Bittker’s Pendulum and the Taxation of Multinationals

— Attributed to John Maynard Keynes

I. Introduction

It seems like only yesterday what one might call the “end of history”¹ in corporate and international tax policy appeared to be at hand. Over time, global tax competition was driving down countries’ corporate income tax rates,² with a predicted endpoint of zero that some experts favored reaching sooner than later.³ Meanwhile, on the taxation of multinationals, the world was said to be marching inexorably toward the universal replacement of worldwide residence-based taxation with purely territorial, or source-based, taxation.⁴ Proponents lauded this shift as both benign and long overdue,⁵ and they tended not to emphasize the fact that existing, putatively territorial, systems generally were hybrids that retained significant elements of residence-based taxation of home companies’ foreign-source income.⁶

Also not always emphasized was the tension — or complementarity, depending on one’s perspective — between the expected decline of entity-level corporate income taxation in general and of residence-based taxation of foreign-source income in particular. Discussions of the latter might suggest that residence-based taxation of multinationals was increasingly being supplanted by source-based taxation. But the broader decline of corporate income taxation suggested that source-based corporate taxation was likewise on a path to extinction.

This in turn would imply that the global profits of, say, an Amazon, Apple, or Facebook might be expected to escape entity-level income taxation everywhere, without even continuing to require the sorts of tax-planning gyrations that by 2011 or so had begun receiving widespread attention.⁷ Hence, the economic value that all these profits represented could be taxed only through other sorts of tax instruments — for example, through worldwide residence-based taxation of the companies’ shareholders, consumption taxation of the shareholders or customers, or specific types of destination-based taxes.⁸

But then this apparent end of history — like so many others before it⁹ — ran into brisk headwinds. In the public policy realm, a rising focus on global tax avoidance by highly profitable, mainly American, multinationals led to extensive pushback efforts, such as those led by the OECD.¹⁰ Those efforts focused not just on strengthening source-based corporate income taxation — already in tension with the maxim that tax-competitive pressures make it undesirable and unsustainable — but also on reviving residence-based worldwide taxation as at least a significant backup.¹¹ Meanwhile, when the United States in 2017 finally moved toward explicit territoriality by exempting U.S. companies’ receipt of dividends from their foreign subsidiaries, it also significantly expanded the current taxability of the companies’ foreign-source income.¹²

The U.S. pendulum would have swung even more decidedly back toward reliance on both source-based and residence-based corporate taxation if key elements of the Biden administration’s Made in America Tax Plan had become law.¹³ Under this plan, proposed in April, not only would half of the 2017 corporate rate cut have been reversed,¹⁴ and source-based taxation strengthened in response to concerns about profit shifting,¹⁵ but the United States would have moved closer than ever to the pole of full worldwide residence-based corporate taxation.¹⁶ While legislative politics have, at least for now, shelved the adoption of any such changes, they would likely be reconsidered in the future if the Democrats found themselves holding larger congressional majorities than they enjoy at present. Moreover, the OECD’s Pillar One¹⁷ and Pillar Two¹⁸ reflect the high present level of interest abroad in strengthening corporate income taxation.

Regardless of whether any such pushback is either well advised, or likely to yield major, long-lasting policy changes, its main political impetus is easily discerned: The headline companies’ huge profits and low global taxes drew worldwide attention that may have been exacerbated, at least in some circles, by their being mainly American companies. The post-2008 emergence of austerity and budget deficits also mattered atmospherically, even before COVID-19 further raised the fiscal stakes (along with many of these companies’ profits).

Yet the new direction is rooted in more than just shifting public sentiment. The last 10 years have also witnessed a complementary shift in the tenor of scholarly discourse regarding corporate and international taxation. In brief, the mainstream intellectual arguments (both empirical and theoretical) for supporting both entity-based corporate taxation in general and worldwide residence-based corporate taxation in particular have gained significant ground. Revised understandings of the economics, law, and politics of taxing multinationals have all dramatically weakened the end-of-history view and provided new support for a change in direction.

This shift could be viewed as representing either something old or something new. On one hand, it involves reviving tax policy views that were more in vogue in, say, the era of the Tax Reform Act of 1986 than they have been more recently. However, it does so on relatively novel grounds that rebut the bases for the end-of-history view, which had themselves rested on rebutting the prior main foundations for 1986-style views. As we will see, this kind of historical back-and-forth process has been taking place more broadly in recent legal and economic scholarship, extending well beyond corporate and international (or other) tax policy.

Against that background, this report has two main aims. The narrower one is to explain the grounds underlying both the end-of-history view and its proposed replacement, focusing as well on why each rationale has seemed so persuasive at particular times. The broader goal is to place these shifts within a broader pattern of back-and-forth intellectual shifts in legal policy thinking, while posing the question (without trying to resolve it definitely) of how the pattern might be explained.

II. Views on Taxing Multinationals

A. Bittker’s Pendulum

Back in 1979, Boris I. Bittker called the “tax theorists” of his day a combination of “old turks” and “young fogies.”¹⁹ He noted that “a generation of idealists in their sunset years, still inspired by the ethics of compassion adopted in their youth,” had recently been joined (and were apparently being supplanted) in academia by “a rising generation of skeptics insisting on the prudent calculation of costs.”²⁰

Oddly, however, like a rooster crowing hours before sunrise, Bittker had espied his era’s generational transition well before it actually took place. The efficiency aficionados he invoked had merely changed the primary rationale for an unchanged support of comprehensive Haig-Simons income taxation. For the old turks (such as Stanley S. Surrey), the key issue had been horizontal equity. Tax-favoring, say, real estate over rival industries would unfairly benefit real estate investors relative to other taxpayers. Young fogies, however (such as Martin Feldstein), used standard neoclassical economic models (such as those using simple supply-and-demand curves) to argue that after-tax returns would re-equalize tax-favored and fully taxed activity or investment choices. Hence, tax preferences for a particular industry, rather than benefiting its investors after tax, would “shake out in competitive resource allocation and translate into misuse of resources.”²¹

In retrospect, this revised reasoning in support of unchanged normative conclusions proved to be no more than a prologue to the main event. As efficiency-based reasoning rooted in neoclassical price theory models spread and broadened in the tax policy field, its capacity to require affirmatively altering prior mainstream conclusions became clear. Views that gained widespread academic support in the decades after Bittker had identified the generational transition — each rooted in straightforward economic reasoning but departing sharply from the compassion-driven consensus of his old turks — included the following:

• marginal tax rates should be lower and far less graduated (if not indeed flat or even declining) than many had previously thought;²²

• capital income, or at least the normal risk-free return to waiting, should not be taxed;²³

