Grey matters

Lessons for international tax reform from the U.S. state experience under formulary apportionment by Kimberly A. Clausing

(Oct. 2013) available at 


This work undertakes a comprehensive analysis of the U.S. state experience under formulary apportionment of corporate income. While formulary apportionment eliminates the possibility of shifting income across states through accounting strategies that manipulate where income is booked, it may heighten the tax responsiveness of formula factors. The present analysis uses the substantial variation in corporate tax policy decisions of U.S. states over the period 1986 to 2012 to better understand the consequences of formulary apportionment. It examines the effects of policy choices regarding tax rates, formula weights, and other parameters on economic activity, estimating the tax sensitivity of employment, investment, and sales. With the inclusion of adequate control variables, results indicate that economic activity is not particularly sensitive to U.S. state corporate tax policy choices, especially in recent years. Still, tax policy choices have important effects on corporate tax revenues. These results suggest important lessons regarding possible international adoption of formulary apportionment.

CFR Comment 

One possible future for the international tax system is a shift toward more reliance on formulas for apportioning taxable income among jurisdictions. The experience of U.S. states and Canadian provinces provides a natural experiment that enables identifying some of the issues and this paper does a fine job of ferreting out the issues that might arise from broader use of the formulary approach, with lots of regressions for those who love empirical work. One key finding is that tax competition among U.S. states has led to a shift toward sales-weighted corporate taxation and away from asset and payroll-weighted formulas. 


US corporate tax reform: Why is a worldwide tax system absent from the debate?

Tax Notes International, Vol. 71, No. 12, 2013 available at 


Reform of the U.S. international tax policy is under consideration in Congress. Policymakers are concerned with both reducing tax disincentives to repatriate earnings to the U.S. and with constraining business tactics to move U.S. income offshore. We argue that to achieve significant tax reform, policymakers should generate reform alternatives based on ideas that are shared across partisan and ideological divides. The common ground among political perspectives includes broadening the tax base and lowering tax rates, simplifying the tax code and assuring U.S. corporations pay their fair share while remaining competitive in the global economy. Most proposals are centered on changing the current tax system into a territorial system rather than preserving some form of worldwide system. Informed by recent research, we present arguments favoring a burden-neutral worldwide tax system as the basis for U.S. international income tax reform.

CFR comment: 

This brief article argues for a worldwide tax system’s advantages over a territorial system. It provides a nice overview of the empirical evidence on the impacts of the territorial system. As corporate tax reform is likely to be a hot issue in the U.S. over the next several years, this is a good introduction to an important issue in the debate.


Incorporation in offshore financial centers: Naughty or nice? by Warren Bailey and Edith X. Liu

(November 18, 2013) available at 


We study associations between measures of firm value and quality and the firm’s choice of legal and regulatory environment. Incorporation in an offshore financial center is associated with lower Tobin’s q and returns on initial public offerings, and is more likely to be selected by firms that are poorly-governed or have low growth opportunities. In contrast, after controlling for firm-level governance, offshore incorporation enhances value for Chinese and Hong Kong firms, and is not shunned by U.S. institutional investors. We show that incorporation in an offshore financial center is not necessarily value-destroying but must be assessed in the context of other firm and home country characteristics.

CFR comment: 

Using data on firm value (measured by Tobin’s q), this working paper finds mixed results on the impact of OFC incorporation. Perhaps most interestingly, there are positive value for Chinese and Hong Kong firms, suggesting there is value in using a jurisdiction where legal rules are well established as the legal home for a company.


Creating Cayman as an offshore financial center: Structure and strategy since 1960 by Tony A. Freyer and Andrew P. Morriss

Arizona State Law Journal, forthcoming 2013, available at  


The Cayman Islands are one of the world’s leading offshore financial centers (OFCs). Their development from a barter economy in 1960 to a leading OFC for the location of hedge funds, captive insurance companies, yacht registrations, special purpose vehicles and international banking today was the result of a collaborative policy making process that involved local leaders, expatriate professionals and British officials. Over several decades, Cayman created a political system that enabled it to successfully compete in world financial markets for transactions, participate in major international efforts to control financial crimes and avoid the political, economic, racial and social problems that plague many of its Caribbean neighbors. Using archival sources, participant interviews, and a wide range of other materials, this article describes how the collaborative policy making process developed over time and discusses the implications of Cayman’s success for financial reform efforts today.

CFR comment: 

Coauthored by CFR Editorial Board Chair Morriss, this paper takes a comprehensive look at what led to Cayman’s success and some of the threats it faces going forward.


Market-dominant small jurisdictions in a globalizing financial world by Christopher M. Bruner

Washington & Lee Legal Studies Paper No. 2013-19 (October 21, 2013), available at  


Over recent decades small jurisdictions have become big players in cross-border corporate and financial services. To date, however, their nature, legal status and market roles remain under-theorized. Lacking a coherent vocabulary to describe the functions that such jurisdictions perform – and the peculiar strengths of those small jurisdictions actually achieving substantial success in the global financial marketplace – we find ourselves unable to evaluate their social and economic impacts in a nuanced and rigorous manner. Accordingly, this article proposes a new conceptual framework with the dual aim of refining the debate regarding the legitimacy and desirability of their activities, and reorienting that debate toward more productive inquiries.

