Redistribution, Globalisation, and Multi-level Governance

Abstract

Global income inequalities are met with increasing calls for direct supranational redistribution. This article argues that from the perspective of political feasibility, this approach should not be prioritised. We use the example of tax competition to show that supranational regulation that stops short of direct redistribution has better chances of being implemented. Moreover, as the case of tax competition illustrates, such regulation can help to shore up the capacity of nation states to redistribute internally, which indirectly tends to reduce global inequalities, too. Against this background, we formulate the conditional subsidiarity principle of redistribution. It states that when the case for direct supranational redistribution is built on the alleged incapacity of the state to redistribute due to the pressures of globalisation, our first instinct should be regulatory reform in order to restore this capacity. Finally, the article asks whether two prominent proposals for global taxation – the global resource dividend and the financial transaction tax – pass the test of the conditional subsidiarity principle.

http://ssrn.com/abstract=2502523

Full text

Article
Peter Dietsch* and Thomas Rixen
Redistribution, Globalisation, and
Multi-level Governance
Abstract: Global income inequalities are met with increasing calls for direct
supranational redistribution. This article argues that from the perspective of
political feasibility, this approach should not be prioritised. We use the example
of tax competition to show that supranational regulation that stops short of
direct redistribution has better chances of being implemented. Moreover, as the
case of tax competition illustrates, such regulation can help to shore up the
capacity of nation states to redistribute internally, which indirectly tends to
reduce global inequalities, too. Against this background, we formulate the
conditional subsidiarity principle of redistribution. It states that when the case
for direct supranational redistribution is built on the alleged incapacity of the
state to redistribute due to the pressures of globalisation, our first instinct
should be regulatory reform in order to restore this capacity. Finally, the article
asks whether two prominent proposals for global taxation –the global resource
dividend and the financial transaction tax –pass the test of the conditional
subsidiarity principle.
*Corresponding author: Peter Dietsch, Département de Philosophie, Université de Montréal,
C.P.6128, Succursale Centre-ville, Montréal, QC H3C 3J7, Canada, E-mail:
peter.dietsch@umontreal.ca
Thomas Rixen, Fakultät für Sozial- und Wirtschaftswissenschaften, Universität Bamberg,
Bamberg, Germany, E-mail: thomas.rixen@uni-bamberg.de
Notwithstanding the mitigating effect of the emergence of a Chinese middle
class in recent years,
1
indicators of global income inequalities still offer a
bleak picture.
2
At the national level, the determination to fight inequalities
1See e.g. Pogge, Thomas, “Growth Is Good! –But What Growth?”in Social Justice, Global
Dynamics: Theoretical and Empirical Perspectives, ed. Ayelet Banai, Miriam Ronzoni and
Christian Schimmel (London: Routledge, 2011), 77–94.
2Milanovic, Branko, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global
Inequality (New York: Basic Books, 2011), chapter 2.
doi 10.1515/mopp-2013-0013 MOPP 2014; 1(1): 61–81
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seems even to have weakened. Paradoxically, while national income inequalities
have been on the rise again for the last 40-odd years in many countries after
having declined between the Great Depression and the 1960s, the tax systems of
these countries have become more regressive.
3
That is, rather than counteracting
rising inequalities, a reduced tax burden on the rich has compounded them
in many places. If one thinks that political preferences and conceptions of
social justice have not changed accordingly to legitimate these changes, this
development presents us with a puzzle.
The common answer to the puzzle is that the growing economic interdepen-
dence of countries, referred to as globalisation, not only creates more inequality
in the primary distribution but also undermines the capacity of the state to
redistribute and bring about a more equal post-tax distribution.
4
A number of
policy proposals to rectify this situation argue that supranational tax and
transfer mechanisms need to be created to fill the void. This article presents a
critical analysis of this position and suggests an alternative approach to the
puzzle. Put differently, we inquire whether any general statements can be
made about the level of governance –national or supranational –at which
redistributive policies should be pursued.