• in light of international tax competition, entity-level corporate income taxation should be greatly reduced or even eliminated;²⁴ and

• the best achievable global regime for taxing multinational corporations (MNCs) would use source-based, rather than residence-based, taxation, and would thus involve foreign-source income being exempted rather than taxed and subject to the allowance of foreign tax credits.²⁵

Bittker may not have seen any of this coming, but he atoned intellectually by hinting at an insightful “longer view” of academic debate.²⁶ Noting that “today’s efficiency theorists differ from their parents but resemble their grandparents,”²⁷ he implied that a broader back-and-forth process might be at work. Today, revived variants of the bygone old turks’ equity prescriptions are back in vogue, albeit standing on new foundations that move beyond, rather than failing to account for, the (formerly) young fogies’ grounding in neoclassical economics. Thus, once again today’s children have broken with their parents but resemble their grandparents.²⁸

A generational back and forth between placing equity versus efficiency in the foreground²⁹ has been an important theme of recent decades’ scholarship in multiple realms — not just tax policy. Consider vigorous antitrust enforcement, disparaged by the Chicago School³⁰ but renascent in modern analyses of the new economy.³¹ Or consider the regained intellectual respectability of support for the minimum wage³² and robust consumer protections.³³ Tax scholars are therefore in harmony with broader intellectual shifts when today they favor, for example, (1) steeply graduating the rates at the top,³⁴ (2) expanding capital income taxation³⁵ or even imposing a federal wealth tax,³⁶ (3) strengthening or expanding wealth transfer taxes (such as through the enactment of a federal inheritance tax),³⁷ (4) increasing entity-level corporate income tax rates (both statutory and effective rates),³⁸ and (5) expanding worldwide residence-based taxation of multinationals.³⁹

A common feature in today’s many pushbacks against the conclusions of the formerly young fogies is a rising appreciation of the problems with Econ 101ism.⁴⁰ This term refers to views that are based on blithely assuming that as a general or even universal matter, “Markets are efficient. Firms are competitive. Partial-equilibrium supply and demand describes most things. Demand curves slope down and supply curves slope up. . . . No curve is particularly inelastic or elastic; all are somewhere in the middle (straight lines with slopes of 1 and -1 on a blackboard).”⁴¹ Hence, under Econ 101ism, one ostensibly needs neither empirical research nor any particular understanding of real-world labor markets to conclude with complete confidence that, say, “a pair of supply and demand curves proves that a minimum wage increases unemployment and hurts exactly the low-wage workers it is supposed to help.”⁴² Equipped with a simple and indeed Panglossian model of perfect markets and pure rationality, one could purport to answer all questions through “appeal to the powers of pure logic . . . dispensing with messy and uncooperative facts,”⁴³ along with any need for empirical inquiry beyond the (it was assumed inevitably) confirmatory.

In legal circles especially, Econ 101ism not only had its day but actually — despite its defects — served good purposes, at least to a degree and for a time. The shift that Bittker espied took advantage of the fact that neoclassical, Econ 101-style assumptions often have a great deal of force. Failing to even consider them — as when one simply assumes that differences in tax treatment lead straight to violations of horizontal equity — can be myopic and naïve. When one rejects the Econ 101 view, one should be able to explain why its core assumptions have failed to apply in a given setting.

Just as the Coase theorem, properly understood, does not predict zero transaction costs but rather shows what might happen were they absent — hence highlighting their central importance — so the precepts underlying Econ 101ism can usefully remind us of the importance, when applicable, of such contrary conditions as market failure, monopoly power, and people’s behavioral departures from neoclassical notions of rational optimization. The lessons of Econ 101ism needed to be fully absorbed (or perhaps reabsorbed⁴⁴) by legal scholars before its limitations could be sophisticatedly understood.

B. Accounting for Bittker’s Pendulum

The previous section suggested that Bittker’s pendulum has gone through at least four iterations: from the formerly young fogies’ grandparents through (in more recent decades) their children. In seeking to account for this back and forth, various types of explanation are possible. For example, one could posit a broader intellectual pattern, be it founded on eternal recurrence, Hegelian new syntheses, periodic generational muscle flexing, or simply the recurring need for lagged course corrections.

Today’s advancement past Econ 101ism is not, however, just a pristine march of science (or fashions) story. The most recent turn also reflects changing social and economic conditions over the past 20 years that have brought fresh (or at least greatly exacerbated) problems to public attention. These include, for example, the rise of high-end inequality and of wildly profitable (yet largely tax-avoiding) global megacorporations, often run by world-famous business titans. How fitting that on the very day I started to write this report, The New York Times’ front page featured two stories about feuds between rival tycoons — Tim Cook and Mark Zuckerberg,⁴⁵ and Jeff Bezos and Elon Musk.⁴⁶ One could hardly imagine a more overt throwback to America’s late-19th-century first Gilded Age, obsessed with its towering Rockefellers, Carnegies, and J.P. Morgans,⁴⁷ whose wealth and power neither the general public nor policymakers could ignore.

More broadly speaking, the four iterations appear to reflect changing societal attitudes about unfettered free-market capitalism as its apparent performance goes up and down. The formerly young fogies’ old turk progenitors had been swayed by the disastrous, seemingly unending Great Depression, followed by the New Deal’s widely credited success in reviving both the macroeconomy and economic justice. This historical experience made credible the view that market failure (and indeed, inefficiency) was pervasive and that well-advised governments could adopt policies that would markedly improve people’s lives.

Then the era of the Vietnam War, Watergate, and 1970s stagflation helped prompt the rise of neoliberalism, support for lower taxes and deregulation, and other such expressions of the view that markets would richly reward us all, if only they were freed from obtuse legal and regulatory constraints. Government was the problem, Ronald Reagan asserted, and the age of big government was over, Bill Clinton agreed.⁴⁸

More recent decades, however, have witnessed rising inequality, foundering economic growth, and repeated financial market scandals and downturns. Then came the Trump administration’s multiple outrages and calamities. This era’s one major legislative product, the Tax Cuts and Jobs Act, not only vastly increased the long-term U.S. fiscal gap while concentrating its benefits at the very top, but also drew “new and arbitrary lines dividing the tax system into winners and losers,”⁴⁹ often with “no discernible policy rationale”⁵⁰ other than rewarding politically, economically, or culturally favored groups.⁵¹

In response to all this, a broad rethinking of the prior era’s truisms has emerged. Luckily for those who are emotionally or intellectually inclined to favor that rethinking, abundant grounds exist in its support. I next discuss the recent turns in economic research and thinking that stand behind the view that entity-level corporate taxation, both source-based and residence-based, can be used effectively as one of many tools to promote economic justice in a given country while also being acceptable (or even a net positive) on efficiency grounds.

