Global Tax Governance

What is Wrong with It and How to Fix It

Peter Dietsch, Thomas Rixen

• Publisher: ECPR Press
• Year: 2016
• ISBN:
  9781785521652
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Commercial banks UBS and HSBC embroiled in scandals that in some cases exposed lawmakers themselves as tax evaders… multinationals Google and Apple using the Double Irish and other tax avoidance strategies… governments granting fiscal sweetheart deals behind closed doors (as in Luxembourg)... the stream of news items documenting the crisis of global tax governance is not about to dry up. Much work has been done in individual disciplines on the phenomenon of tax competition that lies at the heart of this crisis. Yet, the combination of issues of democratic legitimacy, social justice, economic efficiency, and national sovereignty that tax competition raises clearly requires an interdisciplinary analysis. This book offers a rare example of this kind of work, bringing together experts from political science, philosophy, law, and economics whose contributions combine empirical analysis with normative and institutional proposals. It makes an important contribution to reforming international taxation.

Chapter One

Global Tax Governance: What It is and Why It Matters

Peter Dietsch and Thomas Rixen

Until quite recently, a book with the title Global Tax Governance would have been unthinkable. Most social scientists interested in the then already widely used concept of global governance would have thought either that there is no such thing as global governance in the area of taxation or that it is too rudimentary to warrant any attention. This has changed.

Today, global tax governance is very high on the international and various national political agendas. There are two main reasons for this. First, in the wake of the 2008 financial crisis, many states have seen their public debt rise to high levels and, hence, can no longer afford to forgo tax revenues currently lost to international tax evasion and avoidance. Second, political initiatives are fuelled by recent tax scandals (such as Starbucks, Apple, Offshore Leaks and LuxLeaks) that have raised public awareness and guaranteed media attention.

While these events have triggered a rare public debate on international tax issues, the academic discussion, though still relatively young, goes back a little further. Apart from isolated contributions (Picciotto 1992; Palan 1998), issues of international taxation had hardly been dealt with in political science and international political economy until around ten years ago, when a small number of scholars began to address the issue (Sharman 2006; Rixen 2008; Webb 2004). Since then, a sizeable literature has developed. A similar situation pertains for normative political philosophy. While fiscal policy is regarded as an important tool by contemporary theories of justice (for example, Rawls 1999; Dworkin 2002), and while some work on the normative foundations of taxation has emerged in recent years (Murphy and Nagel 2002; Halliday 2013), normative work focused on the international dimensions of fiscal policy has been almost completely absent (but see Cappelen 2001). In recent years, however, a few contributions have emerged (Brock 2008; Dietsch and Rixen 2014; Dietsch 2015; Gaisbauer, et al. 2015). This book aims to take stock of the academic debate on global tax governance.

We are convinced that the recent interest in global tax governance is well justified. Since taxation is the most direct interface between the market and the state, it is the perfect policy area in which to observe the relation between, and relative power of, the two spheres. Moreover, taxation represents one of the core functions of the modern nation-state. Therefore, it should be key to an understanding of how economic globalisation affects state sovereignty and the choice and development of international institutions, as well as the effectiveness and legitimacy of both national and international institutions; these are, of course, the major themes of the literature on global governance.

Politically, the governments and international institutions involved in designing global tax governance claim that they are on track to tackle the problems created by tax competition. Soon after the financial crisis hit, the G20 and OECD revived their ‘black’ and ‘grey’ lists of uncooperative tax havens and forced them to sign bilateral tax information-exchange agreements (TIEAs). Recently, the OECD has even forged an agreement that foresees multilateral automatic information-exchange (AEI) as the new global norm. In addition, the G20 and the OECD are taking steps to control the practices of base-erosion and profit-shifting (BEPS) of multinational corporations.¹ All that being said, most experts, while admitting that these initiatives represent real progress, are less optimistic about their effectiveness.

The contributions to this volume are directly relevant to this political debate. They explain why current attempts to strengthen global tax governance are insufficient; and they propose alternatives. More specifically, this involves (1) identifying the problems that globalisation creates in the area of taxation, through tax competition in particular; (2) explaining the institutions, structures, and processes of global tax governance as well as analysing their shortcomings; (3) developing the normative foundations for an appropriate regulatory response and building on these foundations; (4) deriving proposals for the reform of institutions and policies.

