The Tax Treaties Myth
54 Pages Posted: 28 Mar 2003
Abstract
The prevailing view regarding tax treaties emphasizes their role as the indispensable mechanism for alleviating double taxation of international transactions. Policymakers assume that tax treaties benefit everyone involved. By reducing the burden of double taxation, the treaties facilitate the free movement of capital, goods and services, and help achieve allocational efficiencies.
In this Article, I show that these ubiquitous treaties are not necessary for preventing double taxation. Rather, they serve much less heroic goals, such as easing bureaucratic hassles and coordinating tax terms between the contracting countries, and may have much more cynical consequences, particularly redistributing tax revenues from the poorer to the richer signatory countries.
Using game theory, I examine the interactions between the unilateral policies of different types of countries and demonstrate how these interactions reduce tax levels to as great an extent as treaties do. Without offering any significantly greater degree of stability, treaties often just replicate the mechanism that countries unilaterally use to alleviate double taxation.
One substantial difference, however, does distinguish the unilateral solution from the treaty mechanism. While equilibria of the interaction between unilateral strategies tend to allow "host" countries to benefit from collecting tax revenues, tax treaties usually allocate the revenues more to the benefit of "residence" countries. The revenue disparity is probably insignificant in cases involving two developed countries. But in treaties between developing and developed countries, usually host and residence countries, respectively, reallocating tax revenues means regressive redistribution - to the benefit of the developed countries at the expense of the developing ones.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000
By Zachary Elkins, Andrew T. Guzman, ...
-
Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000
By Beth A. Simmons, Zachary Elkins, ...
-
Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000
By Beth A. Simmons, Andrew T. Guzman, ...
-
Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?
By Eric Neumayer and Laura Spess
-
Do Double Taxation Treaties Increase Foreign Direct Investment to Developing Countries?
-
On Waves, Clusters, and Diffusion: A Conceptual Framework
By Beth A. Simmons and Zachary Elkins