III. Evolving Economic Analyses

The Made in America Tax Plan is in some ways unusual within its genre. Reflecting Paul Krugman’s (slightly exaggerated!) statement that “it’s hard to find a tax expert who hasn’t joined the Biden team,”⁵² it augments such standard trappings as its flag-waving title with a surprising degree of reliance on, and citation to, recent academic research. Moreover, while its academic discussions are understandably brief, it does indeed lay out a picture of how recent scholarship amends the more neoclassical trappings of prior work to reverse many of the end-of-history era’s core conclusions. As we will see, this picture jibes neatly with the Bittker pendulum story as carried forward to the present day. I start, however, with the earlier rise of Bittker’s young fogies.

A. Background on Tax Preferences

Recall the earlier example of real estate tax preferences, which old turks assumed would unfairly benefit real estate investors relative to other taxpayers. In illustration, suppose that investments generally earn 10 percent before tax but that they all — apart from investments in real estate, which are wholly tax-exempt — face a 30 percent income tax that applies uniformly to all investors. Hence, investments apart from real estate end up earning only 7 percent after tax.

What about real estate? If for whatever reason, despite its being tax-exempt, real estate earns the same 10 percent pretax return as everything else, the benefit of the tax exemption accrues entirely to those investors. Indeed, they are unfairly benefiting if, for example, one believes in horizontal equity and interprets it as requiring that two investors who earn the same pretax returns also have the same after-tax returns.

To modern, Econ-101-trained eyes, this scenario looks simplistic and question begging. Why would some people invest in real estate, while others choose taxable assets, when the assumed equality in pretax returns ensures that their after-tax returns will be very different? As Bittker noted, however, equity-oriented theorists typically assumed “(more often implicitly than explicitly) . . . that taxpayers [would] continue to do just what they would have done” without the special exemption.⁵³ With no net shift of investment capital to real estate from everything else, there would be no particular reason to expect pretax returns to adjust for the after-tax difference.

Alternatively, as he further explains, the equity theorists might simply have been assuming that any “changes in economic conduct to take advantage of the . . . [exemption would] not significantly alter the pre-tax yield or other economic benefits produced by the tax-favored behavior.”⁵⁴ Perhaps, for example, some unknown factor might cause investment choices to be inelastic. Or investors might be thought, for whatever reason, to focus myopically or irrationally on pretax returns and thus be oblivious to differences in tax treatment.

While Bittker suggests a paucity of express argumentation on why any of this should have been the case, the equity theorists’ view was not necessarily as benighted and simply ignorant as it can easily look today. For example, they presumably noticed that in real-world cases, for whatever reason (and there are many possibilities), the “implicit taxes” that respond to particular tax benefits often appear to be quite low.⁵⁵ A very partial market adjustment might reasonably seem not to require the equity theorists to alter their conclusions about horizontal inequity. Moreover, because the equity theorists had lived through the Great Depression and New Deal eras and thereby acquired a pronounced skepticism about market efficiency and neoclassical assumptions, the claim that, in Bittker’s terms, resource misallocations do not drive out inequities may not have seemed surprising enough to require much attention or explicit defense.⁵⁶

With the arrival of the young fogies and Econ 101ism, this soft spot in the old turks’ explicit reasoning proved highly damaging to their scholarly sway. In an era of renewed intellectual ascendancy for the belief in well-functioning markets that were presumed to be guided by investors’ rational quest to maximize risk-adjusted expected after-tax returns, it seemed not only inevitable but almost childishly obvious that at least in the ordinary case, there would be, as Bittker put it, an “increase of tax-favored behavior at the expense of its unfavored alternative until the after-tax benefits of the two are equalized.”⁵⁷ From then on, any exceptions to what was now deemed the general rule would need to be more rigorously supported than previous convention had required.

For present purposes, however, the case of special interest is in some respects the opposite of that discussed just above. It concerns a posited income tax dispreference for a particular type of investment. This is the case of uniquely subjecting profits that are earned through a corporation to the corporate income tax, in addition to eventually taxing corporate income at the shareholder level. However, corporate income taxation has enough special features to merit further elaboration in a separate section.

B. Corporate Income Taxation

In theory, a classical corporate income tax system disfavors corporate investment, relative to all other, by taxing corporate income twice: first at the entity level and then again at the shareholder level upon distribution. To be sure, this picture ignores the possible impact of tax avoidance at either or both levels, and the impact of rate differences between the two levels. Yet it provides a basic structure for analysis that tax experts have fruitfully (if, at times, without due caution for its degree of descriptive accuracy) used for many decades.

1. Harberger, part 1 (closed economy).

The classic early (1962) analysis of corporate income taxation by Arnold C. Harberger posits an economy with two sectors, the corporate and the noncorporate, which differ in that only the former is taxed.⁵⁸ Harberger concluded that the corporate income tax is borne by holders of all capital, both corporate and noncorporate. In part, this reflected his applying standard neoclassical Econ 101-style assumptions to the choice between corporate and noncorporate investment. Self-evidently, within that framework, capital would respond to the tax by leaving the corporate sector and flowing into the noncorporate sector, thus raising pretax returns in the former and lowering them in the latter, until the two equalized after tax.

Within the economics profession (legal old turks notwithstanding), this was too obvious a move to give Harberger’s analysis the renown that it rightly drew. That resulted instead from his applying a sophisticated general equilibrium analysis — in contrast to the partial equilibrium analysis that the above equalization argument embodies⁵⁹ — to conclude that, almost by happenstance, the burden of the corporate income tax would not, within his model, be shifted from capital to labor.

An obvious general equilibrium mechanism for shifting the burden of the corporate income tax from capital to labor would have been the tax’s reducing the rate of saving and investment in the economy as a whole.⁶⁰ Harberger, however, assumed that the saving rate was fixed (based on evidence suggesting its inelasticity). His general equilibrium analysis rested instead on his positing observed (but theoretically unexplained) differences between the corporate and noncorporate sectors.

In his model, both sectors use capital plus labor to generate income. However, the corporate sector is more able than the noncorporate sector (for example, real estate and agriculture) to substitute between capital and labor as productive inputs. Thus, when the corporate income tax drives capital from the corporate to the noncorporate sector, the demand for labor increases more in the former than it declines in the latter. Hence, in equilibrium wage-setting, workers win, and the business owners, who now must pay them higher market wages, lose.⁶¹

In sum, Harberger deployed his brilliant analytical and modeling gifts to reach a familiar and easily accepted dog-bites-man conclusion.⁶² As a matter of economic incidence, the corporate income tax would not be shifted, other than within the business realm as between its corporate and noncorporate sectors. The fact that this happened for a seemingly arbitrary reason — theoretically unexplained differences between the two sectors’ ease of substitution between labor and capital as productive inputs — did not prevent his conclusion from gaining wide acceptance.

