Discussing discussions around the corporate income tax

The corporate income tax is under pressure. A host of factors have contributed to economic, normative and political discussions on the need for corporate income taxation and its role in the architecture of national and international tax systems.

Among the most persistent calls today is the lowering or scrapping of corporate income tax (CIT) altogether. And that’s not surprising, given that statutory CIT rates around the world have been in free fall for decades:


Although arguments to support this call are in the media weekly, two recent posts brought them very clearly to my attention. First, Diego Zuluaga, of The Institute of Economic Affairs (a UK free-market think tank), wrote this post in City A.M., the City of London newspaper, arguing that the CIT should be abolished because it discourages investment and incentivises tax avoidance. Second, Scott A. Hodge of TaxFoundation (a US tax policy research organisation) re-iterated arguments that the CIT is harmful to economic growth.

These and other positions are heard often in the debate on corporate income taxation, so it’s fair to examine the arguments and the science behind, which is the aim of this post. I want to break down some of the most prevalent discussions:

Corporate income tax, investment and wages

One central discussion around the CIT concerns its impact on investment and wages. A particularly popular argument comes straight from the neoclassical econ textbook, and is well-established: The CIT discourages investments, harming wages. Capital and investments will flow where the costs are lowest and the returns are highest, relatively speaking. Thus, the higher the CIT, the lower the returns, and thus the less desirable investment climate. If your country has a high corporate tax burden, investors will find it less attractive to invest there. In turn, fewer investments lead to a greater labour to capital share (K/L), meaning workers have relatively less machinery, technology, etc. at their disposal, making them less productive. And since each production factor is rewarded according to their marginal productivity, labour’s wage compensation decreases as a result.

And it’s not just theory. A well-known empirical meta study on these behavioural effects (tax elasticities) tells us that in the average situation, a 1%-point decrease in the effective marginal corporate tax rate will increase the corporate tax base by 0.4% due to intensive investment decisions (e.g. increasing production), and a 1%-point decrease in the effective average corporate tax rate will increase the tax base by 0,65% due to extensive investment decisions (e.g. buying a new plant).


On the other hand, there are a few criticisms of the argument. First, tax is only one side of the fiscal coin – expenditure is the other. Wherever there’s a tax, there’s a corresponding expenditure (or saving for future expenditure). So if the corporate income tax is raised, current or future government expenditure increases consequently, and vice-versa if the corporate income tax is lowered. The actual or potential government expenditure could raise the investment incentive by increasing returns or lowering risk, for instance via spending on education, infrastructure, technology – and thus if it is de-financed, the investment climate might deteriorate. And in fact, studies confirm that CIT rates are relatively unimportant factors in business investment decisions – far trumped by market size, human capital, infrastructure, etc. Most empirical studies on the investment effect of CIT deal with this by using large data sets – long time series (usually 10-20 years) and many countries, thus controlling for other effects on investment. Yet, even 20-year timelines may not necessarily be sufficient to reflect public spending impacts, as it may take several decades for investment benefits or economic growth harms (e.g. from increase inequality) to kick in. Still, in the current research, the results are often, but not always, a negative semi-elasticity of investment to corporate income tax:


Second, even if investment is harmed by the CIT – what kind of investment is it? If it is real, productive investment that is discouraged, it is obviously harmful. If it is virtual ‘on paper’ investment is that is discouraged, it does not hurt the real economy. The latter could be profit shifting, round-tripping investment, or white-washing of black/grey investments. Evidence on the tax elasticity split of these two is naturally extremely sparse, given the difficult task of assessing the ‘real’ or ‘virtual’ nature of investments. Some studies have found that corporate tax incentives are poor at attracting real investments, whilst others argue that there is no relationship at all between low CIT rates and increased foreign investment. Well-known tax economist Kimberly Clausing has also argued that virtual investment re-allocations are far more tax sensitive than real economic activities.

The CIT and economic growth

A related argument, that CIT harms economic growth, is probably the most prevalent and well-analysed position against corporate income taxation. The intensely cited OECD ‘Tax and Economic Growth‘ piece from 2008, also referred to by Hodge, found corporate taxation to be the most harmful tax to economic growth. The conclusion was partly based on a statistical analysis of OECD firm investment levels and corporate taxes 1996-2004. In another study, the OECD compared tax levels with growth rates for 21 countries over 35 years and found that “corporate income taxes appear to have the most negative effect on GDP per capita”. Theoretically, the backdrop is familiar: the CIT causes behavioural distortions (fewer investments, more tax avoidance, etc.), which are harmful to overall output.

As noted above, there may be reasonable questions of the universal “CIT is harmful” thesis in relation to the timeline and the strength of conclusion. Are economic and statistical models sufficiently robust and sensitive to long-term structural evolutions caused by CIT changes, such as the impact of changed public spending levels, inequality (which may also harm growth), to provide clear evidence that the CIT is generally, or even in the average situation, harmful to economic growth? Much of the underlying economic science, based on statistical modelling and econometrics, is taken as evidence of universal laws or generalisable cause-effect relationships, but there are fair questions whether causality is really evidenced. Rather than asking or answering whether the CIT is generally harmful, you might say the more apt question concerns the specific circumstances under which a certain CIT raise or reduction might contribute to economic growth. We know, for instance, that because the CIT acts as a backstop for personal income taxation, at a certain low point, the CIT will facilitate significant tax avoidance as individuals disguise personal income as corporate income. In recent years, even the OECD itself has distanced its 2008 analysis with a more balanced view. Still, we must recognise that a sizable economic literature today holds that the CIT is, generally, harmful to economic growth.

Second, again parallel to above, even if the CIT harms economic growth – what kind of growth is it? If national output growth is based on proceeds from paper shifted assets, the real economy impact might be negligible. If it’s based on actual economic activity shifts, then the story is different. There are reasons to believe real economic activity is less sensitive to tax than virtual capital re-allocation, as noted above. And if that is the case, then lowering the CIT rate merely facilitates an international negative-sum tax competition game, based on virtual capital reallocation, harmful to overall world welfare.

Moreover, it is well-established that CIT rate cuts harm national inequality, as tax burdens are shifted from capital onto labour and consumption, which is usually less progressive, and as public spending (where less wealthy citizens are often the target) is cut. Thus, economic growth from CIT cuts might come at the cost of inequality, less social cohesion and democratic harm.
The question of incidence

A third common discussion on the corporate income tax is its incidence. Who bears the burden of the corporate income tax? Some might find that a strange question, but in economic theory, the corporation is merely an intermediate vehicle. In the end, all flows move through the corporation and end up elsewhere, as dividends to shareholders, as products and services to customers, as wages to employees, etc. When speaking of the CIT incidence, the debate is usually whether it is labour (in the form of lower wages) or the shareholders (in the form of lower dividends or retained earnings) that bear the brunt of the burden. The answer to that question is instrumental to both economic, normative and political assessments of the corporate income tax. If, for instance, it falls primarily on labour, a CIT reduction could well be quite progressive; if it falls mainly on capital (shareholders), it is more likely to be regressive (depending on who those shareholders are).

Hodge’s post and the WSJ essay cited both argue that “workers bear the true economic burden of the corporate income tax through reduced wages.” This is a popular sentiment, and is usually employed in arguments for reducing the CIT. And certainly, scientific support is abundantly available. Theoretically, the incidence depends on the elasticities (yes, that word again) and mobilities of the production factors. In a modern open economy, capital is said to be more able than labour to ‘escape’ the tax incidence, by shifting investments abroad, thus reducing the marginal productivity of labour and incidentally leaving them to bear the burden. Empirically, you can pick any of a long list of studies that find labour’s share of the burden in an open economy to be significant (e.g. 1, 2, 3)

Both the theory and the empirics here are simplified, of course. Corporate tax incidence is highly complex and context-dependent, with differences in the short-, medium, and long-term, but there is no doubt that a large literature supports the notion that labour bears the main burden of corporate taxation.

