Friday, October 28, 2022
Weekly SSRN Tax Article Review And Roundup: Roberts Reviews Dagan's Tax Justice In The Era Of Mobility And Fragmentation
This week, Tracey Roberts (Cumberland; Google Scholar) reviews Tsilly Dagan (Oxford; Google Scholar), Tax Justice in the Era of Mobility and Fragmentation, 4 Revue européenne du droit, Paris: Groupe d’études géopolitiques (Summer 2022).
At a recent Oxford University Philosophy, Law, and Politics Colloquium at All Souls College, Dr. Liam Murphy (NYU) presented his paper, “Why Tax Wealth?” to a large assembly of students and scholars hailing from countries all over the globe and bringing insights from an array of disciplinary fields. He acknowledged that taxing wealth may be an effective and efficient means to tax income from capital (which largely escapes taxation in the United States), but noted that his focus in this article was on the role wealth taxation plays in securing economic justice; he asked whether wealth, itself, contributes to welfare. As some of the colloquium participants noted, Murphy’s fellow political philosopher, Professor Martha Fineman (Emory), would argue that human beings experience an array of vulnerabilities in this material world, that we have differing levels of resilience, that wealth provides an important form of resilience, and that the state has an important role in ensuring our resilience.
This might suggest that wealth should be taxed to strengthen our social safety net and to grow sectors that strengthen resilience (health, education, infrastructure, environmental adaptation, and disaster recovery). Murphy agreed that wealth provides security. He also noted that wealth offers prestige, which is a good not accounted for in existing markets (or not accounted for in a timely way), and that it gives the wealthy an opportunity to shape policy through political influence.
In her review of Murphy’s article, Dr. Dagan first explained that she agreed with Murphy’s propositions (i) that to achieve justice in taxation we must focus on justice in outcomes, and (ii) that no one is entitled to pre-tax income since the earning of that income involves such a significant and broad array of supports from the state, most of which are taken for granted by citizens of developed countries (which is discussed at length in Murphy’s book with Thomas Nagel, The Myth of Ownership). She noted that there is a difference, however, in a critique of the mission (tax justice, with which she agrees), and the means (wealth taxation), which has been made extraordinarily more difficult with fragmentation in tax sovereignty throughout the world.
Dr. Dagan’s remarks drew upon her significant scholarship in this area, including Unbundled Tax Sovereignty: Refining the Challenges published in March of this year, and in her recent article, Tax Justice in the Era of Mobility and Fragmentation. In her comments and in her new article, Dr. Dagan describes first a kind of Tieboutian model of national (rather than local) taxation in which each sovereign balances the public goods and services it offers with the taxes that it must impose to cover the cost of those goods and services. In general, this balance is struck through the political system in democratic countries, with constituents expressing their voice about that balance through their voting preferences. She notes that this model no longer exists as a result of globalization (liberalized trade policies, networked communications, international labor markets) and mobile capital (liberalized currency policies, reduced barriers to foreign investment and disinvestment). Now, both high-wealth individuals and multinational enterprises (MNEs) may pick and choose among many states for public goods and services: (i) maximizing the benefits of research and development funding, capital markets, technical and managerial skills in some jurisdictions, (ii) minimizing the costs of labor and regulation in other jurisdictions, and (iii) enjoying global markets in which to sell their goods and services, while (iv) choosing to be taxed in the lowest-tax jurisdiction. She notes that tax sovereignty has become particularly fraught, with skilled tax lawyers employing “a diversity of mix-and-match components: differing residency rules; source rules; rules for allowing deductions; withholding rates; and over 3000 tax treaties between jurisdictions” to make taxation virtually elective for a select class of high-wealth individuals and MNEs.
