The Discrepancy between 'Ideal' and 'Real World' International Tax Rules - What Drives Politicians When Making the Rules?

Abstract

The current international tax system diverges greatly from a theoretically 'optimal' tax system. One reason for this discrepancy may be that politicians strive for other objectives rather than making tax rules that comply with the theoretical concepts of optimal taxation. In this article, I overview the approaches used in the economic and legal literature to explain the motivations of the people making international tax policy and contrast them with observations from the 'real world'. This article illustrates that the making of international tax policy is affected by many different factors: domestic pressure groups and the structure of the international tax system, along with self-interested politicians and bureaucrats. Considering the complexity of the conditions under which international tax policy is made, it is not astonishing that international tax law deviates from the principles characterizing ideal taxation.

Keywords: international tax policy, optimal taxation, global efficiency, national welfare, public choice theory, game theory

JEL Classification: F50, F53, H21, H25, H87, K34