Harberger’s conclusion caused the corporate income tax to look, in a key respect, quite appealing from a young fogey perspective. True, the tax would have a needless efficiency cost because it would cause capital to shift from the corporate to the noncorporate sector at a loss of pretax profitability. (This helped motivate corporate integration proposals designed to treat corporate and noncorporate investment more neutrally.) Yet because Harberger assumed that overall saving and investment were inelastic, his model helped make the broader enterprise of taxing capital seem quite appealing. For example, investors, who presumably were mostly rich people, would bear both the short-term and the long-term incidence of the tax.⁶³ It would thus be highly progressive. Moreover, given the assumption of fixed savings and investment rates, the corporate income tax would not reduce productivity or economic growth, other than through the adverse effects of the capital shift from the corporate to the noncorporate sector.

However, later decades would make it clear (not least to Harberger himself) that the analysis needed revision. Reasonably for the time, his 1962 analysis presumed a closed economy in which there were no cross-border capital flows. The later rise of integrated global capital markets suggested replacing that model with one in which each country, even the United States, has a relatively small open economy from which capital can readily flow both in and out. Hence, even if savings everywhere remain fixed, a given country’s investment stock may prove highly tax-elastic. As I discuss next, this single change caused the dominant economic view of corporate income taxation to shift in a way that (despite its distinct analytics) paralleled the transition in legal scholarship from old turks to young fogies.

2. Harberger, part 2 (open economy).

As Harberger himself noted in 1995,⁶⁴ once the savers in one country can invest in other countries and effectively be taxed only on a source basis,⁶⁵ the model’s conclusions effectively reverse. Thus, suppose all capital can go wherever it likes in quest of the highest available after-tax return. Moreover, suppose that at the margin, investors demand and can get (but cannot exceed) the normal global rate of return, whatever it happens to be at a given moment. All countries are merely price takers, unable to lure (or retain) capital unless it earns the requisite global after-tax return.

To make a strong version of this model more explicit, suppose the following: Each country has valuable, locally owned resources, including not just land with varying site values and other natural resources, but also people who can supply their own labor. The local resource owners need investment capital to develop the resources’ commercial potential. They obtain it on global capital markets by paying the going after-tax expected world rate of return — nothing more and nothing less.

Suppose that the suppliers of capital are just providing money — unlike the modern case in which we might think of a distinctive multinational company (such as Amazon, Apple, or Facebook) that commands particular intellectual property and expertise. This explains why both (1) to their benefit, they can simply pack up and go somewhere else if not offered the requisite rate, and (2) to their detriment, they cannot demand more than that rate. The locals who are dealing with these capital suppliers therefore face a horizontal supply curve. At the global rate, they can get as much investment capital as they like. There is no need to pay more, and they cannot raise any capital if they offer less.

Suppose that the global after-tax expected world rate of return is 6 percent. All local investments that would earn at least this much are made, with 6 percent going to the investors and the surplus going to the locals.⁶⁶ In this scenario, if the country exempts the income earned locally by those investors, they will indeed charge just 6 percent. But if the source country taxes the investors at, say, a 25 percent rate, they will demand an 8 percent pretax return.

Local investments that would have earned between 6 and 8 percent are no longer made, resulting in a loss of surplus by domestic resource owners. However, the investors are just as well off as they were before (transition aside) because they can earn the same 6 percent return by shifting their funds elsewhere. Moreover, while the investors who earn 8 percent pretax are observably paying domestic income tax on their inbound investments, they do not bear the incidence of the tax, because they would have cleared 6 percent after tax either way. Instead, the incidence is borne locally by the resource owners (including workers whose wages bear the impact of the reduced after-tax profitability).

In sum, if we fully accept this model, capital bears none of the incidence of the corporate tax (short-term transition aside). Investors need not care about the corporate or other business income taxes in a given country because they can simply move their capital elsewhere and earn the same after-tax returns as before. By contrast, the workers and other resource owners in a given country will lose out as demand shrinks for what they have to offer. Thus, the corporate income tax is no longer progressive (at least if we define the better-off as those with more savings). Moreover, it may substantially reduce national income, along with economic growth, if it is a byproduct of inbound investment.

In this model, even the one respect in which a corporate income tax can achieve progressive goals — through the transition effect when it is newly announced — is severely limited by what became known as the time-consistency problem. If you fool investors once by imposing a one-time high tax on their capital once it has entered a given jurisdiction, they will anticipate the tax being imposed again, thereby constraining the ability to fool them twice.

Models like this support the end-of-history view that both source-based and residence-based corporate income taxes are doomed to wither away (and indeed should do so, the sooner the better). The application to source-based corporate income taxation is more straightforward, but a similar analysis may apply to residence-based taxation of multinationals’ foreign-source income.

As I further discuss later, insofar as corporate residence is effectively elective — whether this represents entity-level choices or investors’ decisions about which companies to give their capital to — the tax price for corporate residence that a given country can charge should be limited to its value, which is zero (transition aside) in the pure electivity/interchangeability case.⁶⁷ Consistent with a young fogies-style view of the world, concerns of efficiency, not distribution, are all that should matter in this setting. The advancement of distributional concerns requires different sorts of tax instruments, such as worldwide residence-based income taxation of individuals (with corporate earnings being flowed through to them) or the use of progressive consumption taxes.

C. Corporate Income Taxation Today

1. New evidence.

The above open-economy model of corporate income taxation has compelling internal logic. Its conclusions follow from its premises — which, even if not completely true, also are surely not completely false. However, its persuasive power regarding real-world institutions depends on its assumptions’ degree of accuracy, or at least adequacy. There is good reason to believe that this has declined in recent decades.

