Collection on Taxation

About three years ago I presented a paper at a very interesting and informative conference at the University of Loughborough on Taxation. The book that follows from this conference, Tax Justice and the Political Economy Of Global Capitalism, 1945 to the Present (Leaman and Waris, eds) has now come out. I look forward to reading through it once I get it in my hands.

I took the opportunity to make some improvements to my paper in the intervening time and hope that my proposals will gain some traction. I'll briefly summarise my position, though I will also describe it elsewhere including my forthcoming book on taxation.

I begin by highlighting certain problems regarding international taxation. These are tax avoidance and tax competition. Tackling tax avoidance requires greater international co-operation, as many have acknowledged. However, tackling tax competition is also an issue. This could be done by limiting states in their power to set tax-rates, either insisting on a global tax rate structure or by setting minimum tax rates.

I do not think that tax competition is a bad thing, per se. There are many legitimate reasons why states might want to set their taxes higher or lower than other states. However, tax competition has bad effects, in that it encourages a "race to the bottom" whereby states have to set lower taxes than they otherwise would in order not to lose business or workers to rival states. This is a particular problem for progressive taxation, since the most of the tax-bases that are ideal for progressive taxation (tax on economic rents) are often the most mobile (workers with rare talents and skills, ownership of valuable copyrights, brands and patents).

I propose that the only way to stop this from occurring is for states to have a holistic solution - all states would need to a agree to a common framework for taxation. Assuming a comprehensive lifetime personal tax base, I suggest that states should agree to share tax information on international citizens who pay tax in multiple jurisdictions in order to calculate a global tax rate for that person. This rate would be determined by calculating what the individual would have paid in each of the states which which she has some economic or personal relationship, taking account of the strength of that relationship.

The global revenues from our international citizen would then be shared in accordance with the strength of the relationship with each state. However, the system would have a counter-incentive mechanism in order to deter states from setting tax rates too low. This would work by rewarding states who would have taxed the individual at a higher rate with a larger share of the revenue for that individual. Low-tax states on the other hand would receive a lower proportion of the tax revenue than their relationship would otherwise imply.

This proposal has several virtues. It would stop states from setting different tax rules for their own citizens and outsiders since the calculation is based on the tax that local citizens pay. It would also hold individuals to their past relationships - if someone leaves a country to go elsewhere then their tax revenues will be shared with their past states and therefore fellow citizens. This would reduce the impact of "brain-drain" that afflicts so many countries. As I have emphasised it also counteracts damaging competition over tax rates and tax bases while still allowing states the option of setting very low tax rates if they wish to do so for their own citizens or to encourage economic activity.

The proposal is clearly not immediately ready for real world implementation given the lack of global agreement on taxation. However, with increasing technological prowess it should become more feasible to have an automated global tax calculation system such as this. I argue that political feasibility will come about because states are going to be increasingly vulnerable to revenue loss as current trends continue, with risks and costs falling on states and economic rewards being spirited away through tax havens rather than being shared through taxation.

Governments and their citizens are gradually losing power and they really need to wise up and fight back. Hopefully they are starting to realise this and will support sensible multi-national efforts. My proposal anticipates the need for practical policies at some unspecified future date. However, as I emphasise in my paper, the proposal is also useful as a way of testing the justice of current international tax arrangements. As things stand, we are a long way from justice.