Paul L. Caron

Tuesday, June 1, 2021

Intertax Debate: Tax Competition v. Predatory Cooperation

Leo Ahrens (Freie Universität, Berlin; Google Scholar), Lukas Hakelberg & Thomas Rixen (Freie Universität, Berlin; Google Scholar), Transcending Tax Competition: How Financial Transparency Enables Governments to Tax Portfolio Capital, 49 Intertax 1 (May 2021) ("As non-native speakers of English we are grateful to Steven Dean for pointing out to us that the initial title of this article (Breaking the Shackles of Tax Competition) could be understood as invoking the imagery of slavery. To underline that we had no intention to invoke this imagery, we chose to replace the initial with the present title."):

After the collapse of the Bretton Woods System in the mid1970s, the increased risk of cross-border capital flight forced many governments to reduce tax rates on capital income and corporate profits. Instead of democratic politics, competitive constraints at the international level began to dictate domestic tax policy. Between 1981 and 2009, member states of the Organisation for Economic Cooperation and Development (OECD) reduced the net tax rate on dividends at the shareholder level from 55 to 20% of taxable income, on average. At the same time, the average rate on corporate profits fell from 49 to 25%. Against the background of this three-decade long parallel decline in taxes on mobile capital, we made a puzzling observation. Whereas the average tax rate on corporate profits has continued to decline since 2009, the net tax on dividends at the shareholder level rebounded to 25% in 2017 (see Figure 2 below). How can we explain this break in trends?

We argue in a series of publications that the observed divergence results from different levels of international cooperation against tax evasion by households and tax avoidance by corporations.

Steven Dean (Brooklyn), Predatory Cooperation: Reaction to L. Ahrens, L. Hakelberg & T. Rixen, 49 Intertax 560 (May 2021):

In ‘Breaking the shackles of tax competition: How financial transparency enables governments to tax portfolio capital’, Ahrens, Hakelberg and Rixen note that after decades of decline in the capacity of OECD member countries to tax, those rich countries seem finally to have recovered the knack. To date, they have only applied that newfound knowledge to taxing individuals. The authors optimistically conclude that since international cooperation allowed OECD states to gain the upper hand in their fight against tax evasion by individuals, international cooperation could do the same for tax avoidance by corporations.

The authors employ the imagery of slavery to underscore the significance of this achievement. Until 2009, they suggest, the wealthy states that comprise the OECD’s membership had been shackled, enjoying de jure but not de facto freedom to tax its own citizens. The United States Foreign Account Tax Compliance Act and the OECD transparency efforts that followed ended OECD enslavement at the hands of sinister ‘secrecy jurisdictions’ such as Panama.

This compelling account, in which the OECD wins its freedom from white slavers by learning to work together against the dark forces threatening its way of life, looks quite different when observed from another perspective. In any story, distinguishing heroes from villains relies on understanding motivations and histories that a narrator may or may not choose to relate to her listeners. Ahrens, Hakelberg and Rixen tell the story from the OECD’s perspective, but this response suggests a different vantage point.

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