Tax Competition and Inequality

Abstract:     
International tax competition has undermined governments’ ability to make effective political decisions on tax policies. If they want to regain their de facto sovereignty, i.e. be able to realize their substantive goals of efficiency and equity, governments will in the future have to share some of their de jure sovereignty, i.e. the legal right to design their tax systems, with other governments, in order to regulate tax competition. A normatively desirable solution would be unitary taxation with formula apportionment. In order to substantiate this claim the argument proceeds as follows. First, I describe the current structure of business tax competition and show that it is largely driven by companies’ ability to engage in “paper profit” shifting. I detail how this kind of tax competition leads to inequalities among individuals and different groups of countries. Second, I develop an egalitarian, contractualist argument why these inequalities have to be considered unjust and show that this holds irrespective of whether one adopts a “globalist” or an “internationalist” view of justice. Third, I propose unitary taxation with formula apportionment (UT FA) as a workable solution that addresses the inequalities caused by tax competition. Fourth, I consider the chances of realizing such a proposal. I first argue that judging from the historical experience of international tax cooperation, there is reason for skepticism. Focusing on the interest constellations among relevant actor groups I argue that a major reason for the failure to regulate tax competition lies in the fact that so far all relevant interest groups frame taxation as a purely national issue. If the deadlock is to be overcome, then tax policy needs more politicization on the international level. Transnational civil society could thus play an important role in the reform of international taxation.

Keywords: international taxation, tax competition, global justice

JEL Classifications: H83

Working Paper Series