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This manuscript responds to Income Tax Discrimination: Still Stuck in a Labyrinth of Impossibility by Professors Michael Graetz and Alvin Warren (121 Yale L.J. 1118). In that article, Professors Graetz and Warren challenge many of the arguments we made in our own article entitled, “What is Tax Discrimination?” (121 Yale L.J. 1014). In our earlier article, we set out to accomplish two goals. First, we sought to identify the principle behind the doctrine of tax discrimination as that doctrine is applied by the U.S. Supreme Court and the Court of Justice of the European Union (ECJ) and to translate that principle into economic terms. Second, we sought to describe how courts can advance that principle through case law.

Part I of this article defends our argument that the courts interpret the tax nondiscrimination principle to require “competitive neutrality,” a concept closely related both to the colloquial notion of a “level playing field” between domestic and cross-border economic actors and to the formal economic concept of capital ownership neutrality (CON). Among other topics covered in Part I, we defend our focus on efficiency as the principal decision-making criterion used by courts for deciding tax discrimination cases, explain how we translated the concept of CON into the labor context, defend our focus on cross-border workers as the only group of workers who are legally relevant to the tax nondiscrimination question, provide some preliminary thoughts on the differences between “restriction” cases and tax “discrimination” cases, and provide further discussion of our interpretive sources.

Part II fleshes out our argument that in the absence of cross-border harmonization of tax rates and bases competitive neutrality requires two conditions. The first condition is that all states must agree on one of two methods of avoiding double taxation on interstate commerce. The two alternative methods are worldwide taxation with unlimited foreign tax credits and what we call “ideal deduction”, which includes territorial taxation as one instantiation. The second condition is that all taxes must be uniform on either a source or residence basis. A source tax is uniform if it applies in the same manner to all income from the same source state without regard to the residence of the taxpayer who earns that income; a residence tax is uniform if it applies in the same manner to all income earned by a resident regardless of source. In our original article, we noted that both the ECJ and the U.S. Supreme Court disclaim authority to force states to agree on a method of avoiding double taxation. Accordingly, because it would not be possible for courts to enforce both conditions required to achieve competitive neutrality, we argued that if, as it appears, the courts desire to promote competitive neutrality through the doctrine of tax discrimination, they can do so by enforcing the uniformity requirement. Among other topics covered in Part II, we provide responses to specific questions and challenges raised by Graetz and Warren, including how ideal deduction would work with graduated tax rates and variations in national tax bases and whether ideal deduction could achieve competitive neutrality in the absence of fixed residence In Part II, we also provide resolutions for three factual scenarios that Graetz and Warren posed and for which they claim that a competitive neutrality interpretation of tax discrimination provides no resolution.


67 Tax L. Rev. 375 (2014)