This is an ambitious agenda that could not be addressed appropriately within any single discipline. It requires a thorough understanding of the economics of tax competition at the interface between markets and states; a grasp of the complex and technical legal issues involved; awareness of the geopolitical and social forces at work that might either foster or obstruct reform; and, finally, a normative framework that allows one to weigh such competing values as fiscal autonomy, distributive justice, and economic efficiency. This is why this volume brings together political scientists, lawyers, economists, and political philosophers. Each contribution has a well-defined role in producing a comprehensive assessment of the challenges facing global tax governance today. Unique in this interdisciplinary focus, the book combines theoretical and conceptual work with empirical analysis. One of the key motivations in putting together this collection is the conviction that any approach to global tax governance that is grounded in a single discipline is bound to omit important considerations, and thus will most likely fail to provide sound analysis and policy advice. At the same time, the volume aims to provide a comprehensible and accessible overview that may serve as an entry point to the field for non-specialists.

In this introduction we will first define global tax governance, briefly situate it in the two relevant but often separated bodies of literature on global governance and taxation, and provide a sketch of its historical development as well as of how current events fit into this trajectory (Section 1). We then detail some of the challenges that tax competition poses (for national and global governance), notably concerning state sovereignty (Section 2) and in terms of rising inequalities of income and wealth (Section 3). Section 4 contains an outline of the individual contributions to the volume and of how they fit together. We conclude with a look at some of the lessons for global tax governance that we can draw from this volume (Section 5).

1. What is global tax governance?

In the broadest sense, governance can be defined as the activity of ‘organizing collective action’ (Prakash and Hart 1999: 2). It covers the creation or development of institutions – defined as formal and informal principles, norms, rules, and procedures – that structure individual and collective behaviour. Such governance may be exercised by state and non-state, public and private actors. Governance is global governance if the reach of the principles, norms, rules, and procedures is global or at least international.² Global tax governance thus consists of the set of institutions governing issues of taxation that involve cross-border transactions or have other international implications.³

This definition implies that global tax governance need not, but could, involve a full or partial shift of the power to tax, that is, the right to impose taxes on citizens, to the international level. Currently, the right to tax is firmly tied to the nation-state. While global tax governance circumscribes and shapes a nation’s power to tax in various ways, it exclusively consists of institutions governing the interaction among national tax systems. Whether or not a shift of some or all dimensions of a nation’s power to tax to the international level would be desirable is one of the themes addressed by various contributions in this volume (see Ronzoni 2016, Chapter Nine; Dietsch 2016, Chapter Eleven; Wollner 2016, Chapter Fourteen; and Rixen 2016, Chapter Fifteen in this volume).

Global governance aims at the cooperative regulation of globalisation. The basic assumption/insight is that in an age of globalisation, an ever-increasing number of issues cannot be adequately governed within the nation-state. If societal interactions cross borders and create interdependencies and externalities among national societies and polities, there is a need for global governance (Dingwerth and Pattberg 2006; Zürn 2013). This has been argued convincingly for policy areas ranging from environmental protection, world trade, and financial stability to issues of health, human rights, and security (cf., for example, Kaul et al. 2003). Until quite recently, this line of argument has been conspicuously absent in taxation.

While globalisation and its effects have been a major research field in the fiscal context since at least the 1990s, the focus has been almost exclusively on national political reactions. In taxation, globalisation has entered the debate as tax competition, that is, national governments competing for mobile tax bases. Political scientists and economists have asked: does tax competition lead to a race to the bottom in terms of tax rates and, consequently, in terms of revenues and public-goods provision? Does it constrain the political capacity to maintain the welfare state? A set of influential papers in political science has shown that tax revenues in industrialised countries have remained constant and concluded that, therefore, the autonomy of national tax and welfare state policy was still intact (cf., for example, Swank and Steinmo 2002; Garrett and Mitchell 2001; Basinger and Hallerberg 2004). Others, building on empirical findings in economics (Devereux and Griffith 2002; de Mooij and Ederveen 2008; see Clausing’s overview 2016, Chapter Two in this volume), disagreed. They have argued that the focus on tax revenues alone was misguided and masked important changes in the structure of tax systems. In particular, they have made the case that tax competition has undesirable distributive implications in developed countries and leads to significant revenue losses in the developing world (Genschel 2002; Ganghof 2006; Rixen 2011b; see also Genschel and Seelkopf 2016, Chapter Three in this volume). According to this view, tax competition seriously constrains the autonomy of national policy.

