Risk and Redistribution in Open and Closed Economies

62 Pages Posted: 12 Sep 2012

Date Written: 2006

Abstract

A growing body of tax scholarship considers the interplay of taxation and risk in the domestic context. This article is the first attempt in the tax literature to analyze systematically the relationship between tax and risk in the international, or open economy, setting. I demonstrate how common tax instruments can result in certain jurisdictions disproportionately taxing a portion of the upside gains from successful risky investments, while other jurisdictions end up disproportionately bearing the costs associated with unsuccessful ones. This leads to a phenomenon that I call “divergence.” I provide formal specifications for divergence and then make a preliminary assessment of its magnitude. The distributive effects of divergence appear to be substantial, arguably on the same order of magnitude, from the U.S. perspective, as the nonmilitary foreign aid budget. I then turn to a normative critique of these distributive effects, based on conflicts with the jurisdictional entitlement to tax on the basis of source and with domestic policies regarding the subsidization of risky investment. Finally, I discuss possible responses, including a shift towards global formulary apportionment in transfer pricing and greater reliance on territorial over worldwide systems of taxation.

Suggested Citation

Kane, Mitchell, Risk and Redistribution in Open and Closed Economies (2006). Virginia Law Review, Vol. 92, 2006, Available at SSRN: https://ssrn.com/abstract=2145395

Mitchell Kane (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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