Our central arguments can be summarised as follows. First, we contest the
empirical claim that globalisation necessarily undermines the redistributive
capacity of the state. While it contingently does so under certain regulatory
frameworks, including the present one, globalisation is not incompatible with
national redistributive policies as such. Second, while national redistribution
only represents a partial step towards global justice, we argue that it is impor-
tant to indeed take this partial step through national rather than supranational
tax and transfer mechanisms. The justification for this argument lies in feasi-
bility considerations. In sum, we defend what we will call a conditional sub-
sidiarity principle for redistribution under multi-level governance: When the case
for supranational redistribution arises from the alleged failure of states to
redistribute, our first instinct should be to restore the redistributive capacity of
the state by changing the regulatory framework under which globalization
operates before turning to direct redistribution at the supranational level.
The article connects work on global justice in political philosophy with
international tax theory in public economics. To ensure that the premises of
our argument from both of these disciplines are clear, we start with two
3OECD, Divided We Stand: Why Inequality Keeps Rising (Paris: OECD, 2011).
4Due to lack of space, we cannot discuss the reasons why globalization creates inequalities
and undermines states’redistributive capacities. For an entry point to the relevant literature, see
e.g. ibid., chapter 2.
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preliminary sections. The first of these presents a primer on taxation that serves
to delineate redistribution from other objectives of fiscal policy. The second
section sets out the relation between one’s theory of (global) justice and the
role of fiscal policy in realising the ideal of justice in question. We then, in the
third section, analyse the impact that globalisation has on this relation between
justice and fiscal policy. In this central part of the article, we introduce and
defend the conditional subsidiarity principle for redistribution under multi-level
governance. Finally, in Section 4, we ascertain the implications of this principle
for two global taxation proposals that have been put forward in recent years.
1 A primer on taxation
Before thinking about redistributive taxation in a global setting, it is useful to
rehearse a few preliminary points that apply to taxation in general, that is,
independently of the level of governance. Three questions are addressed: Why
do we tax? What do we tax? And who taxes?
Why do we tax? Three central goals of taxation have been identified.
5
First,
taxes raise revenue to finance government spending. Taxing and spending serve
an allocative function focused on those areas where market allocation does not
lead to efficient results, including the provision of public goods, addressing
externalities, competition policy, etc.
6
Of course, it will often be controversial in
how far government intervention actually serves those purposes. The decision
ought to be made democratically. Second, taxes represent an instrument to
redistribute income and wealth to promote the conception of social justice that
has been chosen through the democratic process. Note that the revenue and the
spending side contribute to redistribution. The progressivity or regressivity of a
fiscal regime can only be evaluated by taking into account both. Third, fiscal
policy is traditionally used to stabilize and smooth the business cycle by tighten-
ing policy during boom years and pursuing expansionary policies during eco-
nomic busts. This third goal of fiscal policy will only play a secondary role in the
argument of this article.
5Musgrave, Richard A., and Peggy B. Musgrave, Public Finance in Theory and Practice (New
York: McGraw-Hill, 1989).
6Note that this allocative function includes the provision of the necessary legal infrastructure
of markets (property rights, judicial review etc.), which can itself be understood as a public
good. See North, Douglass C., Structure and Change in Economic History (New York: Norton,
1981).
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What do we tax? The elements of the modern tax base can be described in
different ways.
7
For the purposes of this article, we will classify taxes according
to the direct taxes on three factors of production –land, labour, and capital. A
tax can be levied both on the flow of income generated –a capital gains tax, for
example –and on the stock of the factor of production in question –a wealth
tax, for example. Once again, this article posits that the particular choices of
what should be taxed are to be deferred to the democratic process. One obvious
desideratum for any tax system is that it should have effective control over the
various elements of its tax base. This aspect will play a central role in our
argument.
Who should tax? The objectives of taxation can be pursued at different levels
of governance. Based on public economics alone, we can only give a partial
response to the question of which level it should be. The part that public
economics can speak to concerns the first goal of taxation, its allocative func-
tion. The power to tax in order to provide public goods should ideally be
situated at the level of government that best reflects the reach of the benefits
provided and burdens imposed. This “principle of fiscal equivalence”
8
requires
that all beneficiaries of certain government activities can be made to share the
costs. It is a condition for an efficient provision of public goods. Normatively
speaking, the principle ensures that those subject to the rules are also their
authors. The question of which group of people needs to be subjected to the
rules depends on the phenomenon at hand. While it makes sense to finance
garbage collection through municipal taxes, for instance, in other cases either
the mobility of a factor of production –capital, for example –or the externalities
of an activity –emitting pollutants, for example –call for the public policy
response to be shifted to a higher level of governance. Fiscal equivalence is
achieved if the power to tax is subject to the principle of subsidiarity that requires
a government function to be located at the lowest possible level that includes
both the beneficiaries and cost bearers. This principle is attractive because it
combines democratic accountability (inclusion of all affected interests and
closeness of decision-makers and citizens) and efficiency (coincidence of bene-
fits and costs).
