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I. Introduction
This Article continues the analysis begun in a companion paper, Stateless Income.1 That prior analysis defined "stateless income" as "income derived by a multinational group from business activities in a country other than the domicile [however defined] of the group's ultimate parent company, but which is subject to tax only in a jurisdiction that is not the location of the firm's customers or the factors of production through which the income was derived, and is not the domicile of the group's parent company. . . Stateless income thus can be understood as the movement of taxable income within a multinational group from high-tax to low-tax source countries without shifting the location of externally supplied capital or activities involving third parties."2
This Article extends the prior article along two margins. First, it considers the implications of the pervasive presence of stateless income for standard economic efficiency benchmarks by which international tax policy proposals are judged. Second, it analyzes realistic steps that policymakers might take to respond to the phenomenon.
Sections II and III analyze the problems that stateless income poses for standard efficiency benchmarks by first exploring the international tax policy recommendations that might logically be drawn from a hypothetical world without stateless income, and then introducing the phenomenon into the model. The analysis demonstrates that conclusions that are logically coherent in a world without stateless income do not follow once the presence of stateless income tax planning is considered.
More specifically, this Article identifies and develops the significance of implicit taxation as an underappreciated assumption in the standard economic efficiency models that are employed in arguing that the United States ought to adopt a territorial tax system; in doing so, the Article relates the existing domestic implicit tax literature to the transnational context. In this respect, the Article can be seen as extending and formalizing the reasoning of a recent paper by Harry Grubert and Rosanne Altshuler, as well as those of some other authors, who have criticized the economic efficiency arguments for territorial tax systems.3
In particular, the "capital ownership neutrality" standard (CON) has much to recommend it in theory, and is based on more sophisticated theories of the multinational firm and the mobility of capital than is the older "capital...