Category Archives: Tax competition

The Paradise Papers should lead us towards a new global tax system

Last week, I published an op-ed in Danish newspaper Politiken with my colleague Saila Stausholm. I reproduce it below, liberally translated, for those interested. Given the op-ed format, it naturally has certain limitations and a certain style that differs from my usual writings on this blog – so take that into account. Here we go:

The Paradise Papers should lead us towards a new global tax system

Last Sunday, the International Consortium of Investigative Journalists (ICIJ) lifted the dam that had been holding back a new giant offshore leak, the Paradise Papers.

While the stories of tax haven usage do not necessarily reveal any illegal activity, the reactions tell us that citizens and politicians are outraged by the implications in the leaks of leaders and elites in the world’s richest countries.

Exactly because much of this activity is legal, the leak highlights the massive chasm between what ordinary people see as reasonable, and what the global elite can do within the limits of the law.

The Paradise Papers thus clearly showcase the structural problems of a nationally anchored tax system that works globally for mobile capital.

It is outdated, and there is a need for not just outrage and political attention, but also new, concrete ideas and the courage to change the system radically.

Small “quick fixes” here and there are not enough. On the contrary, we need to change the tax system fundamentally in order for it to match the ongoing reconfiguration of the global economy.

As illustrated by the tax haven leaks of the past few years, the opportunities to use tax havens and the offshore world are a key symptom of a tax system where regulation has not kept pace with globalisation.

Before the Paradise Papers, we had the Panama Papers, which created outrage in 2016, implicating the Icelandic Prime Minister, the Saudi Arabian king, the Pakistani Prime Minister, football world star Lionel Messi, and actor Jackie Chan.

In Denmark, too, the Panama Papers had consequences: The Danish tax administration is continuing its investigations into the affairs of at least 500 Danes.

Before the Panama Papers, we had the LuxLeaks, which revealed that PwC had helped a string of global corporates attain hugely favourable tax terms in Luxembourg. This had happened while current European Commission President Jean-Claude Juncker was Prime Minister in the Grand Duchy.

LuxLeaks also fostered significant political reactions, and became the starting point for Margrethe Vestager’s high-profile state aid cases against Luxembourg involving Amazon, Fiat, and McDonald’s.

And again before LuxLeaks, we had the Offshore Leaks in 2013. In addition, we have had the SwissLeaks and the Bahamas Leaks. These many leaks must be viewed in light of the increasing focus on tax havens and the issues created by the international tax system for both rich and poor countries.

Since the global financial crisis broke out in 2007-08, nation-states have increasingly identified the strengthening of national and international tax systems as a central part of the solution to the economic challenges we face today: debt crisis, public budgets under pressure, low growth and growing inequality.

As a consequence, both national governments and the international community has ramped up political initiatives against tax havens, against aggressive tax planning, against money laundering, and against tax evasion.

Today, we have much more transparency and better international exchange of tax information; we have closed some of the worst loopholes; and we have changed what is acceptable in terms of bank secrecy, shell companies, etc.

But the political reforms from the past decade have not really taken on the fundamental causes of the problems we are seeing today in tax havens and in the international tax system.

All the key components of the international tax system, established in the early 20th century, have not changed substantially.

Countries can still undermine each other by commercialising their sovereignty and offer favourable terms to foreign capital and thus reduce the economic and democratic capacity of their neighbours. And despite initiatives in the EU and the OECD, international cooperation is still relatively limited and, to a large extent, controlled by a small core of actors from the world’s richest nations.

Global corporations are still, essentially, taxed like they were 100 years ago, when they were small regional networks primarily trading physical goods.

This means that global capital – large corporations and rich individuals – are still able to structure tax liabilities with little friction across borders, while governments are largely bound by geographical and territorial borders.

If we want to address the fundamental challenges facing the international tax system today, we need a complete overhaul of the system. We need global innovation. Innovation is needed because old solutions will not do. And global scope is needed because solutions need to encompass all relevant countries and interests, if we harbour any ambition of finding sustainable and lasting answers.

First of all, we need innovation in terms of more and better inclusion of various interests in political decision-making processes. This is particularly relevant at the international level, where the group of decision-makers involved has historically been very narrow.

Our research has shown that a small group of actors play a disproportionate role in international tax policy-making. And that a core group of technical experts contribute to setting a course for regulatory initiatives that widely differs from the perceptions and goals of the general public and of politicians.

