Formula Apportionment: Is it Better than the Current System and are There Better Alternatives?

National Tax Journal, December 2010, 63 (4, Part 2), 1145–1184

40 Pages Posted: 19 Oct 2011 Last revised: 12 May 2013

See all articles by Rosanne Altshuler

Rosanne Altshuler

Rutgers, The State University of New Jersey - Department of Economics

Harry Grubert

U.S. Department of the Treasury, Office of Tax Analysis (OTA); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 17, 2011

Abstract

This analysis of formula apportionment compared to the current U.S. system recognizes that income shifting has two main sources, excess returns attributable to intangibles and debt, and that a major goal of income division systems is preserving neutrality between arm’s length and related party transactions. A model demonstrates that separate accounts (SA) and formula apportionment (FA) distort behavior along different margins. Simulations indicate that FA has no clear advantage over SA. Static estimates of U.S. tax revenues under FA suggest potentially large increases, but simulations show that revenue under FA and SA is similar once behavioral responses are taken into account.

Keywords: formula apportionment, transfer pricing, income shifting, international taxation

JEL Classification: H25, H73, H87

Suggested Citation

Altshuler, Rosanne and Grubert, Harry, Formula Apportionment: Is it Better than the Current System and are There Better Alternatives? (May 17, 2011). National Tax Journal, December 2010, 63 (4, Part 2), 1145–1184, Available at SSRN: https://ssrn.com/abstract=1844926 or http://dx.doi.org/10.2139/ssrn.1844926

Rosanne Altshuler (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Jersey Hall
New Brunswick, NJ 08901
United States

Harry Grubert

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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