Document Type



Florida Tax Review




Efforts to identify and implement an appropriate tax neutrality benchmark have been persistent themes in scholarly and policy debates on international taxation for fifty years. This paper questions whether the concept of tax neutrality has been adequately specified for analyzing the efficiency properties of international tax systems. As distinct from the closed-economy setting, in the open-economy setting, neither tax revenues received nor the burdens that tax revenues pay for may be taken as fixed. Because tax revenues finance infrastructure and other productivity-enhancing goods - so-called "tax amenities" - and because capital burdens infrastructure, the reallocation of tax revenues among jurisdictions and the movement of assets and productive capacities across borders cause the amount of tax revenue collected in each jurisdiction to diverge from the revenue target. A consequence is that what are viewed as tax incentive effects, or distortions, improve productivity in some cases. Neutrality as a value, however, rests on the idea that tax incentive effects reduce efficiency by causing resources to be allocated away from some optimum non-tax-affected baseline; this idea is what justifies referring to tax-influenced allocations as distortions. An implication is that the baseline is not well specified in the open-economy setting.

This article suggests that, in light of these considerations and of the difficulty in implementing a theoretically satisfactory specification of neutrality, an analysis focusing on the allocative, distributive, and competitive properties of international tax rules would be more helpful than one focused on their neutrality properties. A simple model relating tax revenue and population to productivity is offered.