Academic journal article Erasmus Journal for Philosophy and Economics

Catching Capital: The Ethics of Tax Competition

Academic journal article Erasmus Journal for Philosophy and Economics

Catching Capital: The Ethics of Tax Competition

Article excerpt

Review of Peter Dietsch's Catching capital: the ethics of tax competition. New York: Oxford University Press, 2015, 280 pp.

This excellent book explores normative issues related to tax competition among states and proposes solutions to core problems identified. The two main questions which the book tackles are: What, if anything, is wrong with tax competition? And, if there is something ethically problematic, what should be done? Dietsch argues that "tax evasion and the shifting of profits to low-tax jurisdictions represent egregious forms of free-riding on the part of capital owners and one of the most blatant injustices of modern economic societies. We need to get a grip on them" (p. 223). As far as I am aware, this is the only book-length normative assessment of tax competition available and, as such, it makes a highly original contribution to important literatures. This work, principally in economic philosophy, blends issues and insights from at least four different disciplines, namely political philosophy, economics, political sciences, and international tax law. It is accessibly written and aims to reach a broad audience including philosophers, economists, political scientists, law theorists, along with policymakers and members of international organizations. It is centrally focused on the normative underpinnings of how the international tax regime should be organized. But it also offers concrete proposals about how to create institutions and policies that would best match the theoretical analysis and bring its core normative insights into being.

Dietsch argues that enormous private wealth is hidden in tax havens and restoring fiscal control to states will require more effectively catching this capital, so that those who have a right to tax capital are able to do this effectively. We have to reform the international fiscal policy regimes so that effective taxation is possible. These goals require answering a number of core questions.

If some coordination in tax policy is required to respond to tax competition, what will be the implications for states' fiscal sovereignty? Can one regulate tax competition without calling for an outright harmonization of tax rates? If so, how should we strike a balance between the fiscal autonomy of one particular state and the externalities this autonomy creates for other states? And supposing that reforming the system through multilateral regulation of tax competition is not politically feasible, are there compensatory duties that the winners of tax competition owe the losers? Last but not least, could it be that regulating tax competition will be economically inefficient (p. 7)?

So, to begin the sketch of his answers to some of these questions, what kinds of tax competition are worrisome? Dietsch identifies three kinds. First, states compete for foreign direct investment which involves relocation of real economic activity. Second, there is competition for portfolio capital. "Individuals shiftsome of their wealth in the form of cash deposits, equity, and security holdings offshore-which in fact means nothing other than 'abroad' in the financial world-in order to avoid paying capital gains tax" (p. 3). Approximately 10% of European wealth is held offshore, while the figure for Latin America is 50%, and the Middle East, 70% (p. 3). Third, states also compete for paper profits of multinational enterprises (MNEs). Using a staggering array of methods (such as manipulative transfer pricing schemes), MNEs shiftprofits from high to low tax rate jurisdictions. As one example, in 2009 Google Inc. was able to shiftprofits through Ireland, the Netherlands and Bermuda to cut its taxes dramatically to around 2.4%, far below the US corporate tax rate of 35%. So successful are these methods that 39% of Fortune 500 companies that were profitable for each year between 2008 and 2013 paid zero (or less) tax in one or more of those 5 years. Indeed, such practices have become an essential part of being competitive. …

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