International tax policy is very important, and should have broad participation in all phases from the public, from civil society, from researchers, from interest organisations, and from politicians from all sides. This is not the case today. This would improve the quality of the democratic system and the political decision-making.

One model for such an expansion of participation is a World Tax Organisation. Today, taxation is just about the only major global political issue area where we do not have a global organisation with active participation from across the globe, where global challenges can be discussed, and common guidelines can be laid out.

We have a World Trade Organisation, a World Bank, a World Health Organisation, and so forth. But we do not have a World Tax Organisation.

This is not to say that these organisations are flawless, nor that a new organisation will solve all of our problems on its own. It is just one suggestion and just one part of the solution. What such an organisation does provide is a common global forum, where a broad range of issues can be raised and addressed, which simply does not exist in the area of taxation.

The “global” political discussions we have today largely take place in the OECD, the G20 and the EU; they play a key role in setting the agenda.

This makes it difficult for other countries and other stakeholders to join and influence discussions, despite the fact that many of the issues caused by the current international tax system hit emerging and developing countries disproportionately hard.

Without assuming the full design of a World Tax Organisation, we can at least imagine that it would function as a global forum that could take up key questions about international tax policy and tax havens, start political reform discussions, carry out global consultations, set out global guidelines, etc.

A more expansive idea of such an organisation could, like the World Trade Organisation, be entrusted with the power to assess and enforce whether any one country’s tax system would live up to globally agreed minimum standards, in order to ensure that it did not harm other countries with its policies or allow harmful discrimination of certain persons or companies.

In addition to creating a better forum for the negotiation of common ground rules, we also need to rethink how we tax cross-border activities in the global economy of today.

Today, global corporations and rich individuals have particularly large scope to lower their tax bills by manipulating mobile income across borders because our tax systems are still based around outdated ideas of how and where value is created in a global economy.

For instance, a substantial part of global corporate assets today are intellectual property: patents, copyrights, etc. In short: ideas.

In contrast to traditional assets such as factories, ideas and mobile and malleable. Where and when does an idea originate, and how does it create value?

Despite hundreds of pages of guidelines and regulation, multinational companies retain a great deal of flexibility in answering these questions and thus determining the location and size of their taxable incomes.

Large and complex global ownership networks equally allow corporations to move ideas, services and profit relatively friction-less across borders.

This is why taxation of corporations, and individuals, who effectively operate on a global scale, should also work effectively globally.

In the area of corporate taxation, one proposal in this vein is unitary taxation, where global corporations’ taxable income is consolidated at the global level, before it is distributed to each country of operation based on a predetermined formula.

In this way, it becomes far less important where corporations locate their profits, and thus harder to avoid tax liabilities as in today’s system.

In the area of personal taxation, a truly global tax regime might utilise multilateral tax assessments and audits for globally mobile individuals.

Again, these proposals are not silver bullet panaceas that will solve everything in a second. But they may be part of the solution, and they serve as important pointers towards a positive future for tax systems.

In order for these innovations to realistically happen, we also need a complete rethinking of attitudes to national sovereignty.

A key cause of today’s relatively limited international cooperation in tax matters, and of continued resistance towards a World Tax Organisation, is that governments across the world are terrified to surrender absolutely sovereignty over their tax systems.

However, as German philosopher Peter Dietsch has illustrated, international tax cooperation is not about surrendering sovereignty, it is about strengthening it.

Today, we have de facto lost sovereignty when tax havens induce limitations on our economic and political latitude. And yet we refuse to challenge their rights to do so.

Paradoxically, this insistence on the absolute sovereignty of others’ in tax matters thus weakens our own sovereignty.

If we are to achieve the needed global innovation in tax matters, we need to acknowledge that global cooperation provides a unique opportunity to regain lost sovereignty.

Another acknowledgement that is required for global tax innovation is that international tax politics is not a zero-sum game.

Today, many governments resist good ideas for change because they fear an absolute reduction in national tax revenue.

The Danish government, for instance, has expressed skepticism about a common European corporate tax system, proposed by the European Commission, which has the purpose of eliminating many of the most important current channels of tax avoidance used by large corporations in Europe. This skepticism is caused by a fear that Danish tax revenue would suffer due to our small market size.

