attention to the question of what constitutes evidence.”‘

    Clive and Milton named in the same paragraph. Genius.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. August 2016 at 14:09

    Well, heck, let’s make a party of it;

    ‘Cooperation, not competition, is the creative side of a life of betterment by testing trade [i.e. business]. The members of the clerisy, especially of the European clerisy, take amiability, especially in its American version, to be simply a false rhetoric, the little con. ON either side of the Atlantic they believe and often practice in their own lives, a rule of harshness carried into their business as deans and scholars and teachers and book reviewers. And when they venture into the agora [marketplace] they carry an unbusinesslike harshness into their economic business. It’s just business, says the proud member of the clerisy. That’s why I, a professor, happily free from the corruptions of the marketplace, feel justified to cheat when practicing my own corrupt little market business on the side….’

    As examples; the art critic Bernard Berenson knowingly gave false provenances, for money, about paintings he evaluated, Andrei Shleifer’s dealings with the Russian government in favor of his wife, and ‘A professor of economics at Harvard was caught in 2006 stealing manure and was arraigned on charges of trespassing, larceny, and malicious destruction of property.’

  6. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2016 at 15:33

    Multi-nationals and taxes: more than 30 years ago the major CPA firms had already established practices devoted to placing reported profits into the lowest tax districts globally.

    Since then we have also seen the explosion of tax havens such as those recently reported on in Panama.

    Does taxing income work anymore?

    Interesting question: would a system of tariffs and a simple national sales tax be easier to implement and enforce then a horribly intrusive and intensely complicated income tax system?

  7. Gravatar of John B. John B.
    30. August 2016 at 15:59

    Global tax rates will tend to converge (assuming a minimum of mobility) as higher tax jurisdictions will offer tax credits to offset outflows of capital to lower tax jurisdictions. What any one country does really isn’t that important.

  8. Gravatar of ssumner ssumner
    30. August 2016 at 16:24

    Patrick, She’s always fun to read.

  9. Gravatar of Jerry Brown Jerry Brown
    30. August 2016 at 16:28

    That’s an interesting question Benjamin but I think the answer might be no- that a national sales tax might be harder to enforce than an income tax. For one, most people especially employees, have fewer sources of income than destinations for their expenditures- as in all the people and companies they buy things from. So the sources might be easier to track. And with an effective income and corporate profit tax, those sources of income are incentivized to deduct their own costs to minimize their own taxes, so those incomes are reported if they are legitimate in the first place. I don’t see incentives to report sales on either side of the sale, I mean aside from desiring to follow the law, which of course all companies always do.

  10. Gravatar of morgan warstler morgan warstler
    30. August 2016 at 17:27

    Scott’s brain can’t handle this…

    But it’s very very simple: ANYTIME a non-lawyer, non-beta, master of the universe businessman runs for office…






    You don’t get to blabh, blah, blah about your U Chicago Free market creds and then when we can finally shatter the frame on who runs the US GOVT and make it CEOS….




    As far as the eyes can see. The next 100 POTUS, making this BEFORE TRUMP / AFTER TRUMP in Human History.

    This is what the Libertarian Lizard brain does. It can’t help itself.


  11. Gravatar of Chuck Chuck
    30. August 2016 at 18:09


    That’s more randian than libertarian.

  12. Gravatar of Steve Steve
    30. August 2016 at 18:34

    Brilliant post. Prophetic. I suspect we will be debating this for decades.

    Comment #2 (ssumner reply to foosion) is even better and deserves P.S. status.

    Second, won’t Chinese IP theft serve as a check and balance on US IP monopolization? Although that could get ugly…

    Also, isn’t there a trade connection here? The high profitability of US owned IP undermines the global competitiveness of non-IP work in the US, right?

  13. Gravatar of mbka mbka
    30. August 2016 at 23:17


    Agree with Steve – Brilliant and right to the core of what matters today in international trade.

    Note – The IP based rent extortion issue is very noticeable outside the US. And it’s not just, or even primarily, about the rents we do pay on US IP. Sheer availability is an even bigger problem. Many products aren’t available at all because of byzantine licensing agreements. I’d gladly pay a few dollars for some movies that I am not allowed to get AT ALL.

