Tax Competition and Inequality - New Paper
In this article I present the normative case for global tax governance. I argue that, contrary to an influential part of the literature, national tax policy choices cause significant externalities for other nation states. Focusing in business taxation, I show that tax competition undermines the integrity and distributive principles of domestic tax systems, and aggravates the inequality between developed and developing countries. Further, I demonstrate that the effects of international tax competition are unjust irrespective of whether a globalist or less demanding internationalist perspective on justice is adopted. The minimum requirement of justice is to devise global rules which ensure that national tax systems remain capable to implement distributive justice as they see fit. Finally, I present and discuss a concrete proposal for the global governance of business tax competition, namely, unitary taxation with formula apportionment.The paper itself adds:
There are two reasons why global tax governance has hardly been considered. First, the power to tax is one of the central attributes of state sovereignty. Because of an entrenched belief that to share tax sovereignty internationally is to relinquish an essential part of “stateness,” proposals for global tax governance have been discredited as utopian and even undesirable. Second, an influential part of the political science literature on international taxation has argued that the externalities resulting from domestic tax policy choices on other nation-states are negligible. If this were correct, there would be no need for global tax governance. I show that the second view does not hold and, therefore, it is high time to overcome the first view.By going it alone in a globalised world, you can actually see your sovereignty erode by the ongoing race to the bottom on tax (and other things); while by contrast, sharing sovereignty with other countries in negotiated arrangements can be a way to shore up that sovereignty. It seems paradoxical at first sight, but it is quite straightforward. And Rixen (pictured) goes on to elaborate on a point we've made before. In measuring the impact of tax competition,
the literature has focused on an inadequate indicator. I show that a significant part of tax competition is not about governments trying to attract real economic activity like direct investment and jobs, but about the assignment of paper profits irrespective of where real economic activity occurs.and he gets to the nub of the problem here:
the adverse effects are strongest in developing countries. Second, in the industrialized world, the main effect is on the structure of tax systems. As I detail below, tax competition in its current form creates both domestic and international inequalities, and this is the reason why it should be addressed.Solutions? Well, in a nutshell:
unitary taxation with formula apportionment (UT+FA).We hate the ugly name, but love the concept. More on this in the paper itself, of course, but also on our Transfer Pricing page.
This is an extremely important contribution to the literature. We will make it a permanent item on our tax competition page.