There are many good reasons to be skeptical of the European Commission’s proposal, but tax revenue fears must be understood in the context of the long list of indirect benefits to the Danish public coffers, which are likely to outweigh any direct, absolute revenue losses. These include administrative cost savings and reduction in tax avoidance.

There are countless examples of hesitation around new political ideas because of this zero-sum mentality in tax matters.

But it is crucial that we view global innovation in tax policy as a unique opportunity to ensure a sustainable international tax system for the future.

Global tax innovation can be a critical way to future-proof our tax systems and thus our public finances. With a typical Treasury expression, the dynamic effects of global tax innovation are potentially enormous.

A World Tax Organisation and a global tax system will not solve all of our problems on their own, but they are a important steps in the right direction – and it is unlikely that we can effectively address our current challenges without effective organisational support and global policies.

However, global fora and global politics of this kind today are also plagued by large inequalities in resources, competencies and capacity between national representations. This will not be solved by establishing a new global organisation or new global policies.

This is why we also need to acknowledge the broader global political inequalities that lead to lack of cooperation, both in terms of a lack of will and in terms of lack of capacity.

For instance, a key reason that many small island states have historically pursued “tax haven strategies” is that they simply have not identified or been able to execute viable alternative strategies for economic development, and that they have been encouraged to do so, for instance by successive British governments.

Another challenge lies in the dominance that large Western states exercise in global politics. They tailor global tax rules to their advantage, while small tax havens and developing countries have almost no influence on international standards and regulation.

This gives substantial incentives to defect and to counteract global cooperation.

The USA, for instance, has played a key role in reducing bank secrecy in Switzerland, but in parallel it has strengthened its own secrecy industry at home, effecting what political scientists Lukas Hakelberg and Max Schaub have called “redistributive hypocrisy”.

We need to recognise and address these types of global political inequalities if the fight for global tax innovation is to succeed.

And there are good reasons for trying to do just that. The Paradise Papers and the increasing public attention to the challenges of tax havens and the international tax system underline the necessity of altering the current political course.

Small “quick fixes” of an outdated international tax system will not do.

We are hoping that the continuing stream of offshore leaks will not just lead to outrage but also to fundamental disruption of our whole approach to questions of global political inequality, globalisation, and, specifically, global taxation.

There is a need for broader and better participation in global political discussions of tax havens and tax systems. A World Tax Organisation would be a great place to start.

And there is a need to move towards tax systems that are truly anchored at the global level in order to deal with global economic activity.

There is also a need to rethink our approach to national sovereignty and to depart from the zero-sum mentality.

And finally, we need to address the global political inequalities that pose such a significant barrier to progress in the fight against tax havens.

If we can begin to move in this direction, just a bit, the future suddenly looks much brighter for the international tax system, for public finances, and for the modern global economy.

Power in Numbers: How Data Shapes the Tax Policy Arena

Since the first number value systems were invented around 3400 BC, numbers have played a central role in human society. Arguably, though, they have never been more important than they are today. We fiend for data, quantities, statistics and numbers to an astounding degree. We live in an almost fetishised data-heavy society.

This applies to the tax world as well, of course. In fact, numbers and data are absolutely central to tax policy debates. We obsess over tax rates and the amount of tax lost to evasion and the percentage-growth effects of tax policy changes. We rank national tax regimes’ competitiveness and secrecy jurisdictions and tax avoiding companies. Etc. etc. etc.

Why? Because numbers allow us to quantify anything, communicate easily, analyse and conclude with simple outputs. And so, often times we absorb information and arguments construed as numbers over other types of inputs.

That’s why we play extra close attention when the hear that the European Union loses €1 trillion a year to tax dodging, that Estonia has the no. 1 competitive tax code in the world, that Apple is holding $215 million offshore. It’s also part of the explanation why mathematical models and econometrics is now the standard way to “do science” in modern economics (it wasn’t always like that, to be sure).

But numbers are not neutral. Numbers provide authority in a way that words or plain language sometimes does not. Numbers indicate “we did the math”, summoning ethos appeals that often provide instant credibility.

Thus, those able to produce, use and leverage numbers and data often hold greater sway, and they manage to be influential, impactful and effective in modern debates around tax. The point is similar to one I have made previously on technicisation of global tax policy processes and I think the two are related: This particular feature of the tax policy arena – an affinity for numbers – provides an environment where certain actors and arguments are often favoured.