    Examples. Some time 10 years ago, CD / DVD stores and rentals started disappearing here in Singapore, along with bookstores getting fewer. You would think that’s because people switched to downloads and electronic readers. Yes, but: for a lot of content, the CDs and bookstores have NOT been replaced by legally available downloads. Many books aren’t available on Kindle outside the US, or with delays. iTunes became available some seven or eight years after it started in the US. Pandora etc., none of them exist outside the US (sometimes AU and NZ are allowed). In summary – for a near decade, nothing replaced the CD store, until finally Spotify came along around 2014. Netflix started just this year, and its content is about 15% at best of the US content, for the same fee of course. Many movies are not available at all in Singapore. Not for rent, not for sale, not for download.

    In case you wonder – Singapore does not stand out here, it is famously free trade, and the problem has nothing to do with censorship either. Netflix does offer some nasty M18 or R21 content in Singapore. You can watch Breaking Bad, or Dexter. Just not a lot of recent shows, or movies. For Netflix et al., it is a well trodded world wide issue: Hollywood forbids most recent content offerings outside the US. Users used to get around it by using VPNs faking a US home address, but this was also clamped down recently by Netflix. They now block known VPN providers, more or less on pressure from Hollywood.

    Mind you, physical products are also affected by this fine-combed IP licensing baloney. Many US sellers don’t ship certain classes of physical products outside the US. Anything from tools to guitars on Amazon for instance can NOT be shipped to Singapore, and usually it’s because of dealer agreements with brands, to preserve country specific MSRPs – once again, IP. And I don’t even know if anyone makes money on this. Many people just end up downloading illegally. And for physical orders there are all-legal sophisticated schemes to order your stuff to a physical US address, which then organizes the freight forwarding to Singapore.

  14. Gravatar of H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner) H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner)
    30. August 2016 at 23:27

    How about
    NGDPLT + 20% GDP government(mostly financed by seigniorage) ?
    No tax.(maybe only pigovian taxes on externalities)

    It will blow away cash rents of monopolistic companies.

  15. Gravatar of Anon39 Anon39
    31. August 2016 at 04:28

    Dr. Sumner,

    Public choice theory wins again. Here’s hoping for a Republican party in the future that heeds James M. Buchanan more than Pat Buchanan.

    In the meantime we’ll continue to muddle through.

  16. Gravatar of Benjamin Cole Benjamin Cole
    31. August 2016 at 05:57

    Jerry Brown: good points. Yet every state collects sales taxes, so the Feds can just piggyback and boost enforcement.

    Tariffs on goods should be easy too— in comparison to the infernal scatological income tax “system” in place.

    As you point out: why does the U.S. have a system of income and payroll taxes? Because employees pay those taxes.

  17. Gravatar of morgan warstler morgan warstler
    31. August 2016 at 06:54

    Now that I got that “fake Libertarian egghead betas all turning their nose up at God’s chosen people & their betters (CEOs)” off my chest…


    So my idea here is that we enlist Ted Cruz who needs to re-invent himself a bit and he’s read the blog and this is close to his heart:

    1. 38 state campaign to repeal 16A (Income and IRS) and replace it with 28A (LVT + VAT).

    2. By going to 38 state legislatures with ALEC and Ted, no appeal to Congress must be made.

    3. LVT will be progressive in real terms, as land value increases per sqft against national avg, the tax per sqft increases to suck up all gains on land value approaching 1:1.

    4. Market price demand determines land value. Generally, we’re talking Malibu become Miami bc the taxes are so high that building high and tall is only way to pay them.

    5. Given projected national LVT receipts, VAT covers rest to 21% of GDP.

    6. State collect all funds and pass on nationally set % to Federal Govt.

    7. LVT allows for Pigouvian stuff.

    8. Since we are now taxing only consumption, the other Progressive side of this occurs thru #Uber4Welfare – cash payments made to anyone who wants to work.

    9. This is right in Ted’s wheelhouse.

    10. It’d get 30 red states states right off the bat.

    11. IMO it’s a perfect storm to GUT LIBERAL RICH ONCE AND FOR ALL. Because Red state rich will know they get a better tax rate bc they don’t live in on high value land. And blue state poor WILL LOVE it bc they get to live by the beach / city again. There won’t be enough political cover for Big City Rich Liberals to fight it. And 98% of US Corporations will scream Thankeee Jesus.

