In recent years, international taxation has moved to front and center stage. Once considered one of the more esoteric aspects of taxation, of interest to a few specialists and their clients, the field of international tax has drawn the attention of academics, politicians, the popular press, and international organizations. However, more often than not, those engaged in the discourse rely upon unexamined postulates and rehashed mantras that do little either to identify or to solve the serious challenges of taxation in a globalized world.
Tsilly Dagan is one of the rare breed of scholars who refuses to accept the conventional wisdom of international taxation and prefers to subject some of the field’s most well-entrenched principles to undogmatic scrutiny. In her current paper, she considers some of the challenges faced by countries in designing their tax policy, given the fact that taxpayers are no longer a captive audience over whom the sovereign state has virtually unlimited powers of coercion, but can freely choose where to reside and thus to which country’s tax regime to subject themselves.
Professor Dagan describes the move from benefit to ability-to-pay as the touchstone for discussion of tax theory as reflecting an evolution in the social contract. While benefit theory considers the relationship between the individual and the state to be one of a consumer and a provider of goods that the market cannot efficiently supply, ability-to-pay rests upon the premise that the state is a political community obligated to treat its subject as equals. However, when taxpayers are mobile, states will compete for the most desirable residents and investors. The state can no longer make compulsory demands on its subjects to promote the collective goals of a given group of constituents but instead solicits investments in order to facilitate increased economic activity and bids for prospective residents in an attempt to build the best possible team. Tax becomes a price taxpayers are willing to pay for residing, investing, and conducting business, rather than as a civil duty that they owe to a political community. Moreover, she argues, taxpayers do not necessarily have to choose the package of legal rules, public services, and taxes offered by any one state. They can unbundle and reassemble packages of sovereign goods and subject themselves to limited aspects of a number of countries’ tax regimes. The result is that while it makes senses to impose tax on the worldwide income of relatively immobile taxpayers, it is almost inevitable that more mobile taxpayers – or those who have better planning opportunities – will be subject to what is effectively a benefit tax.
Whether such a phenomenon is desirable depends upon our view of the social contract. If it is about promoting individual self-interest, then the fact that some pay less should not bother us as long as the slice that each gets is no smaller than under the alternative. However, an equality-based ideal of the state would impose more stringent restrictions on the design of the state. The fact that one has options is not a legitimate reason to demand the bearing of a lesser burden. Favoring the mobile does not treat the immobile with equal concern and respect.
Even under an equality model, taxpayers should not be prohibited from splitting alliances. Dagan brings as an example a scientist or athlete who want to pursue a career in one country, while maintaining allegiance to the old country. However, she argues that such a split should not be a means to avoid ability-to-pay taxation. Rather, such taxpayers should be allowed to credit any foreign taxes they pay, thus alleviating the potential excess burden of mobile taxpayers, without allowing them to using mobility as a lever for paying only for the public services actually consumed.
Professor Dagan concludes by describing the dilemma facing countries in an era in which taxpayers have varying degrees of mobility as being between maximizing collective welfare and practicing equal concern and respect for all taxpayers. She leaves unanswered the question of whether a reasonable compromise can be achieved.
This paper is an important contribution to the discourse of international taxation. The fact that it cannot satisfactorily solve the problem that it raises is symptomatic of the intractability of some of the issues that confront tax theory when it leaves the confines of the proverbial island state and discovers the world beyond its borders.