Tax stands at the core of states’ fiscal sovereignty. It allows states to fund not only public goods and services but also the institutions that uphold the collective self-determination of their constituents as members of their political community. Entrusting the state with the authority to coerce us to pay taxes requires not only that it operates efficiently but also that it treats us justly, respects our identities, and supports our communities. This is what I term as substantive tax sovereignty. In other words, substantive tax sovereignty is not only about the state having the monopolistic power to coerce us to pay taxes, but also about ensuring that the state has the legitimacy to do so.
The duties imposed on the state in applying its coercive power are challenging even on the domestic level. Globalization exacerbates this challenge. As I will argue, globalization threatens to undermine states’ ability to comply with their duties and thus might undercut their legitimacy to tax and, with it, their substantive tax sovereignty.
On the domestic level, we imagine a sovereign state controlling a set group of constituents, entrusted with the monopolistic power to coerce them to pay taxes. Its commitment to its constituents’ welfare and to justice makes this power legitimate, indeed necessary, in promoting their collective self-determination. Under globalization, states’ ability to pursue tax’s goals, promote efficiency and justice, and support our individual and collective identities becomes contested and contingent. The competitive global environment increasingly transforms states into market actors, competing for residents and resources. Thus, under global competition states must take into account the supply and demand of resources as well as taxpayers’ mobility and the elasticity of their decisions to relocate. This competitive perspective impacts every aspect of taxation: it undermines states’ ability to pursue domestic justice, it affects the kinds and quantities of public goods and privileges offered by the state, it affects the values that inform the sovereign-subject interaction, and it transforms modes of political participation.
If left unattended, globalization might undermine (domestic) tax systems as we know them; it might pull the rug from under the feet of national tax sovereigns. If competition were to limit states’ ability to adequately provide public goods and services and to support just institutions and equal membership, their very authority to impose taxes may become questionable.
Hence, the challenge facing states’ taxation under globalization is acute: how can their substantive tax sovereignty be sustained to allow them to construct a tax system which is both viable and legitimate in a competitive environment? Some states—those which are attractive enough—can meet this challenge unilaterally by trading off some of their competing interests. Others—those in less demand—may need the support of other states to balance their comparative disadvantage. For them, international tax cooperation may have an important role in reinforcing their tax sovereignty. By leveraging on the collective coercive powers of multiple states, such countries may escape the perils of competition.
Perhaps surprisingly, however, states’ substantive tax sovereignty might be undermined by not only competition but also by international tax cooperation. One clear example of this is where international cooperation inflicts net costs on some states against their will.1 Where some states lose and others gain, either against the will of the losing states or as a result of the losing states being tricked into the deal, the negative effects of cooperation for states’ sovereignty are evident.
But the infliction of costs is not the only case where cooperation might undermine states’ substantive tax sovereignty. Rather, states’ substantive tax sovereignty might be impinged upon even where all cooperating parties stand to benefit, but stronger states benefit more than weaker ones. Although this may seem like an unobjectionable pareto improvement, it is not necessarily so. Despite the fact that they do not inflict net costs on weaker states, such deals might nonetheless undermine these states’ ability to sustain their substantive tax sovereignty in the long run by undercutting their ability to compete for residents.
Are participating states duty-bound to ameliorate these detrimental long-term implications of the cooperative process? I claim that respect for states’ substantive tax sovereignty entails such a duty.2 This means that the benefits of cooperation should be allocated in ways that level the international competitive playing field, namely in ways that progressively share the benefits of international tax cooperation.
My mission in this paper is to examine the predicament of states’ tax sovereignty in a globalized environment under both competition and cooperation. I begin in Part 1 by articulating my conception of substantive tax sovereignty. Part 2 explains how globalization and the marketization of the interaction between states and their constituents undermine substantive tax sovereignty. Part 3 turns to the cooperative scenario, arguing that cooperative pacts are legitimate only if they sufficiently attend to substantive tax sovereignty, and arguing that this requires some inter-state steps that would limit the expansion of gaps between states.