The aftermath of the TCJA has provided an important flashpoint for debate about the model’s continued pertinence. The model would appear unambiguously to predict that the TCJA, because of changes like lowering the U.S. corporate rate from 35 percent to 21 percent, should have triggered a flood of inbound investment (all else being equal). Instead, according to a study released by the widely respected IMF — pertaining to data from before the COVID-19 pandemic — although “U.S. business investment grew strongly compared to pre-TCJA forecasts and outperformed investment growth in other major advanced economies . . . the overriding factor supporting that growth has been the strength of U.S. aggregate demand.”⁶⁸ Any positive investment response attributable to the act itself fell short, not just of theoretical predictions but also of predictions “based on the historical relation between tax cuts and investment as identified by a range of studies in the empirical literature.”⁶⁹ The IMF paper identifies the main reason as “stronger corporate market power compared to previous postwar episodes of tax policy changes.”⁷⁰

As the Made in America Tax Plan notes, other studies have reached similar conclusions — finding, for example, “no evidence that the 2017 tax law has made a substantial contribution to investment or longer-term economic growth.”⁷¹ The report observes that this is unsurprising, given that “much of the corporate tax falls on ‘excess profits,’ not normal returns.”⁷² Because excess profits are the fruit of corporate market power, this repeats the IMF paper’s explanation for the TCJA’s disappointing upshot.

As we will see, assuming excess profits or corporate market power transforms the theoretical analysis of corporate tax policy every bit as much as the shift in earlier decades from positing a closed economy to an open economy. Only it does so in the opposite direction, back toward the views of the old turks, in keeping with Bittker’s pendulum.

2. The impact of excess profits on corporate tax policy analysis.

Recall Bittker’s old turks’ view that disparities in tax treatment will not affect resource allocation because taxpayers will just keep on doing the same things anyway. If one accepts the full open economy model, this is clearly false. However, that conclusion reflects the model’s assuming not just investor rationality in the service of risk-adjusted after-tax profit maximization, but also that companies, at least at the margin, are earning only normal returns that they can readily replicate elsewhere.

That assumption drives, for example, capital’s rapid departure from a given country when an increase in the corporate tax rate means that investments there can no longer match the after-tax rate of return that is generally available elsewhere. By contrast, if comparable after-tax returns are not available elsewhere, or if particular profits simply cannot be earned anywhere else, the old turks’ expectation may come true after all.

The Made in America Tax Plan mentions substantial evidence in the literature suggesting that “taxing . . . excess profits can generate revenue without undue distortion.”⁷³ Intuitively, this reflects that excess profits can resemble free money, which is still worth having even if a tax reduces its amount.⁷⁴ The report also notes evidence that “a rising share of the corporate tax base, over three-quarters by 2013, consists of excess returns.”⁷⁵ Moreover, recent changes to U.S. corporate income taxation, such as the greater allowability of expensing for capital investments, have reduced the extent to which it reaches normal returns to begin with.⁷⁶

A fuller analysis of this point would add an international component that further and more directly supports modifying the open economy model’s assumptions to reach very different conclusions. The extra component pertains to multinationals’ ability to use their IP to earn location-specific rents.⁷⁷

To illustrate this aspect, consider a company such as Airbnb, Amazon, Apple, Facebook, Google, Netflix, or Starbucks — to name just a few — that uses one or more of a globally prominent brand, valuable IP, a web platform, or a broad user network to make itself a profitable new economy player in multiple countries. Suppose that this company is deciding how active it should be in seeking profits through interactions with the residents of a given country. In an old economy version of the open economy model, this might mean that it was considering, say, placing a factory there — involving tangible local capital investment that will result (the company hopes) in its earning more global income.⁷⁸ The company needs only so many factories, so this particular one will go either here or elsewhere, presumably depending on its marginal risk-adjusted after-tax expected profitability.

Now suppose instead that Facebook is considering seeking profits through interactions with the residents of a given country.⁷⁹ Neither its employees nor any of its tangible assets need actually enter the country’s physical territory. Facebook may expect to incur very low marginal costs in adding these interactions to those in which it is already engaged with people in other countries, yet it may enjoy substantial added profits because of adding this set of interactions to all the others. Finally, unlike an old economy company that wants to add a single factory, Facebook is not deciding where to be active as between competing choices. It can operate in this remote way in as many countries as it likes, with no need to choose between them. Its profits from engagement in each country may be largely nonrival with its profits from engagement in other countries.⁸⁰

Under these circumstances, a country in which Facebook operates may find itself, at least up to a point, in the old turks’ world of responding through tax instruments to fixed investment choices. If Facebook can earn profits that are nonrival to its operations elsewhere from interacting with a given country’s residents, it should not be expected to adjust its activity and investment choices in response to even a 99 percent tax on those profits.

In a model featuring excess profits, shareholders really do bear the incidence of unexpected corporate tax changes. Moreover, the tax is likely to be highly progressive and may avoid being (at least directly) distortionary. In the international setting, the model allows source-based corporate income taxes (other than those falling on the normal return) to raise significant revenue from the companies’ owners without inducing a reduction in domestic investment or activity. The corporate income tax thereby shifts from being a very bad tax instrument in a global economy to being one with great advantages.

3. Extending the analysis to residence-based corporate taxation of foreign-source income.

The above analysis concerns source-based corporate income taxation, although it leaves open (pending Section IV below) the question of what “source-based” means — for example, in the Facebook case, in which the company acts purely from afar. For residence-based taxation of companies’ foreign-source income (as defined from a home country perspective), one has to consider the separate margin of corporate residence. Whatever attributes a country uses to define resident companies will be tax-discouraged, insofar as having them increases expected tax liability.

Again, if being a corporate resident were completely elective, as when having or not having those attributes was a matter of complete indifference (taxes aside), one would expect residence-based taxation of foreign-source income to yield little or no revenue. This conclusion changes, however, if the relevant attributes are hard to avoid or have positive value of some kind to a given company or its owners. This, in turn, gives rise to empirical questions about the degree of corporate tax residence electivity.

Federal income tax law generally defines U.S. companies as those incorporated in the United States, whereas other countries typically rely on some measure of where one’s headquarters, central management, or main weight of operations are located.⁸¹ Either way, one might reasonably fear that corporate residence electivity has been ineluctably rising and will continue to do so, what with decades of increasing cross-border shareholding, along with declining cross-border travel and communication costs.

The Made in America Tax Plan appears to be influenced by that pessimism, at least for new companies. While it advocates expanding anti-inversion rules that impede exit by existing U.S. companies, it also appears to count on increased global cooperation between countries, such as through a strengthened global minimum tax regime that would make it hard for new companies to escape being significantly taxable somewhere.⁸² However, as I discuss in Section IV, even in the face of greater global economic integration, corporate residence electivity strongly depends on the legal question of how that residence is defined.

4. Summing up the new turn in corporate tax policy analysis.

Market power that yields extra-normal returns greatly shifts the analysis of corporate income taxation. In a closed-economy model with fixed savings rates, it means that corporate income taxes may be largely non-distortionary and borne by suppliers of capital (such as shareholders) rather than by workers or consumers. In an open-economy analysis, if multinationals earn location-specific rents through nonrival activity or investment choices that address consumers in particular countries, those countries can in principle tax the companies without inducing any reduction in this inbound focus.