How numbers rule

A recent paper by Hans Krause Hansen and Tony Porter in the journal International Political Sociology discusses the distinct features of numbers and how they affect transnational governance:

  • Mobility: As counting strips away meaning behind, numbers are mobile and travel easily across borders.
  • Stability: The meaning of numbers is less complex than words. 83 is less frequently interpreted in different ways than ‘democracy’ or even ‘house’.
  • Combinability: Numbers are easier to combine, also in different ways. 2+2 is always 4; five oranges and two bananas can be 7 or 5+2.
  • Order: Quantitative ranking is intuitive and comprehensible. 1 is higher than 2, etc.
  • Precision: Simple arithmetic allows for great precision in using numbers. One meter is exactly 100 cm, and so forth.

Hansen and Porter specifically analyse barcodes and radio frequency identification numbers in this light, but their insights are more broadly relevant, certainly in the tax world. A few real-world examples to illustrate this point:

Citizens of Tax Justice’s “Offshore Shell Games”

For the American tax think tank/advocacy organisation, Citizens of Tax Justice, the stated organisational focus is “federal, state and local tax policies and their impact upon our nation.” A wide span. And each year, they output hundreds of reports, blogs, analysis, etc. on these topics. Yet, since 2013, their most popular annual output has arguably been the “Offshore Shell Games” report, which surveys the deferred cash stock of US multinationals in tax haven subsidiaries. The vast amounts, up to $2.5 trillion per the 2016 report, and its “leaderboard” of offshore cash piles make for neat media stories.

The $2.5 trillion number is mobile, straight-to-the-point, easy to communicate, thus become widely cited, shared and discussed. The massive figure is also stable, eyecatching yet unmistakable, and leverages the combinability of numbers, being made up of similarly clear individual company numbers, plainly extracted from corporate accounts. Order is key: As we see the number go up each year, from $2 to $2.1 to $2.5 trillion, the simple narrative is one of growth, which CTJ firmly problematises. And finally, precision of the number provides strength: with the bottom-up data approach from corporate accounts readily accessible and the overall number down to a decimal point, the credence of the overall argument is enhanced. Together, these features make for a plain and intuitive case, allowing CTJ to successfully set out the argument that “big US multinationals are hoarding monumental cash piles offshore, avoiding billions in US taxes.”

Tax Foundation’s Tax and Growth predictions

Another American tax research organisation, the Tax Foundation, has been hitting the headlines recently. To be fair, it has been a lot since establishment in 1937. But arguably their current popularity has been driven primarily by data outputs. Of particular note is its “Tax and Growth Model” outputs, a macroeconomic dynamic scoring model used to evaluate economic effects of policy changes. The model is similar to macroeconomic models used by the US government (and other governments), though it allows for less conservative dynamic scoring, meaning behavioural and thus economic effects of policy changes are factored in to a much greater extent (a topic of much debate). (In Denmark, the centre-right/liberal think tank CEPOS works in similar ways, though they often rely on the independent DREAM model, and they work more broadly than tax issues). In short, the model allows you to input policy changes and receive a range of estimates about the consequent economic future. This is what allowed the Tax Foundation to ascertain during the American election campaign that Donald Trump’s tax plan would generate 10-year GDP growth of 8.2%, compared to Hillary Clinton’s -2.6%.

(The list of noteworthy data outputs also includes the Foundation’s US “State Business Tax Climate Index”, which compares and ranks each state’s business tax systems – garnering significant public and policy attention. Such rank comparisons are incredibly powerful, similar to PwC and the World Bank’s international “Paying Taxes” ranking – I’ll discuss why in the third example below.)

Again the numbers there are mobile and stable; they are ease to carry across debates and borders and simple for any recipient to comprehend. The order is central here, too: 8.2 is clearly superior to than -2.6. Combinality is a core component of the GDP estimates; they are made up of hundreds of assumptions and calculations on the effects of policy changes, possible only through such a massive scoring model. Finally, precision is paramount. We are provided with one single, definitive prediction of the GDP effects of a catalogue of tax policy changes, down to a decimal point, providing a true aura of conviction. Hundreds of assumptions, based on a vast economic theory and empirical research, boiled down. The final number provides the ultimate appearance of precision and certainty. In all, the number characteristics contribute to laying the ground for a simple conclusion: “Trump’s tax plan is better for the economy than Clinton’s”.