1. Substantive Tax Sovereignty
I call ‘substantive tax sovereignty’ the ability of a political community to design its fiscal system in ways that support its collective self-determination. The coercive power of the state is merely an instrument to make such an operation feasible and efficient. But tax sovereignty is not merely about power, rather, it is about legitimate authority.3
This conception is rarely raised in the context of domestic tax policy. On the domestic level, tax policy is taken to be the domain of national sovereigns with a monopolistic power to tax. It is often assumed that taxpayer-subjects ought to pay taxes simply because the state has the power to coerce its subjects to pay taxes. However, for states’ power to tax to be legitimate rather than an expression of brute power, it needs to be justified. In other words, for states’ power to be legitimate, it should comply with tax’s normative underpinnings, namely promoting constituents’ collective self-determination and supporting their wellbeing while treating each and every one of them with equal concern and respect.4
The power to tax is entrusted with the state for a reason. It is designed to allow its member-constituents to collectively promote goals that they could not pursue on their own. Specifically, the coercive power of states allows them to build institutions that facilitate their constituents’ collective vision and to provide such constituents with public goods and services that the market alone could not adequately supply. Because this power is entrusted by the people, for the people, states must apply it while treating their constituents justly. The metaphor of the social contract highlights this idea: members of the political community grant the state with coercive authority so that it acts on their behalf to justly promote their collective vision. States therefore ought to serve the collective interest of their constituents and treat each of them with equal concern and respect.5
Rather than brute power to tax, substantive tax sovereignty demands taxing power that is not only efficient but also justified. This is surely not a trivial task, and indeed many of the debates regarding domestic tax policy concern exactly these issues: the tradeoffs between efficient and justifiable taxation, as well as the gaps between these demands and the ways in which tax policy is implemented in light of them. Globalization adds another dimension to these familiar debates—one which not only complicates the social contract but threatens to undermine it.
2. Enter Globalization
In the decentralized global realm of international tax, states’ independence is often considered a stand-in for sovereignty, and thus presumed to fully protect and empower states in making their own tax decisions.6 Conventional wisdom seeks to vindicate such independence by insisting that neither other states nor international organizations should force states to act without their consent. States are entitled to make their own independent choices without interference.7 However, rather than reinforcing their sovereignty, this decentralized structure jeopardizes states’ substantive tax sovereignty by almost inevitably putting them in competition with one another.
In the global arena states, operating independently, compete for mobile factors: capital, economic activity, and—in our times—residents who are increasingly mobile. Mobility enables residents-in-demand to choose among alternative jurisdictions. States often encourage mobility by offering certain privileges and incentives to desirable potential residents in order to lure away wealthy, young and talented individuals. With this intensified mobility, sovereign states have found themselves in an unfamiliar position: once defined by their coercive powers and control over their citizenry and territory, they must now compete over residents with other jurisdictions. This competition has turned states’ decision-making process on its head. The state can no longer be perceived solely as making compulsory taxation demands on its subjects in order to promote the collective goals of a given group of constituents. Rather, it increasingly acts as a recruiter, bidding for residents in an attempt to optimize the combination of its human and capital resources and its tax revenues.
In this reality, the fact that states are independent in making their own choices does not protect them from the forces of the market of tax competition. Actually, this fact facilitates competition. As I shall explain, however, competition might weaken states’ substantive tax sovereignty by compromising their ability to adhere to their duties under their social contract.
The driving force of tax competition is the mobility of taxpayers and resources.8 For some taxpayers, tax has become a price they are willing to pay for residing, investing, and conducting their business in an attractive state, as opposed to a civil obligation they should fulfill. Hence, tax rules and rates have become, to a large extent, the currency of inter-jurisdiction competition. Since states’ decisions are being made independently, they are free to offer packages of public goods, tax rules, and tax rates as they see fit. This means that states become, to a considerable extent, subject to the rules of supply and demand of the market for residents.
Competition, despite its many virtues,9 might undermine tax sovereignty. Although sovereigns insist on preserving their formal exclusive authority in tax matters,10 presumably in order to protect their ability to reflect the collective will of their constituents free from outside pressure,11 this exclusivity has very little to do with substantive tax sovereignty. The truth of the matter is that under competition, it is all too often the international market of states, rather than the individual sovereign state, that shapes tax policies. In competing for residents, investments, and tax revenues, states often need to adjust their tax policies in ways that do not necessarily coincide with the norms that legitimize states’ coercive power.