On the other hand, you can find an equally large literature to support the notion that capital bears the main burden of corporate taxation. Yes, that is correct. Again, there are variations in the way incidence is studied and theorised, but there is a similarly long list of studies available (e.g. 12, 3). In short, the argument here is that capital is not always more mobile and flexible than labour, partly because the ability of capital to ‘escape’ may have been decreased over time due to more sophisticated regulation.

In other words, there is a fundamental lack of consensus in the economics literature on the incidence of corporate taxation. There is no reasonable argument that the burden “clearly falls on labour”, nor that it “clearly falls on capital”. The only likely agreement is that there is some split, which is difficult to define and is context-dependent.

Corporate taxation and profit shifting

A final discussion, invoked by Zuluaga amongst others, is the extent to which the corporate tax burden incentivises tax avoidance. The argument that it does so significantly is, again, based in economic theory, as well as empirics. The CIT lowers the rate of return, and thus capital will flow elsewhere – a part of which will be virtual financial re-allocation (profit shifting). As De Mooij and Ederveen’s table 4 shows above, they empirically estimate that a 1% increase in the statutory CIT rate will decrease the corporate tax base by 1.2% due to profit shifting. The 1.2% estimate is based on a number of longitudinal and cross-sectional studies, mainly from the OECD countries or North America in the 1980s and 1990s. Whether one can generalise based on such evidence is, as discussed above, probably questionable. Still, there are many studies with similar findings. And the effect of profit shifting is obviously less corporate tax revenue, and thus public spending cuts or the shift of the tax burden to other areas.

On the other hand, and as noted elsewhere, over the past decades regulatory tightening of corporate profit shifting may have contributed to a notable reduction in the profit shifting elasticity. Subsequent international reforms have contributed to the lessened ‘virtual mobility of corporate profits. The OECD certainly seem to think so, at least. Furthermore, even if the elasticity is still substantial, ongoing reform attempts will likely squeeze the slipperiness more and more, so that in the future we might expect the effect on tax avoidance of corporate income taxation to become less and less important. So while lowering or abolishing the CIT might be advocated as one way to reduce tax avoidance, there are clearly regulatory alternatives, which may be more prudent.

To sum up: the impact of corporate income taxation on investments, wages, growth and profit shifting are hot, important and contested, and for each debate there are clear arguments for and against. Again and again, we see these arguments being used selectively by different discussants in debates. But it is important to maintain some balance. Ultimate claims on the “truth” about corporate income tax and the science behind it are simply untrue – there is no one answer. The state of our knowledge on these topics are not so that we can conclude decisively on cause and effect, unfortunately. Still, science can bring us far, and we should employ the best research available. But we should employ it with caution. I think we would all do well to keep that in mind.

The quiet BEPS revolution: Moving away from the separate entity principle

For the longest time, international law has treated multinational enterprises (MNEs) as consisting of separate, independent units, rooted in separate national jurisdictions. Apple’s US corporate headquarters is distinct from its Irish holding company, which is distinct from its local national subsidiaries – even though they are all part of the same multinational group. Their reporting compliance and tax liabilities are, to a large extent, manifested separately at the country-level.

This ‘separate entity’ principle resonates throughout international taxation. It is, in particular, the basis of the entrenched arm’s length standard (ALS), the notion that related-party trade should accord to market terms.

The OECD/G2o BEPS (Base Erosion and Profit Shifting) project is, however, fundamentally challenging the separate entity principle. Stronger CFC (controlled foreign corporation) rules (Action 3) will manufacture formal links between group entities located in high-tax and low-tax jurisdictions. Tightened interest deduction rules (Action 4) will mandate group-wide formulas for thin capitalisation. Expanded use of the profit split method in transfer pricing (Actions 8-10) will put pressure on the ALS. And new transfer pricing documentation and country-by-country reporting (CBCR) obligations (Action 13) will provide tax authorities with more and better information on corporate group structures and value chains.

This trend is not a BEPS noveltyz Rather, the BEPS project underscores and accelerates a trend that has been emerging and increasing over the past 10-20 years in particular. There has been, and continues to be, a gradual move towards treating MNEs as unitary structures, rather than distinct fragments.

Interestingly, it is one of the more inauspicious regulatory innovations that provides the best illustration of the BEPS challenge to the separate entity principle: reporting mechanisms.

How can something so trivial be so crucial? Let’s take a step back first. Back in 2015, when the OECD, the G20 and a host of other stakeholders were discussing country-by-country reporting, one contested question was: How and where are companies going to submit their reports to tax authorities? Civil society groups wanted companies to file locally in all jurisdictions where they operate (e.g. to accommodate developing countries), while business lobbies advocated headquarter filing in the parent country of residence (to ensure more ‘trustworthy’ tax administrations would gatekeep the data). The eventual outcome was somewhat of a compromise. Parent-HQ filing was chosen as the primary filing mechanism, but the agreement also built in a secondary mechanism, a ‘safety valve’ of sorts. Thus, in the February 2015 recommendations on BEPS Action 13, the OECD introduced this:


And in the June 2015 Implementation Package, the secondary mechanism was detailed further. Here, we learnt that a subsidiary may be required to file the CBCR if:

a) the parent is not required to file in his home country, or
b) international information exchange or treaty sharing agreements are insufficient for the report to be exchanged from the parent company home country, or
c) there has been a “systemic failure” by the home country as regards the report.

In other words, if, for one of the stipulated reasons, a tax administration is not able to obtain the CBCR of an MNE with a subsidiary in its jurisdiction from another country’s tax administration, the tax administration in question can request the CBCR to be filed locally, by the subsidiary.

Make no mistake: This is groundbreaking. The UK HMRC and the Danish Skat can now force Apple’s local subsidiaries to obtain and provide extensive information on its global taxation and economic activity, in case they cannot procure that information from the US IRS due to a failure on the part of the US legislature, Apple, the IRS or the treaty system. And the same goes for developing country tax administrations.

But this is extraterritorial jurisdiction, surely? An espoused phenomenon in international law and international relations, a threat to the SOVEREIGNTY of nations. We are, after all, requiring purely local managers to provide information beyond the geographic boundaries of their authority, no? How would they even have access to that information?

Except, remember, we are moving towards treating MNEs as unified entities, not as disjointed networks. Therein consists the BEPS challenge to existing international law.

And this challenge is clearly on display. I want to highlight two ways in particular we can observe this:

Firstly, national law-makers are questioning whether it is even constitutional for them to enact or enforce this legislation. As EY note, in the context of the EU implementation of the BEPS agreement:

Certain Member States had expressed concerns that they may not be in position under their legal systems to require the full information of a given group from a subsidiary that cannot obtain or acquire all the information required for fulfilling the reporting requirement.

In the EU context, the proposed solution is to allow subsidiaries to file partial information (what they have available), while countries maintain the right to penalise non-compliance in such instances. But other countries have already implemented the BEPS regulation, which they may or may not be able to actually enforce, both practically and legally.

Secondly, and perhaps most blatantly, the secondary mechanism has led to panic among US multinationals. Why? While other countries have implemented the BEPS Action 13 requirements for financial years starting 1 Jan 2016, as agreed, the US has only required its companies to file for financial years starting 1 Jan 2017, to give an extended adjustment timeline. So there is a very real possibility that US multinationals, many of which have a lot of foreign subsidiaries, will be required to file locally for FY2016.