Part II canvasses extant conceptual frameworks used to describe and evaluate the roles of small jurisdictions in cross-border corporate and financial services. These include literatures exploring globalization and the impact of English legal origins, as well as literatures variously characterizing such jurisdictions as “tax havens,” “offshore financial centers,” “micro-states,” and “global cities.” Finding each paradigm incapable of accounting for the range of small jurisdictions that have achieved substantial success, Part III proposes a new concept that better captures their market roles and salient characteristics – the “market-dominant small jurisdiction” (MDSJ).

I first set out an ideal type, identifying the central, consequential features giving rise to their competitive strengths and fueling their substantial successes. Notably, MDSJs (1) are small in both population and land area; (2) are poorly endowed in natural resources, limiting their economic development options; (3) possess legislative autonomy (if not full sovereignty); (4) are culturally proximate to major economic powers, and favorably situated geographically vis-à-vis those powers, often performing critical “bridging” functions among them; (5) heavily invest in human capital, professional networks, and related institutional structures; (6) consciously balance close collaboration with and robust oversight of the financial professional community, at once conveying flexibility, stability, and credibility; (7) exhibit low levels of perceived public corruption; and (8) actively seek to minimize the political and diplomatic salience of cross-border corporate and financial services.

The foregoing ideal type provides a benchmark against which to evaluate four jurisdictions that have achieved global dominance in particular areas of cross-border corporate and financial services: Bermuda, well established among the world’s preeminent insurance markets; Singapore, a rising power in wealth management; Switzerland, the long-standing global leader in private banking; and Delaware, the predominant jurisdiction for the incorporation of U.S. publicly traded companies and a globally prominent competitor in the organization of various forms of business entities.

Part IV concludes, suggesting that notwithstanding MDSJs’ apparent vulnerability to exertions of economic and diplomatic pressure by major markets, the practical significance of MDSJs will likely continue to grow – as will the practical need for a more effective means of theorizing the roles they play in cross-border corporate and financial services, and the global dynamics their ascendance reveals. Accordingly, we should not remain content with flawed conceptual frameworks and vocabularies that lack sufficient nuance and all too often facilitate glib – and even hypocritical – generalizations about their social and economic impacts.

CFR comment: 

This is a fascinating paper that examines the role of OFCs in the world economy. Well worth reading.



Regional blocks and imperial legacies: Mapping the global offshore FDI network by Daniel Haberly and Dariusz Wojcik


University of Oxford, School of Geography and the Environment Working Papers in Employment, Work and Finance, No. 13-07  (October 28, 2013), available at  


While FDI is generally assumed to represent long-term investments within the “real” economy, approximately 30-50 percent of global FDI is accounted for by networks of offshore shell companies created by corporations and wealthy individuals for tax and other purposes. To date, there has been limited systematic research on the global structure of these networks. Here we address this gap by employing Principal Component Analysis (PCA) to decompose the global bilateral FDI anomaly matrix into its primary constituent sub-networks. We find that the global offshore FDI network is highly globalized, with a centralized “network core” of offshore jurisdictions in Northwest Europe and the Caribbean exercising a largely homogeneous influence over economies worldwide. To the extent that the network is internally differentiated, this appears to primarily reflect a historical layering of social and political relationships. We identify four primary offshore FDI sub-networks, bearing the imprint of four key processes and events: European, particularly UK colonialism, the post-WWII hegemonic alliance between the U.S. and Western Europe, the fall of Soviet communism and the rise of Chinese capitalism.

CFR comment: 

Using an IMF dataset on foreign direct investment and some sophisticated empirical techniques, the authors present some fascinating graphical representations of world financial flows that shed some light on where money goes. Lots of technical details but focus on the interesting graphical presentation of money networks even if principal component analysis leaves you cold.


Moving money: International financial flows, taxes and money laundering by Richard K. Gordon and Andrew P. Morriss


Hastings International and Comparative Law Review, forthcoming 2013, available at  


Allegations by political leaders and others that offshore financial centers enable multinational enterprise to avoid paying a “fair” amount of tax – and that they enable wealthy individuals to evade paying any tax, much of it on ill gotten gains – are once again garnering headlines and inspiring government action. One of the most prominent commentators on these topics, The Tax Justice Network, has recently claimed that thanks to the services of tax havens $21-$32 trillion of wealth of questionable origin remains hidden and untaxed, and that such abuse must be stopped through greater regulation. In this paper we argue that such claims rest on poor data and analysis, and on mistakes about how financial transactions, international taxation and anti-money laundering rules actually work. We further argue that demands for more regulation without considering cost and effectiveness rely on a belief that international financial transactions are assumed illegitimate unless tightly controlled, rather than primarily reflecting the normal, legitimate workings of an efficient market.

CFR comment: 

Coauthored by CFR Editorial Board Chair Morriss, together with ex-IMFer Gordon, this paper unpacks the silliness behind the Tax Justice Network’s efforts at estimating the “price of offshore,” showing how it is driven by their invented numbers and poor analysis. It puts the debate into a larger context, suggesting financial issues are viewed differently by those focused on bad outcomes and those focused on economic growth.



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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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