1. General Observations on Altshuler & Grubert
Take on a difficult, complex issue
Attempt to apply rigorous empirical analysis

2. Basic Results are Straightforward
Exempting active foreign source dividends is unlikely to shift substantial manufacturing direct investment to low-tax locations
Why? Effective tax rate on such income is already low because:
Foreign source royalties often face no U.S. tax
Deferral and repatriation planning yield low effective U.S. residual tax

3. Three Strands of Analysis
Comparison of FDI patterns of U.S. and two exemption countries
Effective tax rate calculations
Estimation of effect of foreign tax credit position on investment location choices

4. Cross-Country Comparison
Mixed results
Least convincing part of analysis
Too much potential variation across the countries in other factors that could confound tax effects
Criterion for low-tax designation may omit some close substitutes (e.g., Switzerland)
Better if could look at differential responses among the countries to changes in local tax rates

5. Effective Tax Rates Most convincing part of the analysis
Shows that current effective U.S. tax quite low
But there are some issues ...

6. Issue #1: Expense Allocations
The authors show that assumptions about the allocation of expenses against exempt income are critical to the results.
Problems:
Unclear what expense allocation rules would look like and how well they could be enforced
There would be a strong incentive to shift interest and other expenses to high-tax foreign affiliates. AG assume that under an exemption system all such expenses would be deducted at the rate in the low-tax location.

7. Issue #2: Income from Intangibles
Assumption about the level of intangible capital (10 % of total) seems low
Raising the level of intangible income is unlikely directly to undo the results; however, there would be:
Bigger benefits from underpaying royalties from low-tax affiliates
Greater potential tax benefits from intangible migration strategies that shift intangibles to low-tax affiliates, e.g., through cost-sharing arrangements

9. Location Decisions and Excess Credits
MNCs permanently with excess credits face incentives similar to those under an exemption system – so how much does excess credit position affect location decisions?
Find some evidence of modest effect. Authors acknowledge basic endogeneity problem: Excess credit position of firm determined also by location decisions.
Not clear that they have overcome this problem
Also unclear how well they can measure long-run credit positions of MNCs

10. Conclusion
The authors’ cautious conclusion seems reasonable – there is little evidence to indicate that large-scale movement of manufacturing investment would occur from movement to an exemption system of this form
However, the ultimate impacts would depend on:
specific provisions of enacted legislation (e.g. regarding expense allocation)
mobility of interest and other expense deductions
importance and mobility of intangible income