At its extreme, such a competitive tax policy focuses on assembling the most attractive ‘team’ of constituents and economic actors by offering the most attractive public services deals to the most sought-after residents at an attractive price. This is very different, of course, from a fiscal policy that seeks to legitimately use coercive measures to provide the best possible public services to a set group of equally considered constituents who share common goals. In what follows, I consider how competition affects each of taxation’s normative goals and how it transforms political participation into marketized participation.
Optimal Provision of Public Goods
In a closed economy the state aims (at least ideally) to provide a package of public goods and services that maximizes the welfare of the entire group of its constituents, their preferences being equally considered.12 Competition provides mobile taxpayers with an alternative—to shift their residency, even their citizenship, to another jurisdiction. It thus effectively allows mobile taxpayers (i.e., those who wish to and can relocate) to choose the regime that would apply to them. This puts states in competition to draw in desirable newcomers and retain their own attractive residents. Thus, the role of the state as a market actor is magnified while its sovereign power is downgraded. As a market actor, the state has an incentive to offer taxing and spending ‘deals’ that cater to the needs of the residents it is seeking to attract and retain. Assuming that residents are completely mobile, they can choose the package they prefer for the price that they can afford.13
However, not all residents are equally mobile. Nor are all taxpayers equally attractive. For example, talented, rich, or young individuals can presumably benefit the local economy more and consume fewer public goods and services. They may also be more mobile than others (money, talent, and youth make it easier to find opportunities and assimilate elsewhere). Thus, in order to attract and retain them, states may be inclined to design their packages of public goods and set their tax rates in ways that cater to the preferences of more elastic and more desirable individuals. Unfortunately, they may be less inclined to attract and strive to retain sick, elderly, and poor individuals.14
The bottom line is that competition puts states between a rock and a hard place: they can and often do act as market players on the global market for states, adjusting their taxing and spending decisions to the supply and demand of the market and thus offering the packages that mobile taxpayers prefer. Alternatively, they can adhere to their domestic obligations under the social contract towards their entire citizenry and provide them with the public goods and services they require and deserve irrespective of their mobility or attractiveness. This, however, may cause the state to incur significant costs due to their failure to cater to the preferences of the more mobile segments of their society (who might leave) and the loss of potential future residents who could contribute to their domestic economy.
Both alternatives undermine states’ substantive tax sovereignty. The former renounces their obligation to equally consider their commitments to all of their constituents. The latter compromises their ability to retain and recruit a superior ‘team’ of attractive residents who could benefit the country in the long run.
Distributive Justice
This competitive setting also limits states in their pursuit of distributive justice. As mentioned, under competition, states striving to draw in (and keep) residents need to offer attractive taxing and spending deals.15 This means not only focusing on the public goods and services that interest the most attractive and mobile individuals, but also lowering the taxes imposed on them.16
Wealthy individuals are often more mobile than others. They may also be expected, in most cases, to prefer less distribution to more distribution (even if they are altruistic, they may prefer to fund charities of their own choosing rather than governmental redistribution). Higher taxes, which are required to finance the welfare state, might thus push the wealthy away.
This means that globalization jeopardizes both ends of the redistribution function of government. On the revenue side, the state has a limited capacity to collect tax revenues from the rich and mobile due to the threat of exit. On the provision of goods and services front, the state faces pressure to use much of these tax revenues to provide public goods and services that cater to the rich rather than redistribute them to the poor. The result is a less egalitarian society: a reduction in tax revenues to finance the welfare state and a reduction in the kinds and levels of welfare services it offers.
Again, states find themselves having to choose between either keeping taxes high and risking losing the wealthy or keeping the wealthy while reducing taxes and welfare. Either way, competition puts pressure on states’ substantive tax sovereignty, pushing states to either curb their compliance with distributive justice or level down the wellbeing of their citizenry at large.
