Academic journal article Global Governance

Tax Competition and Inequality: The Case for Global Tax Governance

Academic journal article Global Governance

Tax Competition and Inequality: The Case for Global Tax Governance

Article excerpt

This article presents the normative case for global tax governance. Contrary to an influential part of the literature, national tax policy choices cause significant externalities for other nation-states. Focusing on business taxation, the article shows that tax competition undermines the integrity and distributive principles of domestic tax systems and aggravates the inequality between developed and developing countries. Further, it demonstrates 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 that ensure that national tax systems remain capable of implementing distributive justice as they see fit Finally the article presents and discusses a concrete proposal for the global governance of business tax competition, namely, unitary taxation with formula apportionment Keywords: tax, global taxation, global governance.

ONE OF THE MAJOR INSIGHTS OF THE LITERATURE ON GLOBAL GOVERNANCE IS the idea that an ever-increasing number of issues cannot be adequately governed within the nation-state. In the age of globalization, there is a need for global governance because of externalities for other states and peoples. If problems cross borders or become deterritorialized, political answers must be global. (1) This has been argued convincingly for policy areas ranging from environmental protection to maintaining a liberal world trade order and financial stability to issues of health and human rights. (2) But one policy area is conspicuously absent from these global governance debates: taxation. I argue that this is a serious shortcoming and make the case for the global governance of business taxation.

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.

The problem of the second view, as I show below, is that it does not use the right indicators to measure the costs of uncoordinated national tax policy choices. Much of the political science literature is preoccupied with assessing how economic globalization affects tax revenues in industrialized countries. Since that tax revenue has largely remained stable, these scholars conclude that tax competition is not a serious constraint for national governments. But if we consider how tax competition works in the real world, it becomes apparent that 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. The effects of this kind of tax competition cannot be measured in terms of industrialized countries' tax revenues for two reasons. First, 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.

A workable solution necessarily requires global tax governance. I argue below that unregulated tax competition and the resultant inequalities do not meet the requirements of justice--irrespective of whether we adopt a cosmopolitan (globalist) or only an internationalist concept of justice. …

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