In response, the US has sought to allow voluntary filing of CBCR reports by US MNEs for FY2016. The proposed US regulations specify:

The Treasury Department and the IRS intend to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to file CbCRs for reporting periods that begin on or after January 1, 2016, but before the applicability date of the final regulations, under a procedure to be provided in separate, forthcoming guidance.

The US is not alone, though. Recent OECD guidance on voluntary filing notes that also Japan and Singapore face similar issues.

The fact that OECD felt the need to issue guidance on such an otherwise trivial topic, and that American, Japanese and Singaporean MNEs are pushing for voluntary filing, underlines the dilemma created by secondary filing. There would be no push for voluntary filing if the secondary mechanism wasn’t seriously threatening existing standards within international law. Increased compliance burdens from expanded reporting requirements was the main criticism of multinationals in response to BEPS Action 13. So it should make us pause that they are now mobilising to voluntarily report to the IRS above and beyond their legal obligations.

But the secondary filing mechanism is just one or many streams pushing for a change in the perception and legal treatment of MNE groups. The ultimate push in this direction is, of course, unitary taxation, which would allocate tax based on the total consolidated worldwide income of MNEs.

What all these developments have in common is that they point in one direction: Increasingly, we will likely see legislation adjust to the new “reality”, that multinationals are not loosely connected collectives but rather more closely integrated enterprises.

Book review: Global Tax Governance – What is wrong with it and how to fix it

One of the major 21st century challenges for politicians and polities at both the national, regional and international levels is the governance of ever-more global, mobile and flexible economic and financial flows. No more so than in the area of taxation, which looks likely to remain the last bastion of entrenched perceptions of national sovereignty, an undisputed cornerstone of the independent and authoritative government, the undeniable prerogative of national policy-makers in the face of growing global economic integration.

Or perhaps world leaders are slowly warming to the fact that they need international co-operation, if they want to address tax competition and the pilloried global tax system in any meaningful way? Peter Dietsch and Thomas Rixen’s recent edited volume on Global Tax Governance (sub-titled “What is wrong with it and how to fix it” – straight to the point) certainly seeks to leave you with the feeling that it is both desirable and irrefutable, “an idea whose time has come”, with reform proposals waiting for the Obamas and Merkels of this world to wake up and smell the coffee.

Global Tax Governance comprises fifteen chapters from a very strong line-up of contributors across the disciplinary divides, compiled by Dietsch and Rixen into 350-or-so pages of excellent reading. International tax competition and co-operation are not simple issues; they are multifaceted, difficult, wicked phenomena, so the diversity of inputs is both welcome and necessary. The chapter authors include economists, legal scholars, political scientists, and political philosophers. This provides a well-rounded gathering of perspectives, which covers many of the key stories of both the problems and solutions related to global tax governance. But there is no denying that this is first and foremost a political economy book – the pure economic and pure legal perspectives, for instance, are marginal. Still, for anyone looking for an intermediate dive into tax competition and the state and issues of international tax governance, this is, to my mind, the top place to start today.

Compared to other recent books on global tax issues, this one scores as the least morality-born but most refined in terms of its problem-identification and solution-building. While Thomas Pogge and Krishen Mehta’s Global Tax Fairness covers more ground and is provocative in its content at times, Global Tax Governance is a more academic book (incidentally because they are more academic authors), with a greater focus on succinct analysis and structure, and probably greater overall coherence. And compared to Dietsch’s previous Cathing Capital, as a compilation it is much more diverse and yet more detailed, though the reading flow is obviously worsened by its amalgamative nature.

Dietsch and Rixen have both written extensively on the topic before, and the book emanates with their footprints. Dietsch’s work on political philosophy and economic governance, which has often touched upon taxation, provides the backdrop to many of the normative and ethical arguments throughout the book, while Rixen’s research on the nature of tax competition and the international tax system as well as his proposed institutional framework solution (an International Tax Organisation) feature especially in the opening and closings of the volume. Moreover, the flavour of Dietsch and Rixen’s close associates (including Philipp Genschel and Laura Seelkopf) shine through. A quarter of the book chapters are written by this group, and several more are based on or build directly on their work. Which is okay (it is their book after all), though you might get the feeling that this analysis and solutions are the only game in town (and of course they won’t tell you otherwise).

The purpose of the book is to identify the need for global tax governance (i.e. the cause problem), take stock of the current international institutional make-up and its shortcomings, set out the normative foundations for a new direction, and propose specific political solutions. The book is divided into four parts to reflect these purposes.

In Part One, we’re treated with two superb walkthroughs by top tax economist Kimberly Clausing and Genschel/Seelkopf on the economic and political nature of tax competition and its impacts. Tax competition is damaging on national coffers and on the economy, we’re told in resounding detail. And it is widely harmful, except for capital and everyone in small open democracies, of course. But it’s a negative-sum game, so in the end the world is worse off. So why haven’t we fixed it? The “winner group” – small economies and capital owners – have powerful voices. And that voice includes the argument that every country has the sovereign right to set their tax rates as they see fit – a significant argument in a world apparently stuck in 1648 Westphalia. And besides, as Lyne Latulippe argues in chapter three, national policy-makers tend to internalise the idea (with a nudge or two from the “winner group”) that they must keep their tax offerings competitive, just like a firm’s market offering must be competitive, no matter that it is probably an awful and damaging analogy. Latulippe’s argument that national tax policy discussions are soaked with competitiveness discourse is something I have also shown for the international level in the OECD/G2o BEPS project.

So where we have gone wrong? In a lot of places, Part Two tells us. Enforcement of international tax governance is a mess (Richard Woodward, chapter five); it will only succeed when, once in a blue moon, the US gets its act together (Lukas Hakelberg, six and Itai Grinberg, seven); and even current international tax reforms are unlikely to succeed (Richard Eccleston and Helen Smith, eight). Woodward emphasises the national implementation dimension of international tax governance, arguing that tax havens do “mock compliance” to OECD’s tax information exchange standards, feigning alignment while muddling enforcement behind their backs. As we’re also seeing in the current BEPS project and elsewhere, the national take-up of global tax standards is highly varied, so this is an interesting point to follow – and Richard has promised more work on this topic, which is absolutely welcomed.

Aside from technical and political shortcomings, Dietsch (in particular) and Rixen often emphasise the normative underpinnings of international tax governance. It’s not enough to say the system doesn’t work, we need to say, ethically, why it must work differently. Thus, Part Three takes us through the ethical case for global tax governance. Miriam Ronzoni (chapter nine) weighs global justice arguments in political philosophy, sketching out why and how either of various positions should address tax competition. And Laurens van Apeldoorn (10) discusses in detail different notions of sovereignty and how they relate to the argument for tax governance. While work by both Rixen and Dietsch (see my book review) have contended that national sovereignty isn’t harmed by tax competition, Apeldoorn mounts the stronger claim that tax competition outright harms national sovereignty, discussing sovereignty recast as a responsibility (rather than a right), requiring not merely non-interference in extraterritorial affairs but a positive obligation to support sovereignty and democracy abroad. Dietsch’s chapter (11) is essentially a shortened version of part I of his previous book, though without a discussion of implementation through an International Tax Organisation (you’ll see why shortly).