To address this problem, Dr. Dagan explains that nation states have a few options. First, they may either provide a tax and transfer system that extends to all taxpayers on the same basis. This risks “exit,” movement by MNEs and high-wealth individuals to lower-tax jurisdictions, which would reduce state revenues and likely shift the burden of taxation to workers and away from those who own capital. Second, nation states may tax according to the taxpayer’s elasticity (in this case, the tendency of the taxpayer to move to another jurisdiction to reduce its tax burden, while retaining benefits of its original jurisdiction). This policy would cater to the preferences of the MNEs and high-wealth individuals, but would maintain or possibly increase revenues overall, improving the country’s ability to provide a social safety net, and support resilience in the face of global pandemics, worldwide economic recessions, and climate change disasters, for example. However, these tax policies favorable to the wealthy come at the cost of political equality and may undermine the state’s legitimacy. Third, nation states may reach a cooperative accord that would tax MNEs and high-wealth taxpayers similarly across jurisdictions, thereby reducing their ability to pick and choose the best benefits and least regulation and tax. Dr. Dagan argues that international cooperation is a promising way for nation states to regain legitimacy, to ensure the fairness of their tax systems, and to treat all of their citizens with equal respect and concern. She notes that the OECD has recently developed a promising two-pillar accord, signed by 140 countries, to address corporate tax evasion. She notes however, that this type of cooperation does not necessarily achieve tax or other kinds of justice for all countries. Unequal bargaining power, unequal representation at the bargaining table, and the network structures and effects of these types of agreements often stack the deck against underdeveloped countries.
Discussions of these types of dilemmas and some potential solutions have grown over the last decade. In 2013, the International Bar Association and Human Rights Institute Task Force on Illicit Financial Flows, Poverty and Human Rights published Tax Abuses, Poverty and Human Rights, which argued that countering tax abuses and improving tax enforcement in developing countries are needed to combat poverty and encourage sustainable development. Philip Alston (NYU) and Nikki Reisch (NYU) underscored the challenges of fair taxation in an unfair world in their 2019 book Tax, Inequality, and Human Rights, which identified structural biases in the international tax regime that undermine human rights, efforts to combat poverty, and improve economic resilience. Professor Allison Christians (McGill), in her recent book, Tax Cooperation in an Unjust World, clarifies the role that the international tax system plays in allowing wealthy states to claim an unfair share of the global economy, argues that the system feeds off of human suffering, draws an explicit connection between taxation and sustainable development, and offers important insights for tax system design. Christians has advocated for such innovations as applying living wage and externality assessment tools to the rules to establish where income arises for tax purposes. Likewise, Professor Reuven S. Avi-Yonah and Dr. Kimberly A. Clausing, in Toward a 21st-Century Internaonal Tax Regime, have discussed sales-based formulary apportionment as an alternative that would stem profit shifting, dampen the incentives for MNEs to move to lower-tax jurisdictions, and likely improve revenues for developing nations as well as developed countries.
As Dr. Dagan notes, we are watching the emergence of a new international tax regime. In each instance and for each country, greater international cooperation will be required to prevent free-riding by MNEs and high-wealth individuals, who currently enjoy the benefits of each country while avoiding the taxes of all countries. If we are to achieve any long-lasting accord, Dr. Dagan explains that we must ask ourselves, “What does justice demand for the regime to be legitimate?” She emphasizes that we must work together, collectively, to allocate the burdens and benefits of cooperation across the international community; otherwise the agreements will not hold for lack of legitimacy. In view of Albert O. Hirschman's 1970 treatise, Exit, Voice, and Loyalty, in addition to “exit” there are two other considerations to bring into view to restore legitimacy. As Liam Murphy notes, we should pay attention to “voice,” and the outsized role the wealthy enjoy in setting policy, including tax policy. Another area for possible contemplation is “loyalty,” or the lack thereof, by those who have enjoyed a country’s formative and foundational benefits, but refused to pay its taxes.