Membership in a Political Community
Competition for sought-after residents also affects equal membership in the political community. Such competition highlights taxpayers’ exit powers and use-value. It stresses taxpayers’ provisional and marketized status and rewards it. The more impermanent the taxpayer is, and the more useful they are for the state, the better ‘deal’ they can expect. A relatively short-term, service-focused commitment of taxpayers to their communities limits their material and emotional investment in these communities as well as their ability (and incentive) to broaden and deepen their ties to the place where they live. By rewarding mobility, communities may become tenuous—dependent on the quality and extent of the services they provide and lacking a sense of belongingness based on some shared commitment of their residents.
These potentially devastating effects do not imply that exit options should be eliminated; exit is essential not only for vindicating people’s autonomy but also for making their membership more meaningful. Rather, the problem lies in the fact that mobility is rewarded, and since mobility is unequal these rewards are not distributed equally. Hence—again—states under competition are forced to choose between sustaining people’s liberty and protecting the robustness of their communities.
Political Participation
The exit options provided by mobility are not only critical for people’s individual liberty and their chosen communities, they also keep a healthy check on the power of the majority. When other jurisdictions are available, governments may be more responsive to the people’s voice; indeed, absent a credible exit option political voice might be merely a façade of participation, where the minority may sound their objection but not be really heard.17 Hence, mobility makes a key contribution to the quality of political participation.
However, the asymmetrical nature of international mobility favors the exit of some (more mobile) individuals over the voice of others (those left behind). In magnifying the influence of the more mobile constituents over others it might undermine the delicate balance necessary for a co-authored political community. Moreover, the competitive pressure to lure attractive residents implies that non-citizens may gain significant power in internal decision-making regarding states’ policies of tax, expenditure, and distribution of wealth without having a formal voice in the process.
Once again competition presents a tough choice between a proper commitment to the notion that states’ social contracts are co-authored by their citizens (on the one hand), and people’s liberty (on the other); states may struggle to navigate a commitment to people’s exit options without undermining the voice of those left behind.
*
Global competition limits states’ ability to comply with all these critical aspects of the social contract underlying substantive tax sovereignty. Competition prompts market standards that limit states’ ability to provide public goods and services, pursue justice, and facilitate their constituents’ collective self-authorship. Whether they succumb to the norms of the market or not, states’ substantive tax sovereignty is at risk. If they give in to market norms, they may find themselves giving in to a thin and commodified version of state sovereignty. If they reject such norms, they may undermine their own ability to pursue the collective goals of their constituency by curtailing their ability to provide adequate public goods and services, secure distributive justice, and (perhaps most worryingly) respect the liberty of their constituents.
3. Can Cooperation Support Tax Sovereignty?
Given the problems arising from tax competition, cooperation is often flagged as the potential solution for protecting tax sovereignty against competitive market forces. If all states got together to limit competition among them (the argument goes), each state might be better able to collect enough revenues to pay for the public goods its constituents need, pursue the justice they demand and deserve, and treat its constituents as equal members in the political community they make up. Many cooperative initiatives thus tried to tackle tax competition, starting with attempts to target harmful tax competition18 and up to the current two-pillar proposal that lists the fight against competition among its claimed goals.19
Cooperation, however, is not a magic bullet. In fact, I argue that not only market forces but also cooperation may undermine states’ substantive tax sovereignty. One may wonder how is this possible, given that international cooperation is based on states’ consent. Arguably, no state should consent to a cooperative accord that undermines its own (substantive) sovereignty. Why would it?
Well, one could certainly imagine cases where states are being forced or tricked into a cooperative accord which inflicts costs on them against their (sovereign) will20 (e.g., reducing the tax revenues they can collect from cross-border investment when compared to a non-cooperative regime).21 Cases where states are forced to give up some of their rights or benefits for others in this way, either without their consent or where their consent is being circumvented, are surely ones in which their sovereignty is undermined. And indeed, a lot of criticism in this area is focused on how weaker states can be empowered in the negotiation process—by providing them with greater expertise and opportunities to be adequately heard so as to support their free consent.
