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Expansion of the Totalization Program using Simplified Agreements to Eliminate Dual Taxation

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Abstract

The United States has signed 30 bilateral social security agreements. Some of its partner countries, such as the U.K. or Germany, have signed international agreements to eliminate double taxation for nationals working temporarily abroad with more than 50 other countries. This project analyzes the potential macroeconomic impact of expanding the countries with international social security treaties by enacting new social security totalization agreements that are simpler than the standard totalization agreements enacted so far. The focus of this project is to simulate the effect on international flows of capital of eliminating double social security taxation through enacting limited treaties with additional countries beyond the current U.S. partners. For this, we extend a theoretical model of foreign direct investment to incorporate social security international agreements with several countries. We model limited totalization agreements that only eliminate double taxation. We use the model to forecast the effects of new, more flexible totalization agreements.

Key Findings

  • We analyze a hypothetical expansion of the international totalization program to allow for agreements to eliminate dual social security taxation.
  • These agreements could, theoretically, have the potential effect of decreasing relocation costs for multinational firms, thus encouraging foreign direct investment (FDI).
  • We consider a set of 11 potential partners, consisting of developed and developing economies, several of them middle income, in Europe, Africa, and Asia.
  • We estimate international relocation costs of managerial talent to be low without international agreement in several of the developing countries we studied as potential partners.
    • An additional agreement would not much change the international flows of capital or multinational production with those countries.
    • There would be some small-scale increase in FDI from the U.S. to some of these countries.
  • Some developing countries we studied do not currently have sufficient relative advantages — in terms of country-embedded productivity or returns to managerial power — to attract activity from American subsidiaries.
    • An agreement to eliminate dual taxation does not affect the incentives of American firms to relocate subsidiaries there.
  • We found that an agreement to eliminate dual taxation would increase U.S. FDI to four out of 11 potential candidates.
  • An agreement to eliminate dual taxation with the 11 countries we considered would cost the SSA some revenues, which we estimate would be less than $114.3 million a year. This does not account for potential revenues due to Americans relocating permanently abroad and never becoming eligible for SSA benefits.

 

Citation

Prados, Maria J., and Dongwook Kim. 2021. “Expansion of the Totalization Program using Simplified Agreements to Eliminate Dual Taxation.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2021-431. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp431.pdf

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Project

Paper ID

WP 2021-431

Publication Type

Working Paper

Publication Year

2021