The book testifies to that fact that national sovereignty seems to have emerged as the favourite argument against tax competition/for tax governance among the Dietsch/Rixen et al. group (even if they discuss different types of sovereignty and related arguments). The sovereignty-focus has been picked up from earlier work on tax havens, such as that by Alan Hudson and Ronen Palan, but it aligns rather poorly with the political discourse of today. The book does tune into, occasionally, the popular stories of tax competition’s effect on inequality or the national coffers of developing countries, financial system risk or human rights, but those are peripheral to the sovereignty argument. I did say this book is less morality-borne than others, but in arguing their cause, it is strange to see so many well-known and well-founded arguments lay idle.

Having thoroughly assessed the issue and outlined the burning platform, Part Four finally gives us the solutions. To be honest, my hopes weren’t high for the final chapters, as I feared they would merely re-state old proposals. And indeed, the chapters pick up on existing reform ideas – unitary taxation and formulary apportionment (Reuven Avi-Yonah, chapter 13), financial transactions tax (Gabriel Wollner, 14), and an International Tax Organisation (Rixen, 15) – while not considering other fundamental questions of the international tax system (e.g. source v. residence). But still, I was to be pleasantly surprised. The chapters do a very good job of not only explaining the proposals in the context of the book, often the authors provide specific links back to the first three parts of the book, explaining to the reader why a given solution addresses current shortcomings identified in Part Two, or why they would fulfill the normative cases of Part Three.

Markus Meinzer (chapter 12), a Tax Justice Network board member and an academic, provides a strong and thorough study of and argumentation for the failure of tax haven blacklists (something I have also discussed). Not merely an advert for the TJN’s Financial Secrecy Index, his chapter is a detailed exploration of historical blacklist shortcomings, the moral and political foundations for change, and the needed response. Meinzer’s illustration of blacklist issues is very useful:


Reuven Avi-Yonah, who has published an infinite (it seems like) number of pieces on unitary taxation proposes, as we would expect, to heal the broken global tax system through unitary taxation with formulary apportionment (UT+FA). However, here Avi-Yonah is more compromise-seeking than elsewhere, where he has mostly proposed UT+FA as a “system overhaul”. His short ‘sweeping away’ of UT+FA criticism leaves something to be desired, but he puts forth the applicability of the UT+FA solution to the current issues (including as identified throughout the book) with usual pomp. Rather than promoting a full UT+FA installment, he proposes here a compromise with the prevailing arm’s length standard (ALS), using the UT+FA method selectively (within the confines of the current ALS system, notably), in situations where transfer pricing requires profit split attribution, and he discusses the need for further reconciliation between the two approaches.

Rixen himself rounds it all off, detailing the institutional solution to others’ material policy proposals. And of course, it is the International Tax Organisation (ITO), untouched by Dietsch in chapter 11 but brought back to the surface here. Rixen’s ITO is a WTO-style arbitration/enforcement solution with a forum-capacity, just as described by Dietsch in his recent book (who has the idea, I believe, from Rixen in the first place). The novelty for regular Dietsch/Rixen readers is modest, but he does engage in a much more detailed explanation of the proposed institutional design, which may serve as a blueprint for policy-makers.

Still, while Part Four contains good chapters, it remains a compilation of various proposals with Rixen’s institutional shell, and not really a coherent solution on how to “fix” global tax governance, as the book’s sub-title promises.

All in all, though, this is a fine body of work, recommendable and readworthy. It provides the fundamentals of tax competition, the burning platform, and a number of well-known policy proposals, all nicely wrapped in a book that explains well what it wants and where it is going. It can be read as a whole or as individual chapters, each of stands on their own as contributions to the literature. There are some odd chapters here and there, and there is a definitive bias in favour of certain argument (e.g. sovereignty), which leaves some interesting points and explorations on the table. But those are minor appeals in the grander scheme. The authors have told us why tax competition is damaging, why international tax cooperation is needed, and the direction of travel for policy-makers. Now, I think the authors would agree, it is up to policy-makers, academic colleagues and other interested parties to take up and discuss their ideas more widely.

My interview with TaxLinked on blacklists and Danish tax

TaxLinked, a relatively new and very interesting online community for tax professionals, publishes a weekly interview series with various people of the tax world. Previous interviews have featured Tax Notes’ Stuart Gibson on the Panama Papers, Texas A&M prof. William Byrnes on FATCA and TJN’s Alex Cobham on tax transparency, and many more fascinating talks.

For this week’s interview, I was very humbled to have the TaxLinked team reach out. I was happy to participate and I think it made for an interesting back-and-forth on tax haven blacklists and what’s going on in Danish taxation.

You can head on over to their site and check out the interview here.



We’re changing the equation of tax competition and corporate profit shifting

Within tax economics, one of the central arguments for tax competition and low(er) taxes on capital, including corporate profits, is that it leads to increased investment and growth (at least in some countries, mostly small open economies).

Why? In short, we know that corporate tax rates and rate changes have behavioural effects. Capital income may change legal forms (between two corporate forms or between corporate and non-corporate forms), firms may change their debt/equity ratios, they may shift profits abroad or increase/reduce investments. It is the nature and size of these effects that determine the result of corporate tax increases or decreases. The ‘go to’ for empirical evidence on this is De Mooij & Ederveen’s 2008 “reader’s guide”. Their literature review finds that, in an average situation surveyed by the literature, the total semi-elasticity of the corporate tax base for these effects (i.e. the % change in the tax base from a 1% increase in the relevant tax, see below) is -3.1, with profit shifting (-1.2) the largest single effect:


I.e. if the statutory corporate tax rate increases by 1%, the corporate tax base is predicted to shrink by 1.2% from increased profit shifting.

There are a myriad of potential arguments to question the certainty and applicability of these findings, but that is for another potential blog; suffice to note here that these figures represent the most accepted available evidence in economic literature on the behavioural effects of corporate taxation.

Based on this evidence, it is regularly argued that corporate tax rate reductions in isolation and tax competition more broadly positively support economic growth as facilitators of investment and eliminators of tax avoidance (again, in some countries at least).

Now, a key element in such assertions is that the status quo is taken for grantedCurrent behavioural effects (tax elasticities) are assumed as universally true. Rather than endogenous to economic tax competition models (i.e. “they can be changed”), behavioural effects are treated as exogenous (i.e. “this is how the world is”). As my review of Peter Dietsch’s recent book on tax competition notes:

One of the key points in Dietsch’s dismissal of tax cooperation as economically inefficient concerns optimal tax theory. Proponents of tax competition that leverage optimal tax theory hold that lowering taxes will result in increased labour supply and decrease tax evasion and avoidance. Analytically, the consequence is less need for tax cooperation to stem a race to the bottom of capital taxation. And this may be empirically true today. But these elasticies (the extent to which the labour supply and evasion/avoidance change with tax rate changes) are (partly) institutionally determined, and thus Dietsch argues there is no reason to assume today’s elasticities for tomorrow – they can be modified through policies and thus we can change the factors in the optimal tax calculation. For instance, by introducing stronger international cooperation on capital tax evasion, it is possible limit the tax evasion elasticity, and thus make tax systems more progressive by increasing the optimal levels of capital taxation, shifting the tax burden back on to mobile capital factors.”

The highlighted part is, in fact, exactly what is happening today and what has been happening for the past decade in particular. We’re changing the equation of tax competition and corporate profit shifting. Numerous and continuous reforms to combat tax evasion and avoidance are contributing to this evolution (even if some commentators questions their effectiveness). This includes regulatory initiatives (such as (automatic) exchange of information, FATCA and the CRS, the OECD MCAA, the revised EU Parent Subsidiary and Savings Tax Directives, the OECD Harmful Tax Campaign, Dodd-Frank, country-by-country reporting, the BEPS project, the EU ATAD and the EU tax state aid investigations) and voluntary standards (EITI, PWYP and the Fair Tax Mark), but also other significant developments (such as the Offshore Leaks, LuxLeaks and PanamaPaper).

