I'm a little late to report on this, but earlier in the Summer I was pleased to have contributed a blog to a Afronomics law symposium : Taxation and the Social Contract in a Post-Pandemic Era: Domestic and International Dimensions
There are lots of interesting blogs on there so do check it out but I'll put a copy of my essay on here as well for completeness:
The social contract, tacit consent, and international taxation
What do we owe our states and what do our states owe
us? This is a difficult question, sometimes answered by invoking a social
contract between the rulers and the ruled which implicitly sets out the rights
and responsibilities of each.
Matters get even more complicated where international
citizens and multinational corporations are concerned. Are they party to
multiple social contracts? Or none? I will argue that if there is a social
contract, then those involved in the international tax system—including tax
evasion and facilitating novel forms of tax avoidance—are party to it.
The Social contract
Socrates famously chose to face death rather than
exile when condemned by his fellow citizens. He felt this was his duty to his
fellow Athenians, perhaps an early invocation of the idea that
there is a social contract between city and citizen.
The social contract tradition is most associated with
thinkers such as Thomas Hobbes and John Locke, who considered what life would
be like without a state to set rules and enforce them. This stateless scenario is
sometimes called the “state of nature.” Hobbes pessimistically assumed that
life without a leviathan state would be ‘solitary,
poore, nasty, brutish, and short.’ Locke on the other hand,
felt that people would respect
and enforce natural rights even without a state.
For Hobbes, a social
contract to create a state was necessary to provide peace
rather than war of all against all. For Locke the
state was necessary because people would not reliably
enforce natural rights in the state of nature. Whatever the state of nature is
really like—and many such as Rousseau will
disagree with both these thinkers—the point is that people would come together to
create a state.
Express vs tacit consent
Perhaps there were pre-historic acts of state creation
among individuals. More likely there was a gradual process of domination by
some over others that over time has got us to where we are. Either way, the
idea that we now are bound to the state because some ancestor of ours
bound themselves is unconvincing. Their consent is not our consent.
Are there are other ways that we consent to the social
contract? Voting and pledges of allegiance have been suggested, but these do
not seem like reliable and universal instances of consent. If everyone is
forced to do these things, then it cannot be taken as a sign of voluntary
consent.
Locke believed that “nobody doubts but an express
consent, of any man entering into any society, makes him a perfect member of
that society, a subject of that government.” For him, then, immigrants can be
said to have given express consent. If they are asked to sign an agreement,
such as an immigration visa, then perhaps we can agree they have signed the
social contract.
For native-born citizens, Locke felt it was enough to
rely on implicit, or tacit, consent. Benefitting from the society, whether that
be having “possessions, or enjoyment, of any part of the dominions of any
government” is taken as a sign of tacit consent. As a result they are “obliged
to obedience to the laws of that government.”
Hume’s criticism of social contract theory
David Hume presented a devastating criticism to the
idea that all members of society have tacitly consented by enjoying the
benefits of society in his essay “Of
the Original Contract.” He pointed out that most people
don’t even think about the issue, but even if they did, taking enjoyment from
society cannot be a sign of consent.
Hume famously wrote:
Can we seriously say, that a poor peasant or artizan has a
free choice to leave his country, when he knows no foreign language or manners,
and lives, from day to day, by the small wages which he acquires? We may as
well assert, that man by remaining in a vessel, freely consents to the dominion
of the master; though he was carried on board while asleep, and must leap into
the ocean, and perish, the moment he leaves her.
Hume also rejects contract theory in general for
other, controversial reasons, and there are plenty
of other criticisms of it. Nevertheless, even Hume accepts
that the immigrant who settles in full knowledge of the government and laws
represents the “truest tacit consent.”
To recap, we cannot rely on tacit consent providing
proof that all members of a given society have agreed to the social
contract. However, those who immigrate and those who have no major impediments
to leaving do not have the excuse that Hume’s “poor peasant” has.
International Taxation
International taxation has received increasing
attention recently, as those involved have been using the system to engage in tax
abuse. These activities cost billions
of dollars in tax lost tax revenue to states in Africa and
elsewhere. There are various forms of tax abuse, some clearly immoral and
illegal to others that
are in a moral grey area. The aim of the tax abuser is to achieve
‘double non-taxation’ where they pay no (or virtually no) tax in any of the
countries in which they do business. We can compare what the business would pay
if it its entire operation were in a single country
My claim here is that all those involved in
international taxation cannot use Hume’s ‘poor peasant’ excuse to engage in tax
abuse. Elites and investors are not forced to benefit from a country. I will
consider the relevant parties, using Kenya as an example state.
Multinational companies
do not have to have operations in Kenya; they elect to locate there based on
the benefits they expect to obtain. If they take advantage of their
international set-up to evade taxation, or even reduce their tax rate by taking
advantage of spurious loopholes and transfer mispricing, then they are breaking
the social contract they signed when setting up in Kenya.
