Companies will shift profit abroad---takes out solvency.
David Gamage 17, Professor of Law at Indiana University-Bloomington, Darien Shanske, Professor of Law, UC Davis School of Law, 2017, “Tax Cannibalization And Fiscal Federalism In The United States,” Northwestern University Law Review, 111 Nw. U.L. Rev. 295, lexis
3. Comparing the States’ Corporate Income Tax Rates to Sales Tax Rates.—Consider first the measured distortionary responsiveness to corporate income tax rates, as compared to sales tax rates. Certainly, not all of this measured distortionary responsiveness is single-instrument. Correspondingly, perhaps about a third of the measured responsiveness to corporate income tax rates comes from taxpayers shifting real investment activities abroad.153 This form of responsiveness might well be induced by the overall tax burden on business investments—potentially including both the burden of corporate income tax rates and the burden of sales tax rates. A state government swapping from the use of corporate income tax rates to the (distributional and revenue-neutral) use of sales tax rates might thus not substantially reduce this form of distortionary responsiveness.
By contrast, the remaining two-thirds or so of the measured distortionary responsiveness to corporate income tax rates comes from: (a) profit shifting, (b) shifting from the use of corporate organizational forms to partnership organizational forms, and (c) shifting from equity financing to debt financing.154 These forms of responsiveness are directly induced only by corporate income tax rates, not by sales tax rates (at least not to any substantial degree).
For instance, perhaps the most prevalent form of profit shifting involves a foreign subsidiary corporation charging its U.S.-based parent corporation inflated prices for the use of intellectual property controlled by the foreign subsidiary.155 By doing so, the corporate group reduces the profits reported to the domestic federal and state governments for the purpose of assessing corporate income tax liabilities, by instead reporting these profits to the foreign (lower tax) jurisdiction of the subsidiary. This form of distortionary responsiveness is thus only directly induced by corporate income tax rates, not by sales tax rates, because only reported profits need be shifted to the foreign jurisdiction. More generally, shifting reported profits to subsidiaries in foreign jurisdictions—as opposed to shifting real investment activities—does not directly affect sales tax liabilities, as sales tax liabilities do not depend on profitability.