The market, taxation, and redistribution
Peter Dietsch, Philosophie, Université de Montréal
Presented at the Cérium summer school
2nd and 3rd July 2010
The market, taxation, and redistribution
Two central questions:
1)
What are the distributive consequences of the international fiscal
landscape?
2)
To the extent that this landscape generates inequalities we should
consider unjust, what institutional responses are called for?
Several subsidiary questions:
1)
Fiscal systems represent a corrective of the market. What is the
justification for the distributive outcome of the market in the first
place?
2)
How do we justify and implement redistribution?
3)
What is the relation between the normative principles of
international taxation put forward here and the sovereignty of
states?
4)
Why not rely on corporations rather than states for a solution?
The market as a means of
social interaction
Two traditional justifications for the market:
1)
The maximisation of social welfare
but consider: 2nd Best Theorem
(RG Lipsey, K Lancaster, “The General Theory of Second Best”, The Review of Economic Studies
24/1 (1956), pp. 11-32)
2)
The guarantee of individual liberty
but consider: externalities
Two insights:
1)
The market is contingent on the state
2)
The market should be judged by its results
(Amartya Sen, “The Moral Standing of the Market”, Social Philosophy and Policy 2/2 (1985), pp.1-19)
The distributive outcome of the market
Important:
 Evaluating a distribution requires a theory of justice
 Justice ≠ Equality
Three ways to redistribute:
1) Ex post (eg through income taxation)
but: effect on efficiency?
2) Ex ante (eg through estate tax)
but: utopian + undermining the rule of law
3) through institutional design (eg through anti-trust policy*)
=> central to my argument today
*
(see Peter Dietsch, “The market, competition, and equality”, Politics, philosophy, and economics 9/2
(2010), 213-44)
Taxation as a means to redistribute
Definition:
A tax is a financial duty levied either on the basis of certain
economic activities or in virtue of holdings of wealth
Objectives:
Raising revenue, redistributing income, influencing behaviour,
smoothing the economic cycle
Some clarifications:
1)
Taxation does not conflict with property rights
(see Murphy / Nagel, The Myth of Ownership, OUP, 2002)
2)
3)
Does taxation imply a conflict with efficiency?
When is a tax progressive or regressive?
Central questions for today
A descriptive and a normative question:
1)
What is the impact of tax competition on the distribution of income
and wealth both domestically and globally?
2)
To the extent that this impact entails injustices, what should we do
about it?
A definition of tax competition:
Interactive tax setting by independent governments in a noncooperative, strategic way
Why is tax competition a problem?

They undermine the fiscal prerogatives of the state: (1) size of the
state & (2) level of redistribution
Why is it often ignored by theories of justice?
Structure
1)
2)
How tax competition works and what its
distributive effects are
How to regulate it
Discussion of two objections:
1)
What about sovereignty?
2)
Why regulation? Why not rely on socially
responsible behaviour of corporations?
Various forms of tax competition
A multitude of ways to create a favourable tax environment:
Lower rates; preferential rates for foreigners (“ring-fencing”);
loopholes; regulation (eg bank secrecy)
Tax competition (mainly) targets 3 forms of capital:
1) Portfolio capital; eg through low rates combined with secrecy
2) Foreign direct investment (FDI); eg through ring-fencing
3) Paper profits; eg through transfer pricing or thin capitalisation
Some figures



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
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Estimates for wordwide yearly revenue losses to
governments due to individual tax evasion or avoidance:
US$ 155 to 255bn
“Developing countries are estimated to lose to tax havens
almost three times what they get from developed countries
in aid.” (Angel Gurria, Secretary-General of the OECD in
November 2008)
Estimates for the US tax gap by the IRS: US$ 345bn
(= 20% of total revenue)
At the height of its preferential corporate tax for
foreigners, Ireland received 60% of US FDI in Europe
60% of world trade is intra-firm
70% of individual wealth in South America is held offshore
The theoretical consequences of tax
competition
A “race to the bottom”:
A sequence of mutual underbidding of capital tax
rates, which eventually leads to an under-provision of
public goods in all jurisdictions
See H.-W. Sinn’s “selection principle”:
If the state intervenes to correct for market failure by
reintroducing competition between states / systems as
the alternative, this alternative will fail, too
(H.-W. Sinn, “The selection principle and market failure in systems competition”, Journal of Public Economics
66/2 (1997), pp. 247-74)
The empirical consequences of tax
competition I
For developed countries:
1)
Fall in average OECD corporate tax rates and top income tax rates
over the last decades
2)
Compensated by base broadening (‘tax cut cum base broadening’)
3)
More precisely, we see a shift of the tax burden
… from multinationals to nationally organised SMEs
… from capital to labour
… towards indirect taxes
… away from high incomes to preserve ‘backstop function’ of
personal income tax
In sum: Developed countries are able to maintain the size of the budget
(1) but only at the expense of compromising the desired level of
redistribution (2)
The empirical consequences of tax
competition II
For developing countries:
Largely similar impact with two notable differences:

The strategy of ‘tax cut cum base broadening’ is
usually not open to developing countries

Effect of ‘Washington consensus’

Example: Brazil
In sum:
Developing countries lose both fiscal prerogatives
of the state
What has been done about it?
OECD:

Report on Harmful Tax Competition (1998)

Several follow-up reports
European Union:

Code of conduct

Savings Directive

Discussion of a consolidated corporate tax base
G20:

Blacklist of tax havens (April 2009)
One problem of all these initiatives:
Their scope
Background justice for international
taxation
Two approaches to deal with tax competition:
1)
A palliative approach focused on distributive outcomes
2)
A preventive approach focused on just institutions
Two proposed principles:
1)
Membership principle:
Natural and legal persons should be liable to pay tax in the state of
which they are a member.
2)
Intentionality principle:
Suppose the benefits of a tax policy change in terms of attracted
tax base from abroad did not exist, would the country still pursue
the policy under this hypothetical scenario? If yes, the policy is
evidently not motivated by strategic considerations and therefore
legitimate. If not, then the policy is illegitimate.
Fitness clubs and free-riding



Consider the analogy between a fitness club and a
country…
Tax evasion and tax avoidance represent forms of
free-riding
Those who do pay for public services have a
legitimate complaint
The membership principle (see above)
Individuals and companies should be viewed as
members in those countries where they benefit
from the public services and infrastructure
Challenges and implications of the
membership principle
Challenges:
1)
Overcoming differences in the definition of
membership
2)
Enforcing the principle
Implications:
1)
For individuals: self-selection into jurisdictions
according to political preferences
2)
For multinational enterprises (MNEs): real instead
of (merely) virtual tax competition
The insufficiency of the membership
principle
Consider two scenarios:
1)
Country A lowers a certain tax rate, because this
better reflects the political preferences of its
citizens
2)
Country B lowers a certain tax rate in order to
attract capital base from abroad


What to say about these changes from the
perspective of justice?
The intentionality principle (see above)
What to make of the intentionality
principle?
Objective:
Delineate (legitimate) fiscal interdependence from
illegitimate tax competition.
Two observations:
1)
Respecting both principles does not lead to tax
harmonisation
2)
But it does lead to some pressure towards convergence of
rates
An objection:
Is the intentionality principle utopian?
Implementation
Agreement on rules:
Definition of (multiple) residence for individuals; of economic activity for
multinationals; adopt Unitary Taxation with Formulary Apportionment
instead of Arm’s Length Pricing
Reform of current practices:
Abolish bank secrecy & preferential tax regimes; make information
exchange effective and automatic
Enforcement:
Creation of a supranational body to provide independent oversight
(International Tax Organisation)
What about sovereignty?
A recent case:
US versus UBS
Three kinds of sovereignty:
(see Stephen D. Krasner, ‘Pervasive Not Perverse: Semi-Sovereigns as the Global Norm’, Cornell
International Law Journal 30 (1997)
1)
2)
3)


Domestic sovereignty
Westphalian sovereignty
International legal sovereignty
Which of these is / are relevant in the context of tax
competition?
Conflict between (1) and (2)
Sovereignty with strings attached
In an economically interdependent world, the notion of
Westphalian sovereignty no longer makes sense
“… the easy – perhaps, indeed, the obvious – part: establishing
that sovereignty (conceptually) must be limited (if it is to be a
right). The hard part is actually specifying some concrete limits.”
(Henry Shue, ‘Limiting Sovereignty’, in: J.M. Welsh (ed.), Humanitarian Intervention and International
Relations (Oxford, OUP, 2004), p. 16)


a notion of sovereignty that entails duties as well as rights
For a suggestion as to the content of these duties, see above
What about CSR*?
Different conceptions of CSR:
1)
Corporate responsibility beyond the letter of the law
2)
Stakeholder theory
3)
A market-failure approach
Consider a minimalist approach to CSR:
Companies have a social obligation to respect the rules of the
game laid down by the regulatory framework
In particular:

Companies have an obligation to pay their taxes

Companies have an obligation not to undermine the respect of
fiscal obligations
* = Corporate Social Responsibility
Why even the minimalist conception fails


for a manufacturer, adhering to the minimalist CSR may be feasible
For the tax planning industry, it seems utopian
Who are the tax planners?

The ‘Big Four’ accountancy firms; law firms; banks
How do they promote tax avoidance?

By selling tax advice

By creating the legal foundation for the laws, trusts, offshore special
purpose vehicles and so on that make tax avoidance possible

By promoting bank secrecy
Two lessons:

lip-service to corporate social responsibility by these companies is
hypocritical

For them, respecting even a minimalist conception of CSR seems
inconceivable
Conclusions
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In order to talk about ‘just taxation’, one needs
to talk just as much about taxation as about
justice
Tax competition undermines the fiscal
prerogatives of the state in ways that exacerbate
inequalities in income and wealth
Tax competition should be limited by two
principles – the membership and intentionality
principles – to ensure a background justice for
international taxation
Yes, capitalism is in crisis, but not necessarily for
the reasons we often think