Not just in their material effect but also in their normative impact do these reforms and events lessen the ability and willingness of corporations to shift profits as part of tax and regulatory arbitrage, thus decreasing the predicted elasticities (i.e. the positive corporate tax base effect from decreased corporate tax rates). This is not an unreasonable assumption, in any case. To my knowledge, there is still no systematic studies of the effects of these regulatory and normative changes on corporate tax elasticities.

This realization is what led Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, to make the following comments in to the Wall Street Journal this week:

“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead, so it’s worth revisiting the whole story,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview.

“In the past people, notably with international income, could use foreign bank accounts to receive and make payments and their home tax office would never know. That era will be over,” Mr. Saint-Amans said optimistically. “In the lead up to this new regime some countries have allowed their citizens to declare their foreign income without penalty, that alone has raised 50 billion euros in extra tax.”

Saint-Amans’ comments also come on the back of the OECD’s release of a new report entitled “Tax Design for Inclusive Growth“, which, as a lead up to this weekend’s G20 Finance Ministers meeting in China, breaks with the advice of prior decades, arguing that the case for low capital taxation and tax competition are “not as clear-cut as previously thought” (p. 40). Although this specific messaging was not included in the G20 meeting communique, the report’s section on capital income taxation is highly recommendable for those interested, and there is no understating the language used here and its policy implications.

The OECD is sending a message, which is likely to become increasingly prevalent: As reforms squeeze regulatory room for and normative consequences of tax competition, capital is less likely to flee national boundaries, and thus countries can, just perhaps, slowly start to ease the foot off the tax competition throttle.


Technicised BEPS: How complexity shapes politics

The BEPS Action 15 backdrop

On June 4, the OECD released public comments received on Action 15 of the OECD/G2o Base Erosion and Profit Shifting (BEPS) project, which concerns the development of a multilateral legal instrument (MLI) for modifying bilateral tax treaties in order to implement treaty-related BEPS recommendations. And on June 7th, the OECD held a public consultation in Paris on the same topic.

Action 15 is one of the most interesting outstanding items in the BEPS project. The multilateral instrument will serve as the umbrella for implementation of BEPS measures related to hybrid mismatch, treaty shopping and, perhaps most importantly, dispute resolution.

However, the OECD request for input that went ahead of the public consultation in fact largely steered clear of the most important political questions, but instead was limited to “technical issues” such as identifying treaty provisions to be replaced, the need for accompanying guidelines and interpretation mechanisms. This is because the MLI’s 96-country ad hoc group is still discussing answers to these key issues, including access requirements and the commitment levels for dispute resolution.

So is there any value in studying this consultation process at all? Absolutely, yes.

To my mind, the interesting thing about the Action 15 public consultation is not necessarily the specific technical questions asked (though they are relevant too). We know (and the OECD staffers know) that mandatory, binding arbitration (in the case of disputes) is the key wish for the US and other states as well as business stakeholders; we know that tax NGOs are strongly against it; and we know largely where different stakeholders stand on the provisions from other BEPS actions to be included in the multilateral convention. (Though I admit I was surprised and intrigued that the Tribute Foundation had gone ahead and found a committed international court to use for BEPS arbitration).

For me, what’s most interesting is the nature and structure of the consultation itself and what it represents. I have written previously on the actors involved in the BEPS policy processes and consultations and what it means for the political economy of international tax governance. And Action 15 neatly illustrates one of the key points I (and others) have highlighted along the way: The BEPS policy process is highly technicised.

The technicisation of BEPS: Participation barriers

The BEPS discussions demand deep, specific technical expertise in order to take part. And the Action 15 consultation certainly evidences that trend. The written comments and (though perhaps to a slightly lesser extent) the Paris meeting, were characterised by detailed technical, often legal, language and arguments. The kind of expertise needed to engage is possessed by tax experts, but not usually by politicians, not by the wider public, and only rarely by civil society groups. In the Action 15 consultation, for instance, there was just one (the BEPS Monitoring Group) civil society input out of 33 comments (3%), which aligns with other BEPS action points, where it has represented less than 5% of comments:


On the other hand, there is a significant proportion of comments from national and international business associations as well as professional associations. The former list includes the prominent BIAC, ICC, BusinessEurope, the British CBI, German BDI and the US Council for International Business. And the latter includes the UK Chartered Institute of Taxation and ICAEW, the Irish Tax Institute and the Tax Executive Institute.

And there are also important interventions from what I have previously termed “lobby centres” – BEPS- or tax-specific lobby groups coordinated by particular, authoritative professionals. In the Action 15 consultation, this includes the above-mentioned BEPS Monitoring Group, spearheaded by Sol Picciotto (of Lancester University and a Tax Justice Network senior adviser), and also the ‘International Alliance for Principled Taxation’ (IAPT), fronted by Mary Bennett (of Baker McKenzie and USCIB, previously the OECD and the US Treasury). The latter, of note, participated at the Paris meeting as the representative of both the IAPT and USCIB and has been, throughout the BEPS project, a favoured representative voice for various interest groups.

This technicised structure of engagement and its effects are recurring in the BEPS processes, but is not inherent to international tax reform as such. At the EU level, for instance, consultations on tax matters often attract a far broader range of commenters. That is not a knock on OECD or the BEPS process, but it reflects the divergent policy process choices and structures of two prominent standard-setting forums in international tax.

The political impacts of technicisation

So why does this technicisation matter – if it matters at all? Some would say it doesn’t. There is an argument that the technical process is just a self-evident part of the policy formulation phase of a standard policy process model:

Agenda setting -> Policy formulation -> Decision-making -> Implementation

Politicians will always delegate some part of the policy formulation to technical experts, often legal experts, in order to translate political agreements into employable rules and regulations. And you might say that this exercise is merely a technical translation, under strict political oversight as politicians have to approve the translated outcome in the decision-making phase.

My alternative proposition as it relates to BEPS is two-fold: Technical experts in BEPS have significant leeway in defining not just the technical translation but also the political direction of new rules. And, given that leeway, technicisation fundamentally shapes politics by conditioning what can be discussed, the criteria for accepted arguments, and who is listened to.

What is technical is political

On the first point, the line between ‘technical’ and ‘political’ in BEPS seems to me a rather blurry divide. (This goes for other global policy reforms as well, but let’s stay on course for now.) For instance, the OECD’s Action 15 request for input on “mechanisms that could be used to ensure consistent application and interpretation of the provisions of the multilateral instrument” might seem like a purely technical issue, but technical solutions could in fact have far reaching political consequences for MLI compliance and adoption measures.

As Ann Nolan of the Irish Ministry of Finance once said: “BEPS is technical in nature but political in flavour“.

Moreover, even if we assume that there is a strict technical/political divide, G20 and national policy-makers have left ample room for technical experts to make politically important decisions by setting out the high-level directions for BEPS actions. BEPS includes some exceptionally tricky, multi-faceted issues, global in scope, which require detailed analyses and discussions to manufacture credible and useful solutions. So naturally policy-makers grant technical experts a large (and possibly larger than in other policy processes) say in the matter.

To take another prominent BEPS Action – number 13 – as example, the road from the G2o Lough Erne declaration’s words on country-by-country reporting:

“We will work to create a common template for multinationals to report to tax authorities where they make their profits and pay their taxes across the world”

.. to the BEPS Action Plan’s words:

“The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template”

.. to the final CBCR report:


.. was primarily paved with technical discussions, but had profound political implications. The decisions, for instance, to grant information access only to tax authorities (not to the public), to require home country rather than local filing, and to exclude several data points from the originally proposed CBCR template all favoured certain technical arguments and interests over others (a meaty research topic on its own).

