[DRAFT -- Please do not circulate.] 1 Reflections on Some Small, Medium and Large Design Issues with Income Source Rules in International Taxation

1 Reflections on Some Small, Medium and Large Design Issues with Income Source Rules in International Taxation Mitchell A. Kane It is difficult to find vocal defenders of current instantiations of source rules in international taxation. As a category, source rules would seem to reflect an assertion of tax jurisdiction -namely on a principle of territoriality -which lacks a firm and universally agreed normative basis. Worse, even under the best articulation of an assumed normative basis of territorially-based taxation (likely some variation of a benefits theory), the existing rules seem to mismatch the normative base in substantial (and irremediable) ways. Worse yet, within the category of source rules, we encounter a range of categorizations that bump up against one another, allowing taxpayers substantial flexibility in substantive outcome based on how they arrange their affairs to achieve one characterization or another. Nor do these problems reflect, as is often the case in disputes about international taxation, the views of some subset of losing countries in a zero sum game. Note, for example, that complaints seem to arise across the range of both developed and developing countries, even though such countries frequently have adverse interests in the setting of international tax policy. Thus developing countries often seem aggrieved by the way current instantiations of source taxation ascribe to them what they view as insufficient tax base. For their part, developed countries may find that under current approaches taxpayers have too much flexibility in sourcing income to jurisdictions that impose little or no tax. One possibility is that the various difficulties with source stem from a basic category mistake, namely that the geographic location of income is not a coherent economic concept because physical location is not a property that can ever properly be ascribed to income (much as Gilbert Ryle famously argued that substance could not properly be ascribed to mind, as under Cartesian dualism). From what I can tell, Hugh Ault and David Bradford were the first scholars