But these easy cases are not the only ones where cooperation threatens substantive tax sovereignty. Indeed, tax sovereignty may be jeopardized even where cooperation seemingly benefits all participants. Consider cases where stronger states benefit more than weaker ones. Such cooperation, which benefits all participants, may seem like an unobjectionable pareto improvement. It is easy to understand why from the short-term perspective of states’ decision makers a state might consent to such an accord. But in the long run even such moves, which seemingly benefit all participants, bear the risk of undermining states’ substantive tax sovereignty.22 The reason for this is that moves which disproportionately benefit stronger countries persistently increase the gaps between states. This asymmetry engenders further detrimental consequences down the road.
To be sure, increasing tax rates allows states to collect more tax revenues and offer better public goods, as well as potentially support redistribution. However, if other stronger states either get a larger share of the benefits (e.g., by being allocated a larger share of the tax revenues) or are allowed to compete on preferential terms (e.g., by providing more generous tax benefits) the rising gaps limit weaker states’ ability to successfully compete for residents. On the one hand, anti-competitive measures curb their ability to compete by reducing their taxes. On the other hand, their lower share in the allocated tax revenues denies them the ability to boost the public goods they provide to the same level as their stronger competitors. Either way, they end up in an increasingly inferior competitive position regarding their own attractive residents and the drawing in of potential new ones. In other words, such a regressive cooperative scheme feeds a mechanism that recurrently increases the gaps between states and shrinks weaker states’ substantive tax sovereignty.
This increasingly aggravated competitive disadvantage prompted by the regressive allocation of the benefits of cooperation also impinges upon the legitimacy of weaker states’ coercive taxing power. The reason for this is that it tends to increase the pressure on these states to further lower their taxes and/or price-discriminate among their constituents in order to be able to keep them. Ultimately, this might push such states to provide even fewer public goods and services and curtail their capacity to treat their constituents justly.
Indeed, the snowball effect of regressive international tax cooperation might jeopardize the substantive tax sovereignty of states in less demand even where they seem to gain in the short term. A cooperative accord that relies upon the sovereignty of its signatories loses its legitimacy where its effect is to curtail the very sovereignty on which it is founded.
This analysis does not condemn every cooperation as such. Instead, it implies that for cooperation to yield acceptable results we need to tread cautiously. Cooperative initiatives that regressively allocate the benefits of cooperation, thus undermining the legitimacy of its signatories, must be rejected. But where the larger share of the benefits of a cooperative pact is enjoyed by weaker countries, cooperation is both legitimate and desirable.23 These cooperative regimes may help level the international competitive playing field and thus support cooperative accords that respect and sustain the substantive tax sovereignty of both strong and weak countries.
4. Conclusion
In this article, I hoped to convince you of three main propositions regarding substantive tax sovereignty, the effects of globalization, and the kinds of cooperation we should seek to promote.
Although we are used to thinking about tax sovereignty exclusively in terms of independence, sovereignty is about more than that. The conception of substantive tax sovereignty I defended is tightly connected to states’ social contracts. It refers to states’ ability to adequately provide public goods and services, to ensure justice, and to treat their constituents as equal members in a political community.
Globalization, with all its many benefits, threatens each and every aspect of states’ tax sovereignty. Tax competition and residents’ mobility under globalization increasingly turn states into market actors. States thus find themselves in a recurring dilemma between sustaining the welfare pie available for their constituents and safeguarding the other—no less constitutive—features of their social contract, namely ensuring the just distribution of that pie and treating their members equally.
Cooperation seemingly resolves these dilemmas, but oftentimes does not. Many cooperative efforts—notably those that regressively allocate their benefits—yield seemingly pareto optimal results, but in the long term end up undermining weaker states’ substantive tax sovereignty. For cooperation to yield legitimate outcomes, it must commit to leveling the international tax playing field by progressively allocating its benefits.
Notes
[1] Think, for example, of a cooperative regime under which tax revenues that one state could have collected are otherwise allocated to another state, thus reducing the former’s revenues. For an example in the tax treaties context see Tsilly Dagan, ‘The Tax Treaties Myth’ (2003) 32 NYU Journal of International Law and Politics 939.