Purely on efficiency grounds, this may greatly increase the appeal of not just source-based corporate income taxation but also residence-based taxation if concerns about residence electivity (and hence elasticity) can be sufficiently addressed. Yet today’s young (or new?) turk proponents of increased corporate income taxation resemble their grandparents in giving high priority to distributional considerations. These relate in particular to concern about apparently rising high-end wealth and income inequality and their arguably broad-ranging ill effects.⁸³ Research supporting the Made in America Tax Plan’s proposal that the tax system focus more on high-end inequality, both inside and outside the corporate income tax system, has multiple dimensions, not all of which center on the economics of corporate enterprise.⁸⁴

IV. Defining Source and Residence

A. Legal Language Flexibility

When a theory of international corporate tax incidence, such as the one underlying the end-of-history view, prominently foregrounds an economic model, such as the old economy version of the small open economy, one might think that only its economic analysis needs careful scrutiny. That would be incorrect. Even if one accepts the end-of-history view’s premises about capital markets and investment, its conclusions regarding source-based corporate income taxation also rest on an implicit legal theory about what domestic-source income can or does mean from a given country’s perspective.

In this regard, recall the earlier example in which a multinational is deciding where to locate a factory, conditioned on the expected marginal after-tax return that it would earn by choosing one country as compared with another. The tax part of the analysis rests not only on countries’ tax rate schedules but also on how they would measure domestic-source income from the factory. An end-of-history analysis seems to presuppose that this is basically an economic question. The factory would earn so much pretax domestic-source income from the contemplated factory — reflecting real-world economic factors such as local labor supply, other resource availability, and transportation costs — and then the local government would take its percentage cut.

One can thus view domestic-source income as basically an economic concept without being wholly oblivious to the various amorphous legal issues that notoriously surround it, such as those pertaining to transfer pricing, or to the allocation of interest expense between a multinational’s affiliates in different countries. Yet the end-of-history view cannot withstand the absence of a sufficiently strong link between (1) the actual economic payoff to placing investment capital in a given location, and (2) the domestic-source income that the investment would yield under the source country’s tax rules. At the extreme, if the two are completely unrelated, choices of factory location will have no effect on how much domestic-source income a given jurisdiction will find and on how much tax liability it will consequently impose — thus suggesting that it will not affect locational investment choices.

The disappointing investment response to the TCJA reflected a pro-taxpayer version of this disconnect. While, as noted in Section III, the act’s failure to meet proponents’ expectations partly reflected the effect of extra-normal returns and location-specific rents, it also had a legal terminological side. These days, when companies shift profits in response to tax rate changes, “we’re mainly looking at accounting tricks rather than real capital flight.”⁸⁵ Tax rates on domestic-source income are evidently not having the effect that one might have expected on companies’ real locational choices when “most — most! — overseas profits reported by U.S. corporations are in tiny tax havens that can’t realistically be major profit centers.”⁸⁶

There also is a potentially pro-government version of the disconnect between the operative domestic-source income measure and real locational choices. Suppose that countries followed what I call a Humpty Dumpty approach to measuring domestic-source income. In Lewis Carroll’s Through the Looking-Glass, Humpty asserts that a word means “just what I choose it to mean — neither more nor less.” When Alice asks “whether you can make words mean so many different things,” he replies that the only question is “which is to be master” — him or the word — and “that’s all.”⁸⁷

In this spirit, a country that could define domestic-source income however it liked and then enforce its liability determinations without facing any practical or legal constraints would truly be the master like Humpty. For example, if a country based the tax on immutable characteristics of some kind (regardless of whether they had anything to do with the physical location of anything), by definition there would be no taxpayer exit option in response to the tax being too high.

In practice, countries may not have quite so much linguistic freedom in defining domestic-source income as Humpty claimed over speech generally. Whether for reasons of comity, enforceability, or preserving one’s broader global credibility as a reasonably good-faith actor, a country may need to draw on some sort of local connection to something. Yet this may still leave them the flexibility to choose, for example, indicia that are highly inelastic. Indeed, recent years have made it increasingly clear that in defining the source of income — and corporate residence — countries stand closer to Humpty’s side of the continuum. That’s further from the side where the legal concepts have fixed economic meanings that countries simply must accept and apply than proponents of the end-of-history view seem to have presumed.

Perhaps fittingly, the very taxpayers that this shift in understanding might end up disadvantaging played an active role in bringing it to public view. Multinationals’ aggressive profit shifting helped undermine the acceptance of both the fixity and the economic meaningfulness of existing source rules. Likewise, their pursuit, in some eras, of corporate inversions — removing companies from the U.S. tax net while (at least, in first-generation transactions) little of substance was actually changing — helped do the same for residence rules.

Over time, however, the source and residence concepts’ high degree of artificiality, which decades of corporate tax planning have so vividly demonstrated, may, from the companies’ standpoint, turn from friend to foe. Specifically, it may help empower governments to design what they call source-based or residence-based entity-level corporate income taxes, without requiring that they rely on factors that taxpayers can readily modify in response to the burdens imposed. Countries may also increasingly find that they can rely on inelastic factors through tax instruments that are not labeled as corporate income taxes, and the distinction may end up being more formal than substantive.

B. New Thinking About Source

A simple example that I have used elsewhere can help to illustrate the boundaries of the source concept’s significant, but not unlimited, measurement flexibility and indeterminacy. Suppose that, while never leaving New York City, I write novels in Tagalog that I sell directly to people in the Philippines (and no place else). In these transactions, reflecting relevant people’s physical locations, the United States is the production country (where I do all the work), and the Philippines is the market country (where people buy and read the books). My income therefore unambiguously arose in the United States under what I call a production-based view of source, and in the Philippines under what I call a market-based view. However, barring more facts to complicate the story, my income cannot plausibly be said to have arisen anyplace else.⁸⁸

Unfortunately, both the production-based and market-placed views of source may prove ambiguous in practice under more complicated fact patterns. U.S. multinationals’ success in claiming that so large a share of their profits arose in tax havens where little is actually happening reflects their exploitation of formalistic and highly manipulable rules that appear to reflect a poorly implemented production-based view. Market-based views may also be manipulable in practice,⁸⁹ although they are widely believed to be less so.⁹⁰ Moreover, while the two views yield rival, inconsistent answers when there is cross-border activity — as in the hypothetical case in which both the United States and the Philippines seek to tax my book profits as domestic-source income — neither abstract theoretical inquiry nor existing practice offers clear grounds for choosing between them.⁹¹

These problems have long inspired expert frustration and criticism regarding source as a core international tax concept. They undermine the search for clearly “correct” answers to source questions, stimulate rule complexity and formalism that multinationals can then exploit, and offer ammunition to both sides when production and market countries want to either claim tax jurisdiction for themselves or dispute such claims by the other side. Yet from a Humpty Dumpty perspective, these problems can also empower governments to sift through a wide range of plausible instantiations of domestic-source income, using whichever might prove the most convenient, whether from the standpoint of minimizing behavioral responses or maximizing revenue.