    12. Reminder, only need to pick off 8 of 20 purple and blue states.

    One fly in ointment, this is why we need Ted most…

    To call a Constitutional Convention we need legal ruling from SCOTUS that it can be limited to ONE and ONLY ONE repeal / replace.

  18. Gravatar of H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner) H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner)
    31. August 2016 at 07:25

    I meant around 20% “inflation” economy.(constant V)

  19. Gravatar of JL JL
    31. August 2016 at 10:40

    A central argument of the European Commission is that the Irish deal had the effect that a lot of Apple’s profits were taxed *nowhere*.

    They state that if Apple Ireland transfers the money to the US, the US will tax it and they don’t have to pay the Irish taxes.

    So it’s up to Apple to choose where they want to pay tax: USA or Ireland.

    Neither is not an option.

    And that seems fair. As long as we are going to tax corporate profits, it would only be fair that all companies pay them on an equal playing field.

  20. Gravatar of Randomize Randomize
    31. August 2016 at 13:41

    Dr. Sumner,

    The trouble with taxing only end-use consumption (as American sales taxes do) is that the localities where items are manufactured support the industry but reap none of the tax base to provide that support. Instead, the bedroom communities where all those products are consumed get the money.

    As an alternative, I’d suggest a split between income and sales taxes so that the both areas, those where production takes place and those where consumption takes place, are supported.

    A VAT would be even better but that’s far to European for American politicians to support.

  21. Gravatar of ssumner ssumner
    31. August 2016 at 17:06

    Thanks Steve, And yes to both of your questions.

    Thanks mbka, Interesting comments on Singapore. I still see movies at the theatre, so I can’t comment on all the modern technology.

    Anon39, Let’s hope so.

    JL, I can’t comment, because I don’t understand the complexities of corporate taxes. As I said, we should just tax consumption.

    Randomize, There are many ways to overcome that problem. An income tax with unlimited 401k privileges, or a combination VAT and property tax.

  22. Gravatar of Scott Sumner on understanding why the US takes various positions in international negotiations | Andrew Gillen's Blog Scott Sumner on understanding why the US takes various positions in international negotiations | Andrew Gillen's Blog
    2. September 2016 at 03:01

    […] Scott Sumner […]

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    3. September 2016 at 15:51

    The IP element is is a result of telecommunications-and-IT globalisation.

    The history of (cross-jurisdiction) trade can be divided into 3 1/2 eras.

    Eurasian (thin networks of high value items)
    Silver (Europeans link globe with silver as dominant trade item)
    Atlantic (The level of shipping and canals creates an Atlantic economy on the cusp of mass trade, a matter of quantity having a quality all of it own: this is the 1/2 era)
    Globalised (Steam sets off era of mass trade, which means Rogowski factor income dynamics).

    One can tell the Atlantic economy (particularly Britain) was on the cusp of mass trade because free trade v protectionism starts becoming an issue. Before that, it is all about fighting over the rents from thin trade networks of high value items because trade was not “mass enough” to affect general factor incomes. Though it was disproportionately important for state revenues.

    But with globally retailable games, films, tv new forms of rents from trade become available.

    And with the possible effects of AI and 3D printing on international goods trade, the effects are likely to become more salient, not less.

  24. Gravatar of Jason Potts Jason Potts
    4. September 2016 at 16:30

    Sinclair Davidson and I develop a model of this same process you describe here

    The Stationary Bandit Model of Intellectual Property

    Abstract: We propose a new model of intellectual property that presents a different view to the market failure/monopoly rent model advanced by Arrow (1962) in which governments protect inventors from private theft. Instead, using Olson (1993), we represent a public theft model of intellectual property arising when entrepreneurs acting in global markets seek protection from a stationary bandit (their home government) principally against the depredations of other governments (the roving bandits). We argue that this model explains why institutional quality matters to the global location of R&D intensive industries, such as biopharma, and why so much intellectual property is located in tax havens.

  25. Gravatar of Pyrmonter Pyrmonter
    4. September 2016 at 17:06

    An extension of the point made about rent appropriatoin in this paper by Sinclair Davidson and Jason Potts of RMIT

  26. Gravatar of ssumner ssumner
    4. September 2016 at 19:05

    Lorenzo, Interesting.

    Thanks Jason and Pyrmonter–I’ll link to that at some point.

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