Here’s the rest of this week’s SSRN Tax Roundup:
- Faith Jane Adekunle (Lagos), Digital Tax: An Overview of the Companies Income Tax Act and Challenges Arising from Taxation of the Digital Economy, Working Paper Series (Oct. 24, 2022)
- Jason Anderson (Kansas) and Ross Riskin (Independent), This Filing Season Provides an Opportunity for Student Loan Borrowers, 175:1 Tax Notes, Vol. 59 (2022)
- Likhitha Butchireddygari, (Columbia), Eliminating Wealthy Investors' Tax Benefit from Police Brutality Bonds, Columbia Law Review (Forthcoming 2022)
- Ilan Benshalom (Hebrew - Jerusalem), The Democratic-Homogeneity Case for Wealth Taxation, Working Paper Series (21 Oct 2022)
- William W. Chip, (US Dept. Homeland Security), The Economic Substance Doctrine, BNA Tax Management Portfolio, No. 508-2nd (2022)
- Stephen Curtis, Cisco's Cost Sharing Arrangement-Frankenstein Poker, Working Paper Series (Sept 21, 2022)
- Tsilly Dagan (Oxford), Tax Justice in the Era of Mobility and Fragmentation, Revue européenne du droit, Paris: 4 Groupe d’études géopolitiques (Summer 2022)
- Ayla Delso (Oklahoma), Taxing the First Amendment: What Ohio's Lamar Advantage GP Co. v. Cincinnati Means for Selective Taxes on Billboards Across the Country, Working Paper Series (Sept. 27, 2022)
- Joachim Englisch (Muenster), VAT Goes Virtual: Security Tokens, EC Tax Review (forthcoming 2022).
- Nyamagaga Gondwe (Wisconsin), The Tax-Invisible Labor Problem: Care, Work, Kinship, and Income Security Programs in the IRC, 102 B.U. L. Rev. ____ (2022, Forthcoming)
- Jeffrey L. Hoopes (UNC - Chapel Hill), Daniel Klein (Mannheim), Rebecca Lester (Stanford) and Marcel Olbert (LBS), Corporate Tax Policy in Developed Countries and Economic Activity in Africa, Working Paper Series (Oct. 24, 2022)
- Kathryn James (Melbourne), The Carter Commission and the Value-Added Tax (VAT): A Prescient Review of the VAT Before its Time Had Come, in The Quest for Tax Reform Continues: The Royal Commission on Taxation Fifty Years Later (Kim Broke, ed., 2013)
- Kathryn James (Melbourne) and Karoline Spies (Independent), VAT and Transfer Pricing, in Virtues and Fallacies of the Value-Added Tax: An Evaluation After 50 Years (Robert van Brederode, ed., 2021),
- Steve R. Johnson (Florida State), Congressional Primacy, Equitable Tolling, and Tax Court Deficiency Litigation, 77:3 The Tax Lawyer (Forthcoming Spring 2023)
- Jinyan Li (York), Hallmarks of Abusive Transactions and the Role of Economic Substance: Comments on Modernizing and Strengthening the General Anti-Avoidance Rule Consultation, Working Paper Series (Sept. 9, 2022)
- Philippe Toledo Pires de Oliveira, (WU Vienna), Improving the Relationship Between Tax Authorities and Taxpayers in Brazil, 50:3 Intertax (2022)
- Erin Adele Scharff (Arizona State) and Darien Shanske (UC Davis), The Surprisingly Strong Case for Local Income Taxes in the Era of Increased Remote Work, Hastings Law Journal (Forthcoming 2022)
- Anculien Schoeman (Pretoria) , Chris Evans (New South Wales) & Hanneke Du Preez (Pretoria), To Register or not to Register for Value-Added Tax? How Tax Rate Changes Can Influence the Decisions of Small Businesses in South Africa, 30:7 Meditari Accountancy Research 213 (2022)
- Abioso Senoaji, (Diponegoro), Juridical Review of the Principles and Systems of Collecting Local Taxes in National Development, Working Paper Series (Oct.12, 2022)
- Fadi Shaheen (Rutgers), Whirlpool: Law or Policy?, 176 Tax Notes Federal 959 (2022)
- Abu Bakkar Siddique (Indiana), Does Corruption Culture Matter for Tax Morale? Evidence From Generation of Immigrant Samples, Working Paper Series (Oct. 11, 2022)
- John Vella (Oxford), Michael P. Devereaux (Oxford), and Heydon Wardell Burrus (Oxford), Pillar 2's Impact on Tax Competition, Working Paper Series (Sept. 28, 2022)