Now, of course there was a feedback mechanism between the technical experts and policy-makers in this policy formulation process. Technical experts are not left to confined quarters, to emerge with white smoke at the consensus achievement, the solution readily accepted by ministers around the world. There are checks and controls by responsible politicians. The point is, again, that technical experts are provided leeway (deliberately or unintended), and that leeway means consensus standards agreed at the technical level will, if not outright dictate political decisions, then at least take a central position, requiring significant political opposition to overturn.

Complexity shapes politics: Crowd pleasing, octopuses and network centrality effects

On the second point – that technicisation shapes the policy process – there are several mechanisms through which this happens. There is a more extensive literature to read on this (I recommend starting here and here), but I want to highlight three: The technical, policy-relevant discussions are conditioned by the types of professionals involved (the crowd pleasing effect), the strength of individuals’ career diversity (the octopus effect), and the relations of technical experts (the social network effects).

The crowd pleasing effect is the effect that discussions will naturally sway towards types of topics and arguments favoured by most of the people involved. When everyone in the room is a lawyer, accounting arguments are proportionally less likely to take hold. In BEPS, where private sector tax lawyers are in the clear majority, legal arguments are simply more numerous and more liable to be accepted by the wider technical community. For instance, the distribution of work roles, sector (realm) and formal education of experts involved in BEPS Action 13 illustrates this:


Again, I avoid judgment as to whether this is “good” or “bad” but note that it fundamentally impacts politics. How so? Lawyers have certain perspectives on BEPS reforms. They are (and this is a crude characterisation, I realize, but bear with me) concerned with legal principles, legal certainty, and how to navigate within the legal rules. They are less concerned, at least in the professional capacity, with perspectives of economic efficiency, distributional consequences, geopolitics, growth and development strategies, financial quantification impacts, data availability, and so forth – any of which arguably have just an important stake in the BEPS policy process.

As the figures show, BEPS (Action 13) is not an all-legal affairs. Of course, accounting, economic, transfer pricing and other logics are also important, and arguments made based on these expertises were treated accordingly. The point here is the illustrate the crowd pleasing importance of the total volume of expertise. As noted above, technicisation means only certain (groups) of people can meaningfully engage in the policy discussions. And the result is that we end up with a policy process in which arguments based on certain expertises possessed by the technical experts are comparatively favoured over others.

The octopus effect is the effect that experts with diverse careers (which I call octopuses) are more likely to be listened to. The importance of career diversity is two-fold: it equips professionals with different expertises, which are needed to push central arguments in the reform debates, and it provides opportunities to build and extend key relations to other stakeholders. I’ll discuss the latter point below.

While legal arguments may be paramount in certain BEPS discussions, being able to formulate arguments based several expertises, is even more effectful. Technical experts involved in the BEPS reforms that can access, for instance both tax law and transfer pricing arguments from multiple sector perspectives, are well-positioned. The phenomenon of ‘revolving doors‘ plays a central role here, as moving strategically between work roles contributes to diversity of expertise and network-building.

A rough, fictitious illustration, which I have previously used for BEPS Action 13 and country-by-country reporting:

In the consultation process, a top US transfer pricing professional with experience from working in the IRS, the OECD and a private law firm, arguing against expansive country-by-country reporting based on private sector, legal and economic expertise, is more likely to be successful with that claim than a development official, who has worked in an animal shelter, the Environmental Protection Agency, and an NGO, arguing for expansive country-by-country reporting because it is ‘fair’ for the public to know MNCs’ tax payments.

Referring back to the recent Action 15 consultation, the octopus effect was evident at the Paris consultation (video available here). Those who spoke the most, beyond the OECD representatives, included the strongly expertised Mary Bennett (discussed above), Will Morris (the highly respected GE Tax Director and BIAC tax committee Chair), and the famous Philip Baker QC.

Finally, the network centrality effect is the effect that actors central to social networks are more powerful. I shall not attempt a detailed deliberation on the social network theory or social psychology behind, but suffice to draw on their relevance for present purposes. First, experts at the centre of networks are proportionally more exposed to information, exchanges and ideas moving through the network, which affords greater potential to learn new ideas (thus gathering more knowledge), influence communications, and transmit messages. It also allows central actors to brokermediate and gatekeep between other actors and/or pieces of information. Moreover, network central actors will have more relations to other technical experts, which may reinforce their image as important, authoritative and influential, including due to social confirmation, bandwagon and cheerleader effects.

Will Morris (noted above), for instance, is not just well-knowing, he is an absolutely network central actor in the technical BEPS community. A tax lawyer working for a major US MNC, he holds prominent positions in the BIAC and CBI tax committees, he is a member of the European Tax Policy Forum, is an engaged stakeholder with the UK HMRC, and privately he hosts regular gatherings of international tax professionals for discussion and networking. Few, if any, are as well-connected throughout international tax and transfer pricing networks. And he is clearly looked upon as an important figure. His network centrality is important for being heard at the OECD, and allows Morris to enjoy influence with key decision-makers and technical experts in the BEPS community.

The bigger picture?

The natural upshot of the above analysis might be to ask: Is this a problem? This normative point I have thus far refrained from addressing. A topic for another detailed blog perhaps, but clearly, there are democratic, economic and social implications, at the very least. Who benefits from this structure of technical engagement? Should it be changed and, if so, how? Can it be changed? I leave these questions for your perusal, thought and comment for now, while promising more to come on this topic in the future.

Catching Capital: Thoughts on Dietsch and tax competition

Globalisation and the intensified competition among firms in the global marketplace has had and continues to have many positive effects. However, the fact that tax competition may lead to the proliferation of harmful tax practices and the adverse consequences that result, as discussed here, shows that governments must take measures, including intensifying their international co-operation, to protect their tax bases and to avoid the world-wide reduction in welfare caused by tax-induced distortions in capital and financial flows.

(OECD, 1998. Harmful Tax Competition – An Emerging Global Issue, p.18)

While tax competition had been an interest to academics for decades before, the 1998 OECD report really put ‘tax competition’ on the global political agenda. A substantial literature has followed, but rarely does it touch upon the ethical foundations of tax competition.

A recent book by Peter Dietsch, professor at the Department of Philosophy of the University of Montreal, does just that. ‘Catching Capital: The ethics of tax competition‘ sets out to accomplish three main things: It seeks to investigate the phenomenon of tax competition and its ethical underpinnings, to argue that it is damaging, and to offer a useful solution to the issue.

Given the book was published in almost a year ago, in August 2015, it seems to have received relatively little buzz. As far as I was able to identify, there is only a few available reviews and just a handful of citations and mentions. But perhaps it is too early to judge. Having read the book with interest, I offer my thoughts below, not quite as a pure review but also as a repository for thoughts on the arguments and ideas put forward by Dietsch in the book.

As an introductory summary, I found the book both entertaining in both its specific point of attack (ethics), its substantive arguments and its normative character. Dietsch delves fascinatingly into the political philosophy of taxation, a theme so basic yet so far from modern tax discussions, whilst connecting the philosophical discussions to relevant, important real-world issues. The discussions go deep when the author desires (for instance when dismissing the economic efficiency arguments against tax cooperation) and shallow elsewhere (for instance when discussing current international tax reform streams). The structure, at times, leaves something to be desired – the argument flow within and across chapters can become muddled and in its persistence to immediately address all potential angles and criticisms of the topic at hand, the pace is often disturbed or broken. But all in all, it is a well-argued and thoughtful piece that succintly explains both a burning platform, an interesting future solution, and a roadmap towards addressing tax competition today.