Wealthy international individuals
similarly do not have to have investments in Kenya. They choose to engage with
Kenya and are therefore bound to the Kenyan people via their contract with the
Kenyan state.
Taxation professionals,
such as lawyers and accountants, are also bound to the social contract. This is
going to be the case if they are outsiders who are benefitting from working in
Kenya, or even working with clients with interests in Kenya. However, local
professionals are also going to have skills that should provide them with opportunities
to leave Kenya; they cannot use the ‘poor peasant’ excuse.
Perhaps we
can even add members of the local elite as well. They will often have
the resources to be able to leave Kenya and would be welcomed elsewhere.
Other excuses or justifications for tax abuse?
Another Humean ‘excuse’ would be that the parties
would not have considered leaving, and therefore cannot be said to be tacitly
consenting. I think it is enough that the individuals have been in a position
where they have made decisions about where to base themselves. This is bound to
be the case for multinational companies, of course, but I think it will apply
to most individuals involved in the international tax business.
A second line of excuse might be that some states are
illegitimate, and it would be better not to provide revenues to governments
that violate human rights. This is a compelling argument. However, I would
question whether the correct response to human rights violations is to extract
wealth from the state. This is not going to make the situation any better. The benefits
from tax abuse could be placed in a trust fund to be used to support a future
legitimate government. It certainly cannot justify making profits from
the state.
What does the state owe?
The social contract is between the state and the
people. The state is a supra-human entitle of course, but certain individuals
have responsibilities to ensure that the state honors the contract: the head of
state, members of government, and high-ranking officials.
They owe the citizens protections from external
threats, but also internal ones as well. If the state is illegitimate, as
mentioned above, then the social contract is broken. In this case, the
international investors should boycott the state, or at the very least engage
only in ways that benefit the people of the state and not their oppressors.
My focus here is on international taxation, and in
this regard, officials should be looking to ensure that their citizens do not
lose out from international taxation. Officials should view tax abuse as a
threat to the citizens of the country, and certainly not an opportunity to
exploit for personal gain. My focus here is on the other parties, however.
What do citizens and international investors owe?
I expect one main response to my argument will be that
the social contract only requires people to follow the law. If those involved
in international taxation do follow the law, what is the problem? If they break
the law, then they are subject to legal sanction, and rightly so. But does this
cover all cases?
In some cases of tax abuse, the law is broken but the
state does not realize because those involved hide the situation.
However, this is to say that some people who claim this defense are acting in
bad faith. Of course, it would be wrong for states to punish those who have
not broken the law. However, this does not mean that all those who have not
been found guilty have done nothing wrong. They should not fool themselves or
the rest of us.
The deeper complaint is that those involved in
international taxation should not be actively seeking to enable tax abuse which
robs states of revenue in the first place. Hopefully, professionals will
already inform the authorities of any wrongdoing, and also inform the
government and civil society of any new loopholes.
Multinational corporations might take the position
that they have competitors who will be seeking out international tax advantages,
meaning that they need to as well. There is no room for expensive do-gooding in
the corporate world; do-gooding companies will just get taken over by more
ruthless rivals. The international corporate world is akin to Hobbes’ ‘state of
nature.’
However, companies and their agents can respond to
this situation in two ways. Option one is to advertise that these loopholes exist,
to express that they are a source of great regret and that they should be
closed as soon as possible. Option two is to quietly take advantage of the
loopholes, and to seek out new ones. To seek to empower low-tax and secrecy
jurisdictions and to undermine attempts to clean up the system. Option two does
not seem compatible with the social contract to me.
Conclusion
Political obligation in general has come under fire
from philosophical
anarchists, and I have not responded to those objections here
(though I remain unconvinced). There are also other theories of political
obligation as well as consent theories. But even if tax abusers claim to be
philosophical anarchists, I would argue they should avoid engaging with states
(perhaps basing themselves in stateless areas of the world) rather than seek to
gain from investing in them.
I have not considered all the arguments against consent theories—I have focused on Hume’s early criticism of the social contract. My argument, therefore, is a conditional one. If there is a social contract, then certain participants in society are clearly party to it. This will include those in a position to engage in tax avoidance and evasion using the international loopholes.
References (all accessed 24 June 2020)
Dagger, R. &
Lefkowitz, D. "Political Obligation" The Stanford Encyclopedia of
Philosophy (2014).
Locke, J. Two
Treatises on Government [1688]
Hobbes, T. Leviathan [1651]
Hume, D. “Of
the Original Contract” from his Essays: Moral,
Political, and Literary [1751]
International
Bar Association, Lipsett, L. and Cohen, S. B. Tax Abuses, Poverty and Human Rights (2013)
Plato Crito [399BCE]
Rousseau, J. J. Discourse on inequality [1755]
