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Diminishing Competitive Government

May 4, 2009

To riff off Tom Stoppard in The Coast of Utopia, freedom is what space we give each other, not what we take from each other like a fought-over loaf.  But the U.S. government enjoys a good scrum.  Two interesting posts to consider. 

At the Oxford University Press blog, Cardozo law professor Edward Zelinsky says there are many benefits to telecommuting across state borders, particularly in NYC’s tristate area.  But New York State’s onerous tax laws discourage this:  

A major impediment to telecommuting is New York State’s extraterritorial taxation of nonresidents’ incomes. When a nonresident works at home for a New York employer, New York imposes income tax on the telecommuting nonresident for this out-of-state day even though the nonresident never sets foot in New York on that day and even though New York provides no public services to the nonresident telecommuter on his day working at his out-of-state home. The result of New York’s extraterritorial taxation is typically double income taxation of the nonresident for telecommuting from outside the Empire State, a classic confirmation that no good deed goes unpunished.

What’s good for New York State is good for the Feds.  The Obama administration is announcing a plan to lasso in offshore tax avoiders. (WSJ story.) Greg Mankiw points us to some research on the topic from his colleague Mihir Desai at the Harvard Business School.  From the abstract to Desai’s paper, Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms:

This paper address these questions by analyzing the available evidence on two related claims – i) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and ii) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. 

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