[2] There may be other reasons to support the amelioration of differences between developed and developing countries or even between their constituents. See e.g., Adam Kern, ‘Illusions of Justice in International Taxation’ (2020) 48 Philosophy & Public Affairs 151; Johanna Stark, ‘Tax Justice Beyond National Borders—International or Interpersonal?’ (2022) 42(1) OJLS 133; and Ivan Ozai, ‘Two Accounts of International Tax Justice’ (2020) 33(2) Canadian Journal of Law and Jurisprudence 317. For a brief overview of the differing positions on global justice see Tsilly Dagan, ‘International Tax and Global Justice’ (2017) 18 Theoretical Inquiries in Law 1.
[3] See e.g., Koskenniemi: ‘[W]e no longer see any magic in sovereignty. It is merely a functional power possessed by a ruler or a government to rule a population for its own good…We respect it if it brings us valuable objectives—security, welfare, human rights, “good governance”, and the “rule of law”. If sovereignty were to endanger these, then…why respect it?’; Martti Koskenniemi, ‘What Use for Sovereignty Today?’ (2010) 1(1) Asian Journal of International Law 61.
[4] For a more elaborate explanation of this point see Dagan, ‘Tax and Globalization: Toward a New Social Contract’ (2024) 44(3) OJLS 487, 492–3.
[6] See e.g., Benvenisti describing and criticizing the traditional view of states’ sovereignty as the freedom to be left alone and suggesting that ‘[s]overeigns that seek to ensure the “freedom to” to their citizens need to engage proactively with foreign actors, public and private’; Eyal Benvenisti, ‘The Future of Sovereignty: The Nation State in the Global Governance Space’ in Sabino Cassese (ed), Research Handbook on Global Administrative Law (Edward Elgar 2017). For a review of literature describing the changing views on sovereignty in the context of international tax see Diane M Ring, ‘What’s at Stake in the Sovereignty Debate?: International Tax and the Nation-State’ (2008) 49(1) Virginia Journal of International Law 155.
[7] See, however, Yariv Brauner, ‘BEPS, Sovereignty, and the Future of the International Tax Regime’ in Sergio Andre Rocha and Allison Christians (eds), Tax Sovereignty in the BEPS Era (Kluwer Law International 2017) (criticizing the use of sovereignty arguments in the international tax context). See also Ring, arguing that ‘[t]he evolving meaning of sovereignty, with its increased focus on the state’s responsibility for its citizens, is reflected in international tax arguments for sovereignty. The close link between taxing powers and the ability of the state to fulfill its obligations to its citizens explains why states articulate sovereignty as a defense to certain international tax overtures’; Ring, ‘What’s at Stake in the Sovereignty Debate?: International Tax and the Nation-State’. Finally, see Christians arguing for ‘an emergent vision of sovereignty that entails positive obligations or duties of nations in exercising the power to tax what I refer to herein as a nation’s “sovereign duty” to other nations under an implied social contract’; Allison Christians, ‘Sovereignty, Taxation and Social Contract’ (2009) 18 Minnesota Journal of International Law 99.
[8] Another major force in this context is what I elsewhere termed as ‘fragmentation’, namely: the ability of taxpayers to unbundle the packages of public goods and services offered by states, and pick and choose among their components, mixing and matching taxing and spending jurisdictions even without relocating; Dagan, ‘Tax and Globalization: Toward a New Social Contract’.
[9] For a detailed account of the virtues of competition see Tsilly Dagan, International Tax Policy: Between Competition and Cooperation (Cambridge University Press 2018) ch 4 and references there.
[11] See Koskenniemi: ‘In such contexts, sovereignty expresses frustration and anger about the diminishing spaces of collective re-imagining, creation, and transformation of individual and group identities by what present themselves as the unavoidable necessities of a global modernity. Against those, sovereignty articulates the hope of experiencing the thrill of having one’s life in one’s own hands’; Koskenniemi, ‘What Use for Sovereignty Today?’ 70.
[12] Conventional wisdom provides that the packages of public goods and services should be set by political mechanisms (voice). For a complete discussion of this debate see Dagan, International Tax Policy: Between Competition and Cooperation ch 4.