Rather than reopening this important debate, which will be taken up in detail by the three contributions in Part One of this volume, the relevant point for the purpose of this introduction is that international political actions were not considered by political scientists and economists. This overlooks two important aspects. First, globalisation itself, including tax-base mobility, is a political phenomenon, that is, it is the result of deliberate international cooperative efforts to liberalise international trade and investment and reduce cross-border tax distortions. It is a product of global governance. Second, national adaptation to the pressures of tax competition is not the only possible reaction. Governments could, in principle, react by establishing global governance mechanisms, or by adapting existing ones, to rein in harmful tax competition. For a long time, both aspects of global tax governance – the removal of tax obstacles and regulating tax competition – were the almost exclusive territory of international lawyers, who focused on explicating and interpreting the relevant legal rules (cf., for example, Graetz 2003).⁴ Meanwhile, the political and economic determinants of global tax governance have received little or no attention. It is only recently that political scientists, economists, and political philosophers have taken up the issue. It is one major purpose of this volume to present original contributions of scholars engaged in that enterprise.

The long-time neglect of global tax governance is all the more surprising as the history of global tax governance goes back to the beginning of the twentieth century and to the first wave of globalisation that was comparable in magnitude to the current one (Bordo et al. 1999). The original and initially sole purpose of global tax governance was to mitigate international double taxation in order to liberalise international trade and investment.⁵ In response to demands by the International Chamber of Commerce (ICC), the League of Nations commissioned several reports and convened meetings that ultimately resulted in a model convention for bilateral double tax avoidance (DTA) treaties shortly before the Second World War. In parallel to these developments, several countries began to develop unilateral (domestic) laws on the taxation of cross-border activities and also drafted bilateral tax treaties. After the war, this work on DTA was briefly taken up by the United Nations before it then migrated to the Organisation for Economic Co-operation and Development (OECD), which continuously revised and modernised the model convention. Over time, due to these multilateral efforts, a remarkable homogeneity among national laws and bilateral treaties has been achieved. Today, there are about 2500 DTAs (Rixen 2008; Genschel and Rixen 2015).

As intended, the abolition of capital controls enabled increased capital mobility and the effective removal of tax obstacles through DTAs has increased the potential fiscal advantages of moving capital across borders. In this sense, globalisation in general is a political phenomenon and tax-base mobility, in particular, is the result of global tax governance. However, the specific principles and rules chosen to avoid double taxation had an unintended, albeit foreseeable, consequence. They caused the related phenomena of tax evasion and avoidance as well as of tax competition. DTA treaties aim at disentangling the transnational tax base and assigning it to different jurisdictions. Once the jurisdiction to tax has been established, a country is then free to apply its own national tax law to its share of the income. DTA rests on the mere interface-regulation of autonomous national tax systems, and governments retain almost unlimited sovereignty over their share of the transnational tax base (Bird and Wilkie 2000: 91–5; Vann 1991: 102). Governments are free to underbid each other in tax rates and other relevant legislation in order to attract a larger part of the transnational tax base. This is the supply side of tax competition. On the demand side, taxpayers exploit the resulting differences in national tax systems and engage in profit-shifting and tax arbitrage, which are...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Table of Contents
• List of Figures and Tables
• List of Abbreviations
• Contributors
• Acknowledgements
• Chapter One – Global Tax Governance: What It is and Why It Matters
• Part One – The Problem: International Tax Competition
• Part Two – Shortcomings of the Current Regulatory Framework and Initiatives
• Part Three – Normative Principles for Global Tax Governance
• Part Four – From Theory to Practice: Just Institutions for International Tax Governance