Taxing intagibles

The importance of capital gains tax

[…]we must rethink how tax revenue is raised. If all income were taxed at the same rate, intangible investments made by companies would still generate revenue in the form of taxes paid by the companies’ wealthy owners. The alternative – to maintain the status quo – will only ensure that as growth in the intangible economy intensifies, current revenue gaps will eventually become gaping holes.

Taxing the Intangible Economy
By: Roger Farmer – University of Warwick

Multinationals: in which countries is income from intangibles reported?

US multinationals commonly follow two strategies to shift Intellectual Property income to low-tax countries: a) cost-sharing arrangements; and b) IP transfers. In addition, the relative decline in availability of skilled human resources able to engage in R&D activities in the U.S. increases domestic R&D wage costs relative to foreign R&D wage costs. In response, firms increasingly seek foreign R&D talents to reduce their R&D costs. De Simone and al. find that although both tax incentives and cost savings contribute to outbound R&D-related income shifting, tax incentives contribute about three times more to foreign profit margins attributable to R&D activity than wage savings.

Panel D shows the five-year weighted average statutory income tax rate difference between the U.S. and foreign inventor countries by year. Panel E shows the five-year weighted average wage cost difference between the U.S. and foreign inventor countries by year.
R&D and the Rising Foreign Profitability of U.S. Multinational Corporations
Authors: Lisa De Simone, Jing Huang, Linda Krull
From: Stanford University, Virginia Tech, University of Oregon

The assumption that intangibles raise firms’ profitability is yesterday’s story!

James Bessen uses data from a sample of firms which traded on US exchanges between 1970 and 2014 and found that returns to investments in intangibles did contribute to increased firm profitability up until 2000. But since then regulatory rents have become more important. He suggests that it is the extent and/or complexity of new regulation that generates the potential for rents.
Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?
Authors: James Bessen
From: Boston University