Recent years have witnessed significant progress, in both the scholarly and policymaking communities, toward leaving behind prior eras’ angels-on-the-head-of-a-pin fuss about what the source concept really means and whether physical presence is a sine qua non for taxability. Instead, the modern focus — favoring today’s young turks against their formerly young fogey precursors — has increasingly been on how national governments might be able to tax a given multinational’s derivation of profit from its direct and indirect interactions with their own residents, without being readily defeated by tax planning.

Consider, for example, recent scholarly proposals to replace the existing regime of transfer pricing and separate-entity accounting with global sales-based formulary apportionment within multinational groups,⁹² or with a revised version thereof that is more planning-resistant as well as formally more compatible with existing practice.⁹³ Likewise, the recent adoption by many countries of digital services taxes, while formally not involving corporate income taxation or the measurement of net profit as such, can reasonably be viewed as functioning in lieu of those taxes to address practical challenges in domestic-source income measurement,⁹⁴ much as gross withholding taxes on passive income have been so described.⁹⁵

In sum, more flexible thinking about measuring domestic-source income — and about devising formally distinct measures that likewise target MNCs’ efforts to reach domestic consumers — has helped revive the credibility of taxing multinationals’ profits on what can plausibly be called a source basis. To be sure, for the incidence of taxes on particular sales in a given country to fall on the companies’ owners and not consumers, it may be necessary that the companies have market power, such that they are earning excess profits rather than normal returns.⁹⁶ However, the rise of powerful and hypervaluable new economy companies suggests that this precondition can frequently be met.

C. Defining Corporate Residence

When it comes to defining residence for U.S. corporate income tax purposes, economic reasoning that is based on real-world phenomena offers even less aid than it does regarding source. For the residence of individuals, one can at least observe where they physically spend time, have dwellings that they regard as their homes, or have strong family or business connections.⁹⁷ For an abstract legal entity such as a corporation — a mere nexus of contracts, as corporate law theorists sometimes put it⁹⁸ — residence is even harder to theorize satisfyingly.

As I noted briefly earlier, the United States bases corporate residence on the taxpayer’s place of incorporation. Other countries generally rely on the location of what one might call its “real seat.”⁹⁹ However, the real-seat standard varies between countries, not just in its particular details but also in the extent to which the inquiry is more formalistic (for example, where are annual shareholder meetings held?) or more substantive (for example, where is the true center, if any, for active management?). Other suggested approaches to defining corporate residence would look at factors such as (1) the percentage of a company’s ultimate beneficial shareholders who are domestic residents, and (2) whether the company is publicly listed on domestic capital markets, or even just actively marketed to residents.¹⁰⁰

The Made in America Tax Plan does not discuss changing the U.S. corporate residence standard, other than by expanding the anti-inversion rules. This may reflect its reliance on the prospect of multilateral cooperation in imposing residence-based global minimum taxes to reduce the relative tax-disadvantageousness of U.S. corporate resident status. Despite this reticence, however, it is plausible that the report’s proposed tax increases for U.S. companies’ foreign-source income would strongly motivate, at a later stage, domestic legal changes designed to make domestic residence harder to avoid.

This would require stepping onto ground that is even less well-trodden than that concerning the definition of source. Questions that are relevant to how one might want to define corporate residence but are neither theoretically nor empirically well understood at this point include at least the following:

1. how companies’ founders make corporate residence choices under alternative legal regimes for determining residence;

2. what factors affect midstream residence changeability under any particular set of anti-inversion rules; and

3. how investors factor corporate residence status into their demand for particular equities.

In considering the prospects for unilaterally maintaining the feasibility of significant residence-based tax burdens, although the rise of cross-border shareholding is clearly adverse, the Humpty Dumpty spirit may support a degree of optimism. After all, one’s rules need not target the unavailing truth of what it really means to be a resident company. Instead, in the pure Humpty sense, they might be driven purely by the goal of making corporate residence costly to avoid in a wide swath of relevant cases.

More specifically, the aim would be to raise significant revenue, relative to the deadweight loss imposed on domestic individuals.¹⁰¹ Adding in concern for global comity and credibility might suggest also requiring that one’s approach bear some plausible relationship to factors indicating a meaningful local connection of some kind. Unfortunately, while several different approaches have been tried or at least suggested (as noted above), to my knowledge there has been little empirical research that sheds much light on the relevant constraints.

One type of approach clearly worth considering, however, would involve the disjunctive application of multiple metrics, such that qualification under any of them would cause a company to be deemed a resident. Suppose, for example, that either being domestically incorporated or having a domestic headquarters — and perhaps also, as a third alternative standard, being listed or actively marketed domestically — would suffice. The use of multiple criteria might result not only in casting a broader net than otherwise but also in reducing avoidance behavior directed at any one of the criteria. For example, the use of a stand-alone real-seat standard might induce companies to move their headquarters out of the would-be residence jurisdiction, but this would be unavailing (and hence not worth doing) in cases in which the companies would also qualify as domestic residents based on active domestic marketing.¹⁰² Moreover, needing to defeat all the criteria might tend to raise its nontax costliness, thereby reducing takeup.

The use of multiple residence criteria would presumably increase the frequency with which companies would qualify as residents of more than one country without having deliberately planned that outcome. This might unduly tax-penalize companies that found themselves in that position. The answer, presumably, is for putative residence countries either to enact statutory rules identifying circumstances under which they will recede or to coordinate responses with each other through multilateral agreements.

In sum, actual practice regarding corporate residence has not much evolved, other than through the enactment of anti-inversion rules that target attempted midstream changes in a given company’s residence status. However, increased scholarly focus on the fundamental artificiality of corporate residence implies flexibility in how countries might reasonably define it. This, in turn, may end up empowering greater use of residence-based taxation of foreign-source income than would have been feasible were it a single fixed thing. U.S. proponents of that taxation would be well advised to consider efforts of this kind, especially (but not only) if they succeed in enacting changes like those in the Made in America Tax Plan.