The book is structured around five chapters, which – to give it all away – can be crudely summed up as follows:

1: Tax competition harms fiscal sovereignty.

2: The solution to tax competition is WTO-style international tax law and arbitration based on “do no strategic harm” principles.

3: Tax cooperation is not inefficient in economic models, and even if it were, this would not mean that it is inefficient in the real world.

4: National sovereignty is enhanced by international tax cooperation, not eroded.

5: Compensatory duties are needed for low-income countries that currently win from tax competition in order to smooth a transition to the new system.

Tax competition harms fiscal sovereignty

On the first point, the point made by Dietsch is clear: Tax competition renders national polities unable to tax capital at their choosing, given that it can escape and transform flexibly to avoid the tax grasp of states. Put simply, capital is darn difficult to tax under current national and international tax systems and in today’s world of globalised capital markets. And the effect is damaged national fiscal sovereignty; citizens cannot any longer decide how and how much they want to tax capital – their choices are institutionally limited and some will inevitably be ineffective.

What has become the ‘natural’ consequent conclusion in policy circles is that we should stop trying to tax capital, and instead tax immobile factors (consumption, land and to a lesser extent labour), as my blog on European tax policy plainly shows. Thus, the most popular current streams in addressing tax competition to accept this slipperiness and nudge us to avert the tax gaze elsewhere. Even more radical reform ideas, such as unitary taxation, which are viewed as a means to tax corporations more effectively, are based on formulary apportionment through less mobile factors such as sales and employees.

But it raises the question of whether or not it is really a good idea to just ‘give up’ taxing capital because it is hard? It may create outcomes that are problematic from an ethics or equity viewpoint. As Dietsch writes, the trend to shift taxation from capital to labour, consumption and land has had the effect that “OECD countries have bought fiscal stability in terms of revenue at the cost of a less redistributive system” (p. 48).

“No strategic harm” and an International Tax Organisation

So what are national politicians to do these days? In chapter 2, Dietsch offers his reply: An International Tax Organisation (ITO), modeled on the World Trade Organisation (WTO), with two key principles of global tax justice, enshrined in international law and enforced via arbitration and expert panels:

  1. The membership prinicple (with a transparency corollary)
  2. The fiscal policy constraint

The former is simple in wording, but the devil is in the detail. Individuals and corporations should pay tax in the state where they are members, i.e. where they benefit from the services provided by the corresponding tax expenditure (e.g. public services or infrastructure). And in order to make this assessment, states need transparency, i.e. access to information on economic agents’ behaviour and assets across borders.

Hallelujah, on we go. Right? Not quite. What exactly constitutes ‘benefits from’? Is there a certain threshold, in terms of time, resources invested, or other tangible support received? Unfortunately, Dietsch does not offer a sufficient detailing of the practical implementation of the principle. How are we to judge whether and to what extent a person or a company is a member of a state? In this respect, the membership principle is somewhat analogous to the ongoing discussions at the OECD and EU levels on what exactly constitutes “taxing profits where value is created” – a phase repeated so often by international tax policy-makers that it has lost all meaning. The challenge lies in defining membership, as it does in defining value-creation.

The fiscal policy constraint holds that countries should not engage in tax competition which collectively puts countries worse off (a reverse Pareto test, in economic terminology). In order to do so, Dietsch holds, tax policies must not:

a) Strategically (deliberately) be designed to attract economic activity from other states, and
b) Negatively affect the aggregate fiscal self-determination of the countries in question

If a national fiscal policy is strategic but non-damaging, it’s okay. This could be where Scandinavian countries invest heavily in free education so as to attract foreign capital. If it is damaging but non-strategic, that’s okay. This could where citizens, say of the US, have exercised their democratic voice to express a preference for relatively low taxes and public spending. If it is both, that’s not okay. Dietsch cites the Irish tax regime as an example here.

The main ideational and theoretical novelty in Dietsch’s proposals here is these principles. The question of a World Tax Organisation has been discussed for decades. But Dietsch’s ethics-oriented inquiry has produced two key principles that are open to challenge but coherent and useful in assessing what is and what is not ‘acceptable’ tax competition. Indeed, Dietsch himself notes that the key challenge of his book is to “identify where the boundaries of the fiscal autonomy prerogative should lie, and what institutions serve to protect them”. But whereas most proposals to address this question, including those surveyed by Dietsch in the book (capital controls and unitary taxation), offer technical solutions to regulating capital (or abstaining from it), Dietsch’s solution is fundamentally different. It is philosophical and principles-based.

The above is not to dismiss his contribution on the enforcement-side. Dietsch usefully substantiates the case for sovereignty-pooling, which is a key prerequisite for most effective enforcement proposals. (I’ll discuss this further when addressing chapter four, which concerns sovereignty.)

On the other hand, the high-level nature of his solutions also means certain technical details are unaddressed. Though the author does touch upon these points, it never becomes quite clear how the membership principle is to be determined, how the intentions and outcomes of national fiscal policies are to be evaluated, or how exactly to avoid all the pitfalls of ITO’s inspiration, the WTO (for instance the continued geopolitical features of its decisions and its rules).

Now, the effect of Dietsch’s proposals, if carried out, are not to be understated. He characterises three types of tax competition, of which the two former are the most problematic and harmful: Competition for portfolio capital, for paper profits and real FDI. These are, to some extent substitutive. As long as businesses can shift paper profits, there is less need to reallocate real FDI. The effect of decreasing competition, in particular of the two first types, will be to produce a more real and true market and economic competition for actual investment and actual economic activity. This is a similar argument we often hear about other proposed solutions, such as unitary taxation and the EU CCCTB – that in limiting ‘backdoor’ tax competition (or poaching), “real” competition would intensify. And that is most likely correct. But as Dietsch details, open, real and fair competition should be preferred – even though it creates other issues – to hidden, on-paper and selective competition. One reason is that the former follows the membership principle, so that when income or assets are shifted between countries, it will align with the location where benefits are obtained from the expenditures of taxes paid.

Tax cooperation is not inefficient

Having outlined the burning platform and the solution, Dietsch needs to defend his proposals. There is no shortage of economic and legal analysis to counter-argue his case. Meeting the former head on, Dietsch adds to his analysis on tax competition as damaging fiscal sovereignty in a philosophical sense, with the point that tax cooperation is not inefficient from an economic point of view. Note that Dietsch’s focus is not on ambitious arguments that tax cooperation is efficient or that tax competition is inefficient per se. He sets out to demonstrate the more moderate claim that tax cooperation, of the sort he advocates, is not economically inefficient.

I was happy to see Dietsch open this argument with an important point, which often gets lost in popular tax debates: Tax is only one side of the fiscal coin. The other side is public spending. In standard economics, taxation is often a bad thing, because the corresponding expenditure is assumed not to outweigh the welfare loss created by the the tax. But Dietsch argues that this general assumption is importantly flawed. Tax provides basic market-enabling (legal frameworks, health and safety, etc.) services and public goods, along with investments in education, health, infrastructure, etc. – all of which may outweigh deadweight losses. Similarly, arguments that tax competition is efficient because it leads to economic growth often rely on assumptions that markets are perfectly competitive and that resulting economic growth will lead to welfare gains that outweigh the corresponding losses. Dietsch finds this to be unrealistic and improbable, in particular at the global level, not least because of the presence of public goods and negative spillover effects. (It may lead to national gains at the expense of neighbouring countries, but this is a lesser argument as it guarantees a race to the bottom.)

