Paul L. Caron

Friday, February 12, 2021

Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Ozai's Inter-Nation Equity Revisited

This week, David Elkins (Netanya) reviews a new article by Ivan Ozai (McGill; Google Scholar), Inter-Nation Equity Revisited, 12 Colum. J. Tax L. 58 (2020):

Elkins (2018)

In 1963, Peggy Brewer Richman introduced the concept of inter-nation equity as a cornerstone for normative analysis of international taxation. In 1972, she (now Peggy Musgrave) and her husband Richard Musgrave fleshed out the idea. Their argument was that the international tax base should be allocated in such a way as to recognize the entitlement of countries to tax the income arising in their territories and to allow for some degree of international redistribution.

Since that time, the literature has transformed the term “inter-nation equity” into a catch-all term devoid of any substantive meaning. It is often used simply to denote the vague concept of fairness. Commentators have employed it in ways that denote different and sometimes even contradictory conceptions of the idea. In this week’s article, Ivan Ozai examines the original meaning of the term as envisioned by the Musgraves and proposes a number of measures that might be adopted to promote those ideas.

According to the Musgraves, inter-nation equity concerns two fundamental questions: which countries should tax income internationally and how the taxing jurisdiction should be distributed among them. With regard to the first question, they answered that source should take precedence over residence, both because source jurisdictions are typically low-income countries and because corporate residence is a fairly arbitrary decision. Once it is determined that the source country has the primary entitlement to tax, the next question is how much the source country is entitled to tax. Here the Musgraves proposed three alternative principles for making such a determination. One is the principle of non-discrimination, or as it has come to be known, capital import neutrality. The idea that is that all economic activity within a country’s border should bear the same tax rate. The second, the principle of national rental, considers the total national gains of each country from international investment and suggests that there should be an equal net benefit to both sides. The third is the distributional approach, according to which tax rates should be differentiated so as to benefit the poorer country (i.e., the country with the lower per capita income).

Thus, relying upon the principle of inter-nation equity when advocating either a strictly entitlement approach or a strictly differential approach to the allocation of taxing rights is a misuse of the term as conceived by the Musgraves. In effect they took a middle path between cosmopolitanism (the idea that the normative requirements of distributive justice apply at the global level) and statism (the idea that a state has no duties of egalitarian distributive justice outside of its borders).

Ozai goes on to propose a number of means by which to apply this dual approach in practice. One example concerns the concept of source. In some instances, the source rules are fairly unambiguous. In others, they are rather arbitrary. A Musgravian approach might be to permit source countries to tax income generated unambiguously from their territory (the entitlement component), but to allocate taxing rights in a way that would best promote international distributive justice when allocation according to entitlement cannot be asserted unambiguously (the differential component). Of course, such an approach requires a determination of when income is generated “unambiguously” from a country, and this would introduce a not inconsiderable degree of uncertainty.

The requirements for differentiation are similarly unclear. Recent proposals do not treat similar low-income countries alike, as they favor those with certain attributes, such as natural resources. In terms of domestic tax theory, such an approach may promote vertical equity, but at the expense of horizontal inequity. Another problem is granularity. Placing countries in categories (developing, least developed, transition, newly industrialized, and small island developing) is problematic both because each of these contains countries in very different circumstances and because, for those on the cusp, countries in very similar circumstances might find themselves in different categories.

The author concludes that despite the prevailing realist view of international relations, which sees the terms of agreements as dictated by self-interest and bargaining power, there is evidence that governments are to some extent motivated by a concern with international justice. He adds that allocation of taxing rights is a viable option compared to alternative policies, such as development aid.

In a rapidly evolving field in which discussion of minutiae often makes it easy to lose sight of overarching goals, it is useful every so often to take a step back and reflect on the bigger picture: what we are actually trying to achieve instead of how we attempt to achieve it.

Here’s the rest of this week’s SSRN Tax Roundup:

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