[13] See Charles M Tiebout, ‘A Pure Theory of Local Expenditures’ (1956) 64(5) Journal of Political Economy 416. This can conceivably support preference satisfaction of taxpayers (at least in the absence of market failures). Traditional market failures such as externalities, free-riding, and barriers for relocation and tax avoidance undercut even further the ability of states to optimize the provision of public goods and services. Furthermore, it has been argued that tax competition will drive tax rates down to a suboptimal level, where states are forced to under-provide public goods. For a formal model supporting this argument, see George R Zodrow and Peter Mieszkowski, ‘Pigou, Tiebout, property taxation, and the underprovision of local public goods’ (1986) 19(3) Journal of Urban Economics 356. Although it is unclear what exactly constitutes the ‘optimal’ level of public goods, it is pretty clear that redistribution would be reduced; Julie Roin, ‘Competition and Evasion: Another Perspective on International Tax Competition’ (2001) 89 Georgetown Law Journal 543.
[14] States may also have an incentive to practice ‘price discrimination’ among taxpayers to target mobile and desirable individuals with specific tax benefits that only they enjoy (e.g., reduced taxes on capital, or incentive for the high-tech sector). This may be done through offering wide categories of lower tax (e.g., tax capital at rates lower than labor), or by offering a variety of loopholes (e.g., tax deferral for business income, or through the dispersed holdings of CFCs) allowing residents with extensive investments overseas to more freely plan their taxes, and allowing foreigners to use the local tax jurisdiction to plan around their own countries’ tax rules. See Dagan, International Tax Policy: Between Competition and Cooperation 34.
[16] For a detailed analysis of tax competition, and how it may affect domestic redistribution see Reuven S Avi-Yonah, ‘Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State’ (2000) 113(7) Harvard Law Review 1573, 1575–1603.
[18] See OECD, Harmful Tax Competition: An Emerging Global Issue (Organisation for Economic Cooperation and Development 1998).
[19] OECD/G20 Base Erosion and Profit Shifting Project, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Organisation for Economic Cooperation and Development 2021).
[20] Indeed, consent-based cooperation was criticized in the past for reasons that had to do with the biases of the international process: many have criticized the power imbalances of the negotiations, the lack of true voice for some countries, or the lack of capacity of their negotiators. See e.g., Rasmus Corlin Christensen, Martin Hearson and Tovony Randriamanalina, ‘At the Table, Off the Menu? Assessing the Participation of Lower-Income Countries in Global Tax Negotiations’ (2020) ICTD Working Paper 115 <https://www.ictd.ac/publication/at-table-off-menu-assessing-participation-lower-income-countries-global-tax-negotiations/> accessed 7 October 2024; Yariv Brauner, ‘Serenity Now! The (Not So) Inclusive Framework and the Multilateral Instrument’ (2022) 25 Florida Tax Review 489; and John Vella, ‘The OECD/G20 Inclusive Framework’s Two-Pillar Solution’ (2021) 5 British Tax Review 515. Other reasons may include the strategic positions of developing states vis-a-vis one another and the differing cooperative abilities among groups of countries (specifically OECD countries and other groups of countries). For an analysis, see Dagan, International Tax Policy: Between Competition and Cooperation ch 5.
[21] For an example of a strategic interaction that causes this see e.g., Dagan, ‘The Tax Treaties Myth’.
[22] Multiple reasons may explain why some states might be unable to resist such deals despite the long-term implications. These may include short-termism or domestic political economy of their leaders, and a lack of capacity among their negotiators; with respect to the latter, see Martin Hearson, Imposing Standards (Cornell University Press 2022).
Competing Interests
I would like to thank Hans Lindahl and Cees Peters as well as Tilburg University for the kind invitation to deliver the Montesquieu lecture as well as for their kind hospitality and generous support. Special thanks to Carla De Pietro, Maaike Geuens, Ricardo Garcia Anton and Mijke Houwerzijl for their thoughtful engagement with the paper and their invaluable comments. Finally, I would like to thank Peter Lernyei for his excellent research assistance.