9
By contrast, public economics on its own cannot give us a satisfactory
answer to the question of who should tax when it comes to the second goal of
taxation, that is, redistribution. Here, the principle of subsidiarity needs to be
7For an overview, see Musgrave and Musgrave, Public Finance in Theory and Practice (Part V).
8Olson, Mancur, “The Principle of ‘Fiscal Equivalence’: The Division of Responsibilities among
Different Levels of Government”,American Economic Review, 59, 2 (1969): 479–87.
9Oates, Wallace E., Fiscal Federalism (New York: Harcourt Brace Jovanovich, 1972).
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complemented with a normative foundation that justifies why redistribution
should take place at a certain level of governance rather than another.
Whereas in the allocative context, the principle of subsidiarity can appeal to
functionalist considerations and hence seems to act as a stand-alone principle,
10
this move is not available in the redistributive context. As we shall see in the
next section, the normative foundation subsidiarity requires in the redistributive
context is a theory of (global) justice.
11
A closer look at the present section reveals a hierarchical order between the
three questions discussed. The question of why we tax is more fundamental in
nature than the other two. The above considerations on the issue of who should
tax, in particular, clearly show that responding to this question inevitably sends
us back to the first question of why we tax. A satisfactory answer to the question
of why we tax requires a theory of justice, particularly in the context of redis-
tribution. It is to this normative part of the puzzle that we now turn.
2 Justice, redistribution, and feasibility
Viewed through the lens of theories of justice, the questions of the level of
governance at which redistribution should occur, and why, appear straightfor-
ward. After all, it is precisely the point of a theory of justice to determine the
relative benefits and burdens of different individuals and groups in society.
Therefore, the normative case for redistribution at any given level of governance
flows directly from the theory of justice one holds.
To illustrate, consider the following non-comprehensive list of theories of
global justice and their implications for fiscal transfers at different levels of
governance. First, take a cosmopolitan theory of justice that proposes a number
of egalitarian principles of justice among all people in virtue of their common
humanity
12
; second, take a left-libertarian theory that requires equal distribution
10 This is not always true. For example, decisions about the level of governance at which
health or education policies –and hence their funding through the tax system –should be
situated are also dependent on normative premises. Against this background, the difference
between the allocative and the redistributive context turns out to be one of degree. In the
redistributive context, subsidiarity requires “thicker”normative premises, whereas in the allo-
cative context it can rely on relatively “thin”ones.
11 For the idea that “subsidiarity is secondary to general principles of justice”, see also
Gosepath, Stefan, “The Principle of Subsidiarity”,inReal World Justice, ed. Andreas Follesdal
and Thomas Pogge (New York: Springer, 2005), 157–70, p. 170.
12 See e.g. Caney, Simon, Justice Beyond Borders: A Global Political Theory (Oxford: Oxford
University Press, 2006).
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of natural resources, or the benefits thereof, among all human beings.
13
Both of
these normative positions have in common that they require not just suprana-
tional coordination, but a global fiscal apparatus of substantial cross-border
taxes and transfers to realise their ideal of justice. Third, take a statist theory of
justice that holds that the coercive framework of the state is a necessary condi-
tion for the existence of egalitarian principles of justice
14
; fourth, take another
flavour of the statist position that sees reciprocal provision of certain basic
public goods as a necessary condition for the existence of egalitarian principles
of justice.
15
For both of the latter views, there may be humanitarian duties of
assistance across borders, but there are no sufficiently thick principles of global
justice to warrant the creation of a global fiscal apparatus. While even these
views might call for some level of supranational coordination, they will stop
short of substantial direct redistribution at the supranational level. On the
spectrum of theories of global justice we have just set out, a number of inter-
mediate positions are possible, too.
This characterisation obviously does not do justice to the various positions
invoked, but the important point in the present context is to establish that the
answer to the question of who should redistribute flows directly from one’s
theory of global justice.
Now, consider the following observation. If the principal level of political
decision making is situated at a lower level of governance compared to the
scope of redistribution that one’s theory of justice calls for, this asymmetry
creates a considerable political obstacle to the realisation of the theory of justice.
