Weekly SSRN Tax Article Review And Roundup: Saito Reviews Kern’s Progressive Taxation For The World

This week, Blaine Saito (Ohio State; Google Scholar) reviews a new work by Adam Kern (NYU), Progressive Taxation for the World, 74 Tax L. Rev. __ (2024): 

A growing set of voices in tax scholarship are seeking to reemphasize notions of justice. But one of the areas where many of these discussions have traditionally faltered is in the area of international taxation. Many commentators argue that justice really can only happen within a given state and society, not across the world. In his piece, Progressive Taxation for the World, Adam Kern seeks to rebut these ideas, showing that when countries act in the international tax arena to grab more taxing rights for themselves, the justice claims of the poorest countries are actually heightened. He also urges for notions of international taxation where needs of people are given a greater place than economic contributions of a given jurisdiction. The piece forces us to grapple with why we continue then to ignore such claims in our thinking and policymaking.

Kern’s contribution is the idea that these notions of fairness and distributive justice matter even on the international stage. He opens by critiquing the two key conceptional frameworks. First is the contributory frame. The idea is that the more economic factors a country contributes to the business entity, the more taxing rights it should get. But the contributory idea fails to address the concerns about the needs of people that lies at the heart of distributive justice. Second is global progressivity, the idea that more taxing rights should go to poorer country. Kern is sympathetic to this view. But he notes key critiques. One is that there is not always a link between who is poor and a poor country. Another is that the claims of treating the entire world as a big society is radical, and states anyhow should look out for their own interests. The last is that the international tax regime is a poor tool for distribution, because of issues like corruption or the idea that foreign aid is a better means.

Kern then outlines his framework that buttresses the goal of global progressivity. Kern assumes national partiality, the idea that a nation will seek taxing rights for itself and use it on its citizens. But such partiality actually increases the need for giving the next set of taxing rights to poorer nations. The two effects are the “strengthening effect” and the “steepening effect.”

The strengthening effect is that the stronger national partiality is, the weaker the objection of giving taxing rights to poorer countries because they are ineffective at using their taxing rights. Kern, in justifying the strengthening effect, relies on standard welfarism and welfarism’s standard notion of what is vertical equity. Taxing rights often have a tradeoff between equity, giving income to people who have less, and efficacy, the costs of distributing money through the government. But when countries act in a way partial to themselves and their citizens, they reduce the total set of taxing rights available. That increases the inequities that remain in the global system. Thus, as richer countries get more partial, it strengthens the idea of overlooking matters like difficulty in delivering the benefits of taxation or even corruption.

The second major effect is the steepening effect. The idea here is that the more countries claim taxing rights for themselves and the benefits for their citizens, they should seek to assign any remaining rights to the very poorest countries. Kern motivates this effect from the idea that we should think again of all the taxing rights in the world as a big budget. The smaller the budget, the more, because of the declining marginal utility of money, should go to the poorest people under standard welfare analysis. The same motivation goes to taxing rights between nations. As the budget shrinks because rich countries grab more taxing rights for themselves, it steepens the need to distribute remaining taxing rights to the poorest of the poorer nations.

Kern not only outlines the logic of each of these, but he runs simulations that show these effects hold. That in turn puts the need for progressivity into greater relief.

Kern then talks about the implications, examining two policies. The first is the foreign tax credit. The credit is justified as a means of creating neutrality and avoiding double taxation. But it also moves tax revenue from the U.S. to foreign countries. Most commentators assume that U.S. interests, whether it is in overall economic growth that accrues to the U.S., or U.S. revenues, should take precedence. But when one takes his framework, Kern shows that perhaps the foreign tax credit should have a rate or base that favors greater credits when taxes are paid to poorer nations.

The second is formulary apportionment. Many have advocated for formulary apportionment to replace the separate entity view that dominates international taxation, and thereby eliminating the pesky issue of transfer pricing. Kern shows though how his framework provides the theoretical justification for some of his previous work of including equity factors that apportion more revenues to poorer countries.

Kern shows that global progressivity is not something that we should reject. The goal of supporting these ideas too does not necessarily require an entirely new framework outside of welfarism. Instead, welfarism, to which most commentators ascribe, effectively supports global progressivity. When showing it in this way, Kern forces us to question why we may continue to resist progressivity. Of course, maybe we never thought about the useful strengthening and steepening effects. But it may also be an acceptance of a received wisdom that is actually inconsistent with underlying principles and the state of the world.

Additionally, the framework Kern provides requires us to think carefully about the new tax tools that we are rolling out, like Pillar 2’s global minimum tax. The concerns he raises also apply to these and other international tax proposals. Because we have been so blind to these matters of distributive justice and global progressivity, we have designed tools that do not take them into account. Kern’s article forces us to recon with that, and even push international tax policy into a potent tool for building a more just community of nations.

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

• Kristin E. Hickman (Minnesota), Bridget C.E. Dooling (Ohio State), Competing Narratives in OIRA Review of Tax Regulations, 19 J.L. Econ. & Pol’y ___ (forthcoming 2024) (date posted: Apr. 12, 2024).
• Alex Raskolnikov (Columbia), Taxing the Ten Percent, 62 Houston L. Rev. ___ (forthcoming 2024) (date posted: Apr. 12, 2024).
• Pasquale Pistone (International Bureau of Fiscal Documentation), Ivan Lazarov (International Bureau of Fiscal Documentation), and Alessandro Turnia (International Bureau of Fiscal Documentation), Automatic Exchange of Information and the Protection of Taxpayers’ Rights. Towards a New Multilateral Multi-Tiered Architecture (date posted: Apr. 12, 2024).
• Takayuki Nagato (Gakushuin), Designing a Tax System that Encourages Innovation in Start-Ups, (date posted: Apr. 11, 2024).
• Tsilly Dagan (Oxford), GLoBE: The Potential Costs of Cooperation, 51 Intertax 638 (2023) (date posted: Apr. 10, 2024).
• Tamir Shanan (Akron) and Doron Narotzki (Akron), Tax Treaties and Denizenship Based Tax Systems, 6 N.Y. Int’l L. Rev. 57 (2023) (date posted: Apr. 10, 2024).
• Daniel J. Hemel (NYU), Wealth, Schmealth, Welfare, and Schmelfare, 59 Wake Forest L. Rev. ___ (forthcoming) (date posted: Apr. 10, 2024).
• Adam Cowing (UC Irvine), Equity and Ownership in Affordable Housing, 2024 U. Ill. L. Rev. 399 (2024) (date posted: Apr. 9, 2024).
• Michelle D. Layser (San Diego), Privacy and Tax Information Collection: A Response to Blank and Glogower (date posted: Apr. 8, 2024).