Tax Justice Network’s “Financial Secrecy Index”

The Tax Justice Network, another productive tax advocacy/research organisation, has been highly successful with its key number ranking output: the Financial Secrecy Index. The FSI compares jurisdictions around the world based on financial secrecy and size. The FSI, published first in 2009, then 2011, 2013 and 2015, surveys 15 key secrecy indicators (legal rules, administrative practice, etc.) and the overall national financial services market, which rolls up into a final global ranking of “secrecy jurisdictions”: 1, 2, 3, and so forth. The size feature was included in particular in order to challenge prevalent understandings of “tax havens” as small offshore island states. Instead, the USA, the UK, even Germany and Japan, have ended up high on the secrecy score, prompting headlines back in 2009 like, “Delaware – a black hole in the heart of America“.

Looking once more to the distinct characteristics of numbers, we can see the importance. The US being the number 1 (or number no. 3, in the 2016 report) most secrective jurisdiction in the world is a firm, easy-to-grasp statement, easy to transmit and hard to misunderstand. It provides a strong challenge to conventional wisdsom on tax havens. Combinability has also been central to one important FSI story. The anatomy of the FSI score is of course a combined number. Further, if you combine the scores for the UK, its overseas territories and crown dependencies, it would top the list – which has been one of the key media stories following the FSI launch. Order, of course, is the key ingredient to a ranking, and provides a powerful messaging tool. Number 1 is number 1, number 2 is behind, ahead of number 3, etc. The ability to say, based on an extensive data exercise, that “Switzerland is the top secrecy country in the world”, and “the US is (one of) the top secrecy jurisdictions in the world”, is highly impactful. Finally, the precise scoring on multiple indicators, allows for the appearance of a strong representation of reality: Switzerland’s 2016 FSI score is almost double that of Luxembourg – potentially a damning indictment.

Numbers affect tax policy, but not always

Numbers matter for tax policy. Much like the technicisation of international tax reform, the number-obsession creates participation barriers to policy debates and shapes politics and policies, with important democratic, economic and social implications. And much like the reliance of modern academic economists and indeed public and international economists on econometrics and mathematical modelling has become necessary and crucial in order to be taken seriously and impact economic policy debates, the ability of tax policy actors to draw upon quantitative support for tax policy arguments has become essential.

Indeed, numbers push arguments, emphasise issues and change perceptions. The $2.5 trillion dollar offshore cash pile guides attention towards US deferral reform and MNC tax behavioural norms. The 10%-point swing in GDP growth estimates tells us that one Presidential candidate’s proposals are significantly better for the economy. And the secrecy jurisdiction ranking persuade us that, despite conventional wisdom, the US and the UK are among the key enablers of ‘the offshore world’.

Policy actors able to produce, harness, manage and broker quantitative support for policy arguments thus stand at a potentially significant advantage in tax debates, with the possibility to effect real policy change.

However, it is important to recognise that not all numbers or data-based arguments are successful and influential. The datafication of policy debates is certainly just one part of the equation. Numbers are assessed and filtered through policy processes and debate arenas, and some are certainly less robust and authoritative than others. Maya Forstater, for instance, has done yeoman’s work to dispel the precision of certain ‘Wild Ass Guesses‘ within the tax policy area. When arguments with quantitative support are successful, it is often not entirely because of the quantitative element itself; often, it is because those proposing the data-backed arguments are also able to draw on strong expertise and key networks (as I have argued elsewhere). For instance, the ability of the Tax Justice Network to draw on credible expertise to build and push the Financial Secrecy Index as a global benchmark was a key success factor in changing the discourse around “offshore tax havens”.

Thus, the next time you observe a tax policy debate (or indeed other policy debates), pay attention to the use of numbers, data and quantitative support. And see how it is used, leveraged and combined with other factors, such as credible expertise and networks. Often, this is how policy arguments are won and lost.

 

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:

Udklip

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.

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:

Udklip

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.

* POST-SCRIPT JUNE 2018 *: A new paper by the IMF was released on this exact topic recently. I shared some thoughts on the paper on Twitter, which provides a relevant addendum to this blog post. To read, see below:

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. 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.

Udklip

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.