Category Archives: Technicisation

Technical politics, sovereignty and the prospects of tax multilateralism

International tax cooperation is hard. Especially when it challenges national sovereignty. Sovereignty is close to heart for politicians. Taxation remains a cornerstone of the nation-state and of the social contract. Governments are not liable to relinquish absolute authority on tax matters.

So, at least, the story goes. Indeed, the reality – and the associated perception – of taxation as the ultimate prerogative of sovereigns (alongside the use of force) has fundamentally shaped all kinds of analysis of international tax matters. In political science, for instance, the predominant approach to international taxation relies on realist models of inter-state power battles. When tax is the point of discussion, states are the relevant players and power is the game, with sovereignty at the core of the underlying dynamics.

That’s why, it is said, for instance, that the European Union has never been able to take control over direct tax regulation, although its powers span an otherwise extensive array of national legislative agendas.

Sovereignty is also cited as a key criticism of the European Commission’s recently re-launched proposal for a Common Consolidated Corporate Tax Base (CCCTB). The CCCTB, of course, is the Commission’s flagship initiative to harmonise calculation of companies’ taxable profits, ridding the private sector of having to deal with 28 (soon to be 27) different such rulebooks. The CCCTB would revolutionise the corporate income tax system in the EU, moving from one of tax base allocation based on the arm’s length and separate entity principles, towards one based on unitary taxation, with tax base allocation through formulary apportionment, i.e. divided between Member States according to local sales, labour costs and assets.

More importantly, the CCCTB would mean EU Member States surrendering national sovereignty on tax matters. Effectively, rules for deductions, incentives and so forth would come under the control of the EU system, with individual countries having to obey rules agreed at the supranational level, and going the multilateral EU route to any substantial changes.

Whereas the CCCTB has been lamented as largely ‘doomed’ because of the EU’s sovereignty-challenging, hard law, bargaining-based policy process, another major multilateral tax initiative, the OECD-led, voluntary, soft law, consensus-based Base Erosion and Profit Shifting (BEPS) project, has been praised for its speedy and effective solution-building.

However, both projects are indicative of increasing international tax cooperation. They have much more in common than usually discussed, and that tells us something about the general prospects for tax multilateralism. While national sovereignty and power politics are important barriers to tax cooperation, they have been overemphasised at the expense of alternative understandings of the lack of traction for the CCCTB and similar initiatives.

Here, I want to expand on this argument, drawing two key distinctions, namely between political and technical policy arenas, and between legal and effective sovereignty, in understanding the outlook for international tax cooperation.

Technical vs. political levels

Every policy decision, every policy process, develops at the intersection of two key policy arenas: the political arena and the technical arena.

At the political level, we see most clearly the distinctions described above. Hard law vs. soft law; sovereignty vs. cooperation; my country interests vs. your country interests; etc. The primary actors are states, embedded in distributional conflict.

The technical level, however, is different. I have written elsewhere on the topic so I shall keep it short. Suffice to note that the protagonists here are primarily experts and professionals, bureaucrats and advisers, working to build credible technical solutions, with country interests and high politics in the background.

Each level is important in a policy process, although one may weigh more heavily at certain points and in certain settings. But the relation is key. The technical level shapes the political level, and vice versa. Experts influence what can and cannot be proposed and discussed and accepted as policy issues and solutions; politicians influence the framework in and speed of which certain policy topics are taken up, and so forth.

At the same time, the ‘technical’/’political’ distinction should not be overemphasised. What is technical is political: a minor, seemingly technical addition to a policy recommendation may have enormous distributional consequences. And what is political is technical: politicians’ ability to promote technically authoritative arguments in proposing issue solutions is central to policy success.

While popular explanations typically highlight dynamics at the political level – country interests, national sovereignty and distributional politics – as the preeminent cause of policy success or failure, the technical level remains underappreciated.

The success of the BEPS project, for instance, has not merely been down to goodwill from the G20 and OECD nations, but, to a great extent, it is a consequence of dynamics at the technical level, as I have written elsewhere. Consensus around key technical BEPS provisions throughout a significant international community of professionals has played a central role in effective policy uptake. The delivery of technically strong, agreeable solutions from the technical level to the political level, while still needing to be ratified, was essential in inclining political decisions and a major contributor to widespread implementation.

Similarly, while the CCCTB’s difficulty is usually ascribed to power politics, I would argue that it may have as much to do with technical opposition. The Commission’s proposal faces a number of key technical-level barriers. Several specific provisions have received negative scrutiny, in particular the R&D superdeduction. More generally, the CCCTB is an attempt at wholesale replacement of 28 distinct corporate tax systems, each with vested technical stakeholders, along with the complete overhaul of the international tax system and demolition of entrenched, well-established and well-supported legal and economic principles. It is safe to say there is extensive technical-level resistance to the proposal.