One of the key points in Dietsch’s dismissal of tax cooperation as economically inefficient concerns optimal tax theory. Proponents of tax competition that leverage optimal tax theory hold that lowering taxes will result in increased labour supply and decrease tax evasion and avoidance. Analytically, the consequence is less need for tax cooperation to stem a race to the bottom of capital taxation. And this may be empirically true today. But these elasticies (the extent to which the labour supply and evasion/avoidance change with tax rate changes) are (partly) institutionally determined, and thus Dietsch argues there is no reason to assume today’s elasticities for tomorrow – they can be modified through policies and thus we can change the factors in the optimal tax calculation. For instance, by introducing stronger international cooperation on capital tax evasion, it is possible limit the tax evasion elasticity, and thus make tax systems more progressive by increasing the optimal levels of capital taxation, shifting the tax burden back on to mobile capital factors.

The upshot of Dietsch’s line of argumentation is two-fold. Firstly, because the assumptions underlying economic pro-tax competition models assume away key institutional features and fail to capture real life features adequately, they tend to prescribe levels of capital taxation that are below the optimum. Secondly, because these standards models are insufficient, Dietch calls for better empirical research on whether specific tax policies represent aggregate (Pareto) improvements or deteriorations of welfare, rather than whether tax competition in general is good or bad. On these points, it is fair to question whether Dietsch’s assessment of economic theory and research is somewhat stylised. The economic literature on tax competition is diverse and comes to conclucions all along the spectrum, as Dietsch also recognises. Yet his dismissal of this literature rests mostly on general traits and models, which may be dominant in the literature, but which do not paint the full picture.

Tax cooperation enhances, not erodes, national sovereignty

The second key defense that Dietsch makes for his proposals is that tax cooperation does not undermine national sovereignty. Traditionally, this has been the main argument against international tax cooperation. Countries want to retain full rights over taxation, often viewed as a cornerstone of the sovereign nation-state and a key part of the social contract. More than anything else, this is why we do not have international cooperation on tax to the same extent we have it on trade or human rights.

But the trade-off between cooperation and sovereignty, and the notion of sovereignty which this perception of a trade-off implies, is inadequate in today’s world, argues Dietsch. The choice today is to maintain full authority, based on the outdated Westphalian concept of sovereignty, remaining unable to tax capital effectively, or to pool some sovereignty for effective capital taxation, thus reinforcing sovereignty itself.

While Westphalian sovereignty – the agreement on non-intervention in a states’ internal affairs by other states, named after the 1648 Peace of Westphalia – may have been a useful framework for fiscal policies in a world of immobile production factors, it falls short in a globalised world. The fundamental mismatch between internationally mobile capital and territorially-bound states cannot be ignored.

As Dietsch’s colleagues, Thomas Rixen and Philipp Genschel have detailed, any individual country faces a trilemma in addressing tax competition. It can only curb tax competition by relaxing sovereignty or unilaterally engaging in double taxation.


The international tax system of today is based on the historical choice to pick national sovereignty and avoiding double taxation, as countries avoid real international cooperation and emphasise the avoidance of double taxation through bilateral tax treaties.

One of the most important interventions of this book is to remind us that national sovereignty is not absolute. Just like with individual personal freedom, the authority of an individual country will always, at some point, impact the authority of another. The myth of absolute freedom or absolutely sovereignty is just that – a myth.

Here, Dietsch latches on to recent developments in international law and argues that sovereignty needs to be re-cast as a responsibility rather than a right. This means it comes with caveats, of which Dietsch in particular highlights the requirement to respect the fiscal self-determination of other states. If we accept this argument, that sovereignty is a responsibility, the act of tax cooperation becomes in fact not a violation or sovereignty but a central feature of it.

This is an idea becoming increasingly loud. As recent as July 10, Harvard professor Lawrence Summers launched a call for “responsible nationalism” in the Washington Post. His words align well with Dietsch’s analysis:

What is needed is a responsible nationalism — an approach where it is understood that countries are expected to pursue their citizens’ economic welfare as a primary objective but where their ability to damage the interests of citizens of other countries is circumscribed.

Unfortunately for Dietsch and Summers, this is also an idea that is unlikely to take hold just yet. Whether based on a correct analysis or not, national self-determination remains the ultimate backstop to international cooperation (in particular on tax) in the eyes of national policy-makers.

Transitional justice

Before rounding off, Dietsch explores a number of subsidiary ethical questions related to the implementation of his proposals. Should small developing countries be allowed to continue tax competition? How should we calculate compensatory duties (Dietsch’s proposal for sanctions under the new ITO regime)? And what about the populations of existing tax havens? While these are interesting explorations, the book skips quickly across the topics, which leads us to conclude they are included largely for the sake of mention. The limited analyses, e.g. on calculation of tax losses from competition (an extremely difficult topic in itself), also means this is the weakest part of the book.

A diligent, normative, and also non-normative book

In conclusion, it is worth highlighting that Dietsch’s book is a normative one. It argues that tax competition is significant and damaging, and it proposes a real solution to deal with this problem. But then again it also deliberately avoids, somewhat awkwardly, being normative. In fact, the author is extremely careful to emphasise what he is and is not making claims about. Dietsch notes, for instance, that income inequalities within and between countries are exacerbated by tax competition, but makes no definitive claims as to whether this is good or bad. At times, the author provides almost all the arguments necessary to make further normative claims, but avoids going all the way, perhaps for fear of over-stretching or because he finds their solutions immediately unfeasible or out of scope. This is, in a sense, admirable integrity, but also to some extent disappointing.

In avoiding some of those conclusions, I think a lot is missed. I applaud Dietsch for his diligence in bringing his arguments, again and again, back to questions of ethics. To my mind, most of the key questions we discuss today on tax issues always somehow trace back to questions of morality. (For Dietsch, of course, this question of ethics is not about individual agents but rather the ethics behind the design of institutional system to deal with tax and tax competition – another debatable omission.) Unfortunately, Dietsch often avoids actually making any substantive claims regarding ethics, beyond those concerned with national fiscal sovereignty. For instance, Dietsch’s book is adamant that tax competition is really only a problem for the sovereignty of large states (because small states benefit from it), and the solution should come from these countries. If the book finalised its lines of argument that tax competition worsens inequality (which may hurt the economy too), that it increases risk of and exacerbates financial crises, that it distorts fair market competition, and so forth – in addition to the substantiated claim that it undermines sovereignty – he might have come to the conclusion that it is not only detrimental to large states, and that is a problem more wide in scope than sovereignty.

On the other hand, the deliberate lack of normativity is also a strength at times. Dietsch proposes no subjective theory of ‘fairness’ or ‘justice’, nor any opinion on the ‘right’ levels or balance of taxation and similar questions, and he develops principles and recommendations that are applicable largely without reference to national or international politics or tax systems. In this way, he leaves the utilisation of his arguments open to a range of actors and groups with varying interests.

Because of the authors diligence, while there are and will continue to be prominent counter-arguments to the ideas advanced by Dietsch in this book, the book has already surveyed and responded to many of the most obvious ones, at every turn of the argument, though with varying conviction and success. But even if one only buys halfway into the proposals put forth, accepting some of the ideas as relevant, this is an important stepping stone. As Dietsch, citing Pablo Gilabert, notes:

.. If the institutional reforms laid out in part I turn out to be unfeasible for political reasons today, there still are a number of things we can and should do to make their implementation possible in the future.