The Tax Treaties Myth

54 Pages Posted: 28 Mar 2003

See all articles by Tsilly Dagan

Tsilly Dagan

University of Oxford, Faculty of Law; Bar Ilan University


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

Dagan, Tsilly, The Tax Treaties Myth. Available at SSRN: or

Tsilly Dagan (Contact Author)

University of Oxford, Faculty of Law ( email )

St Cross Building
St Cross Rd
Oxford, OX1 3UL
United Kingdom

Bar Ilan University ( email )

Ramat Gan
Ramat Gan, 52900

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