Thus, technical-level entrenchment may provide a barrier just as significant as power politics to the CCCTB and EU tax multilateralism in general – even if the interplay of high politics and technocracy is decisively different in OECD and EU. Power politics may play a more significant role during policy formulation and decision-making in the EU compared to the OECD. But there are also important overlaps. For instance, there is significant similarities in the nature and make-up of the community of professionals involved in the technical levels in the EU and the OECD. Differences are, in my view, not so substantial that they undermine the importance of the technical arena in the EU.

Legal vs. effective sovereignty

Another underappreciated distinction in analyses of tax multilateralism is that between effective and legal sovereignty. Many analyses of international tax cooperation have highlighted governments’ aversion to surrendering (legal) sovereignty on tax, their desire to retain the full right to design policy, in explaining lack of traction for tax multilateralism. However, this argument unduly evades the fact that tax multilateralism may, and indeed does, effectively challenge national sovereignty even if it does not do so strictly as a matter of law.

Going back to the BEPS and CCCTB, from a sovereignty perspective, these projects again seem entirely different on the surface. CCCTB is hard law, requires formal pooling of sovereignty, is embedded in the complexities and frictions of the EU system, and has immediate and highly visible inter-nation distributional consequences. BEPS is soft law, based on consensus cooperation, born out of a flexible, technicised OECD process, and has fewer obvious ‘cui bono’ implications.

But although BEPS is seemingly of a softer nature, indications are that it actually behaves similarly to legally binding projects. Countries around the world are implementing key BEPS provisions in a way remarkably close to recommendations. As a matter of law, there was no imperative to do so, but as a matter of practice, there is. The technical-level consensus and dissemination of policy discourse plays a central role here, alongside national political commitments to the OECD and its tax policy processes. Indeed, OECD tax outputs have been known to take on legal ‘hardness’ (cf. 1, 2, 3). Formally, the BEPS recommendations retain ‘soft’ qualities – they can be unilaterally changed at political will – but in practice, there is a strong normative allegiance. As a matter of law, it is non-binding, but effectively… well, if not outright ‘binding’, then certainly something closer to binding than non-binding.

In the same way that international tax competition de facto undermines national sovereignty (effectively constraining national policy choices), while de jure leaving it untouched (nations formally retain the right to design policy), we might say that BEPS de facto is a pooling of sovereignty, although de jure it is not. National sovereignty has effectively been pooled or surrendered as a result of the BEPS process.

Of course, policy-makers may not perceive it as so. They may never articulate it. And they may rightfully hold that the distinction remains crucial. But the increasing trend towards tax multilateralism – indicated by both BEPS, CCCTB and a host of other international initiatives – may well be a result of increasing recognition that pooling of sovereignty is essential in order to improve the international tax system, whether that is effective or legal sovereignty-pooling. As German political scientists Thomas Rixen and Philipp Genschel have argued, countries can only curb tax competition by relaxing sovereignty or unilaterally engaging in double taxation:

Udklip

Thus, the emphasis on governments clutching to legal national sovereignty is perhaps somewhat overemphasised in accounts of tax multilateralism.

The Prospects of Tax Multilateralism

So what does this mean for the prospects of tax multilateralism more broadly?

In my view, the lack of traction for the CCCTB, due to continued challenges at the political and technical levels, should not be seen to crumble the overall prospects of tax multilateralism in the EU or beyond.

On the contrary, it seems to me that the underlying dynamic of political-technical interplay in international tax provides fertile ground for tax multilateralism, as both BEPS and the attempt at CCCTB testifies to. The lesson, rather, is that tax multilateralism has to happen under the right circumstances.

The CCCTB may be a dead fish, but this may be less about absolute adversity towards pooling/surrendering tax sovereignty than it is about adversity towards the particular modality and scope of pooling/surrendering tax sovereignty in the CCCTB case. It is the specific characteristics of the CCCTB – the extensive scope of the overhaul, the distributional implications, etc. – that explains its inability to get off the ground, while BEPS has shot out of a cannon. The long list of technical issues associated with the CCCTB regime, alongside the political squabbles, is not a recipe for success. In that sense, the CCCTB may be more fraught than BEPS ever was, asking for a more expansive and apparently unappealing pooling of sovereignty, underpinned by slow and friction-filled decision-making processes, compared to the perceived speediness and efficiency and technical OECD discussions.

Thus, while existing initiatives international tax cooperation may fall flat, we should not take that as evidence that tax multilateralism is failing. We should take it as evidence that we have yet to hit the right approach in the interplay of technical politics and political politics.

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.