A Critical Reassessment of the Role of Neutrality in International Taxation

45 Pages Posted: 11 Dec 2019

See all articles by David Elkins

David Elkins

Netanya College School of Law

Date Written: July 15, 2019

Abstract

Neutrality plays a central role in the literature on international taxation. In its most prevalent form, the concept of neutrality posits that in order to maximize aggregate global welfare, capital needs to flow to where it would produce the highest pretax return. The thesis of this Article is that neutrality is ordinarily inapplicable in the field of international taxation.

When considering neutrality in the international arena, the problem that one encounters is that the term “international taxation” is commonly used to describe a number of very different types of tax regimes (what the Article refers to as “intranational taxation,” “supranational taxation,” and “inter-jurisdictional taxation”). Although the literature tends not to distinguish among them, the different types of international tax regimes are conceptually distinct and require radically dissimilar guiding principles. The Article argues that neutrality is an appropriate principle with regard to only one type of international taxation: a hypothetical non-Pigouvian supranational tax. With regard to intranational taxation, neutrality has no role to play, as a rational country will exploit its tax system to promote the welfare of its own constituents without regard to which investments it would have attracted in a no-tax world. With regard to a hypothetical Pigouvian supranational tax and in particular with regard to the much-scrutinized field of inter-jurisdictional taxation, neutrality is irrelevant, as here it is the after-tax return and not the pretax return that is determinative of allocative efficiency. Promoting neutrality would undermine the very goals that the principle of neutrality purports to serve.

The Article concludes by noting that the current discourse with regard to international taxation is fraught with conceptual confusion. First, there is a tendency to rely upon concepts that were developed within the context of domestic taxation without a thorough examination of their applicability to the international arena. Second, there is a tendency to lump together a number of very distinct types of tax regimes under the overbroad category of “international taxation,” and to ignore the fact that due to the fundamental dissimilarities among them, the principles of tax theory relevant to each will also be different.

Keywords: tax, international tax, international taxation, neutrality, efficiency, allocative efficiency, pigou, pigouvian tax, pigouvian taxation

JEL Classification: K34, A19, E62, F60

Suggested Citation

Elkins, David, A Critical Reassessment of the Role of Neutrality in International Taxation (July 15, 2019). Northwestern Journal of International Law & Business, Vol. 40, No. 1, 2019, Available at SSRN: https://ssrn.com/abstract=3492524

David Elkins (Contact Author)

Netanya College School of Law ( email )

Israel

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