Taxing the Bandit Kings

(w/ D. Dharmapala) 118 Yale Law Journal Pocket Part, 98 (November 2008).

The rise of significant inbound capital flows originating from sovereign wealth funds (SWFs) has occasioned a debate over the appropriate regulatory and tax treatment of these funds. In particular, it has been argued that the tax exemption currently enjoyed by SWFs confers an advantage on these entities as providers of capital to U.S. firms relative to private foreign investors, and that a tax should be imposed on SWFs to restore fairness. This brief essay argues that the distinctive nature of the portfolio choices facing SWFs negates this fairness argument. Indeed, changing the tax treatment of SWFs as has been proposed would distort choices that are otherwise efficient and would handicap U.S. firms and workers.