The Use and Abuse of Location-Specific Rent

Abstract

International tax law divides taxing rights among countries. An ideal allocation of taxing rights would (i) enable countries to raise substantial amounts of revenue; (ii) allow them to do so efficiently; and (iii) assign rights fairly. The conceptual basis for such an allocation would be the holy grail of international taxation.

Many tax scholars believe that they have found the grail. They say that it is the concept of location-specific rent. A location-specific rent is a return to a factor of production that exceeds what the factor’s holder requires to deploy the factor to a particular location. A substantial quantity of location-specific rent likely exists. In theory, taxes on location-specific rent are difficult to avoid and are efficient. And, since location-specific rent can only be earned in one location, each location-specific rent seems to be made possible by one particular society. For that reason, it strikes many scholars as fair that each country should have the exclusive right to tax the location-specific rent that originates in it.

In this article, we push back on this emerging consensus. Our first contribution is to clarify what location-specific rent is, as we provide the first rigorous definition of location-specific rent to appear in either the legal or the economic literature. Second, drawing on this definition, we show that location-specific rent is not the holy grail of international taxation. The appeal of location-specific rent rests on two key assumptions: (a) location-specific rent is measurable and (b) each location-specific rent is made possible by one particular society. Both of those assumptions, we show, are often false.

Third, and more positively, we identify a modest role for location-specific rent in international tax policy. In some specific contexts, the practical hurdles to measuring location-specific rent are surmountable. Moreover, since location-specific rent can be taxed efficiently, all else being equal, it is good to increase countries’ aggregate capacity to tax location-specific rent. Frequently, however, all else is not equal: often, increasing one country’s capacity to tax location-specific rent will come at the expense of people who live in another country, or we must choose which country ought to have the right to tax some location-specific rent. To address those situations, we need to rely on a general theory of global distributive justice. Such a theory probably would not imply that each country has a distinctive or superior claim to tax the location-specific rent that originates in it.