V. Multilateral Cooperation

The Made in America Tax Plan’s silence on changing U.S. corporate residence rules, other than for midstream inversions, leaves it all the more reliant on multilateral cooperation to address residence electivity. As it notes, a global minimum tax might help substantially in this regard because it would ensure that non-U.S. MNCs face comparable residence-based tax liability on their tax haven foreign-source income. Since the plan’s issuance, there has indeed been diplomatic progress on this front. In June the G-7 finance ministers and Central Bank governors issued a joint communique in which they committed “to a global minimum tax of at least 15 percent on a country by country basis,” to be further pursued at the next G-20 meeting.¹⁰³

Yet it remains too early to tell what fruit these efforts will ultimately bear, and the grounds for skepticism are clear. As Peter Barnes recently argued, a global minimum tax “requires all countries in the world to hold hands. . . . Unless they can get 90 percent of the world’s countries to adopt it, countries will view exempting themselves from the system as a great way to create a potentially significant competitive advantage.”¹⁰⁴

This view is so well grounded and widely accepted that the Made in America Tax Plan itself echoes it to a degree, noting that countries face “a collective action problem. When [they] compete against each other to attract multinationals’ profits and activities . . . the result is a race to the bottom . . . [as they] try to gain a competitive edge by undercutting each other’s tax systems.”¹⁰⁵ More specifically, the collective action problem identified here is a prisoner’s dilemma. It rests on the view that even if all countries would be better off if all cooperated, each individual country might benefit from defecting, no matter what any other country might do.

Presumably, because the main issue here is residence-based taxation of tax haven foreign-source income, the claim is that countries would benefit from offering residence status without those taxes being imposed. Also, defector residence status might prove tax advantageous on other grounds, such as by making the holders of that status useful counterparties in profit-shifting transactions. In any event, would-be defector countries might either charge a modest fee to companies that wished to claim residence status, or else require some kind of local physical connection (such as an office or annual meeting site that would provide local benefits).

As in other areas discussed earlier, the internal logic behind this view is sound. Once again, however, the completeness and accuracy of its premises can be challenged. In particular:

1. The crucial legal question in the avoidance of U.S. corporate residence is not what any other country does but what U.S. law does. No matter how many tax havens — or for that matter, how many peer countries — are willing to recognize a given MNC as their resident for tax purposes, this will prove unavailing if the United States decides to make the same claim. Even if a tax treaty between the United States and the other residence claimant has implications for resolving the dispute, this can be overridden in the United States by statute because we use last-in-time rules to resolve conflicts between tax (and other) laws and treaties.

2. Even insofar as the United States needs cooperation from other countries to curb profit shifting (or for that matter, real activity shifting), whether by resident or nonresident MNCs, it is not without means to encourage this. Some years ago, when the United States enacted the Foreign Account Tax Compliance Act, demanding cooperation from foreign banks in identifying accounts held by U.S. residents, skeptics called the effort insane and bound to fail.¹⁰⁶ It soon became clear that FATCA was attracting enough global buy-in from non-U.S. players (both governments and financial institutions) for even early critics to start conceding that it had achieved significant success. For profit shifting, the Made in America Tax Plan seeks to leverage foreign cooperation in resisting the race to the bottom through a proposed new international tax rule called SHIELD (an acronym for stopping harmful inversions and ending low-tax developments) that would deny MNCs “U.S. tax deductions by reference to payments made to related parties that are subject to a low effective rate of tax.”¹⁰⁷ That provision, if enacted, not only would directly address profit shifting but also might put pressure on other countries to cooperate so that MNCs would have no reason to avoid including them in global planning structures.

3. More broadly speaking, the traditional national self-interest model that underlies the standard view of tax competition is perhaps too simple. Although often not made explicit, its most straightforward version might rest on a rational choice model in which nations, like individuals in the neoclassical setup, are pursuing their financial self-interest. Thus, in the prisoner’s dilemma described above, defection may be motivated by its generating modest tax revenues or fees, or from its attracting inbound investment that yields positive local externalities.

While this is by no means a frivolous way to think about countries’ choice metrics, one should recognize that — even if the neoclassical framework works adequately for individuals — by its own terms it does not apply to the fruits of collective political choice. In a political system, be it democratic or not, in which many different people can exert degrees of influence, individual actors have an incentive to favor what is best for them, not for the country as a whole. Moreover, those with only minimal influence, like individual voters in a mass society, have almost no reason to even try to determine what policies would be best for themselves individually, given the unlikelihood that they can alter the outcome. Even for powerful actors, political preferences are often driven by ideological or symbolic issues, rather than narrow economic calculation about overall national welfare. And there is often great disagreement about where national self-interest, broadly considered, actually lies — a problem that is acute in the international tax field, even just among leading scholars.¹⁰⁸

Consider how fundamentally U.S. policymaking objectives have changed, both internationally and in the domestic tax arena, between the Trump and Biden (or, before that, Obama and Trump) administrations. These head-snapping changes in direction, in addition to rebutting any presumption that national policymakers should be expected to follow consistent aims across time, also help show the linkage between (1) more progressive versus more conservative domestic political ascendancy, and (2) attitudes toward global interaction. For example, the Trump administration’s evident distaste for liberal democratic countries and leaders such as those in western Europe, and its eagerness to ally with repressive authoritarians and plutocrats, inevitably correlated with a very different stance toward both global tax cooperation and highly profitable MNCs’ tax avoidance than that of the Biden administration.¹⁰⁹ More generally, even if the Trump administration remains a unique historical outlier, the prospects for widespread multilateral cooperation in addressing MNCs’ tax avoidance will clearly be greater if parties that are more on the left side of the political spectrum do well in national power struggles over the next few years.

VI. Conclusion

Recent calls for increased entity-level corporate income taxation of multinationals, on both a source and a residence basis, have a distinctly back-to-the-future cast. At least as to the bottom line, they have far more in common with 1986-era thinking than with what has often prevailed in more recent decades.

This historical back and forth has ample parallels in other areas, and there are precedents from earlier eras. In corporate and international tax policy, as well as in the issues of taxing capital income and addressing high-end inequality more generally, the intellectual back and forth has reflected the rise of standard neoclassical Econ 101 precepts that in the preceding period had been underappreciated, followed by a growing awareness of what those precepts leave out. Meanwhile, the popular back and forth has reflected fluctuating public perceptions of unfettered free-market capitalism’s merits and performance.

As Mark Twain reportedly said, “History may not repeat itself, but it often rhymes.” This helps show that the current era, with its rising intellectual support for entity-level corporate income taxation (on both a source and residence basis) may not be the end of history, either. However, even Bittker might find it difficult to forecast today the next ensuing turn in the road.