For example, when the state represents the locus of central political control, this
poses a problem for the implementation of, say, a cosmopolitan theory of justice
that calls for substantial redistribution beyond the state. This is precisely the
predicament encountered by the strategy described in the introduction in
response to global inequalities. Attempting to meet global inequalities with
global tax and transfer mechanisms is an effective proposal in the context of
ideal theory, that is, when agents are motivated to respect the demands of
justice placed upon them. In non-ideal circumstances, however, this strategy
faces a serious feasibility constraint. A situation where the theoretical demands
13 See e.g. Vallentyne, Peter, “Left-Libertarianism: A Primer”,inLeft-Libertarianism and Its
Critics: The Contemporary Debate, ed. Peter Vallentyne and Hillel Steiner (Basingstoke:
Palgrave, 2000), 1–20.
14 See e.g. Blake, Michael, “Distributive Justice, State Coercion, and Autonomy”,Philosophy
and Public Affairs, 30, 3 (2001): 257–96.
15 See e.g. Sangiovanni, Andrea, “Global Justice, Reciprocity, and the State”,Philosophy &
Public Affairs, 35, 1 (2007): 1–39.
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of justice are global but the politics remain steadfastly national is a prime
example for such a non-ideal context. Unless the citizens of the transferring
state have internalized the theory of justice that calls for the transfer, the fact
that the decision to pay the transfer lies with them while the potential recipients
do not have a say means that the transfer is very unlikely to happen.
Three comments need to be added here. First, the existence of this feasibility
constraint does not weaken the normative case for redistribution as such. While
this would be the case if the feasibility constraint in question were of a “hard”
kind, for example if it were physically impossible to meet the demand of justice,
a“soft”feasibility constraint does not undermine the duty in question.
16
The
political feasibility constraint in the present context is “soft”in the sense of
socially contingent. Arguably, a cultural change could bring about a world in
which the asymmetry between national politics and global redistribution is
overcome. In this world, individuals have internalised the theory of global
justice in question and vote for redistribution beyond their borders.
Second, if such a world seems remote from our standpoint today, this does
not weaken the normative case for redistribution as we just pointed out, but it
might modify the content of the duty it engenders. As Gilabert has pointed out in
his innovative work on dynamic duties, if a feasibility constraint prevents us
from discharging duty X at time t
1
, we may still have a duty Y to do something
that will increase our likelihood of being able to discharge duty X at time t
2
.
17
For instance, if the realisation of cosmopolitan duties of justice that call for
cross-border redistribution is beyond our reach today, we may still have a duty
to change the political environment such that their realisation will become
possible in future.
Third, theories of justice that aspire to changing the world for the better
should take feasibility constraints seriously. If they do not, they open themselves
up to the criticism of being utopian. Accepting the significance of feasibility
constraints has practical consequences. Notably, if a duty of justice to redis-
tribute can be discharged in different ways, we should favour the actions and
policies that face the weakest feasibility constraints.
We now have all the building blocks from both political philosophy and
public economics in place to put them together. The next, core section of the
article will ask whether there are any general statements that can be made about
the level of governance at which redistributive policies should be implemented
under conditions of globalisation. In pursuing this inquiry, we do not
16 For this distinction between different kinds of feasibility constraints, see section 4.2 of
Gilabert, Pablo, From Global Poverty to Global Equality (Oxford: Oxford University Press, 2012).
17 Ibid., section 4.6.
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presuppose any particular theory of global justice. On the contrary, we explicitly
aim to arrive at conclusions that hold independently of the theory of global
justice one might endorse.
3 The effect of globalisation on inequality
How does the phenomenon of globalisation complicate the accounts from tax
theory and from theories of global justice we have presented in the two previous
sections? What should be our normative and political response to the distributive
and institutional effects of globalisation? To answer these questions, we will first
briefly illustrate a set of problems globalisation causes in the fiscal context. In
particular, we will show that certain aspects of globalisation do indeed undermine
the redistributive capacity of the state under the status quo (Section 3.1). Second,
we will show that this effect of globalisation is contingent on the regulatory
framework. There are alternative regulatory frameworks available, under which
globalisation does not undermine the redistributive capacity of the state (Section
3.2). While the necessary reforms to put in place these regulations do require
supranational cooperation, they do not imply direct redistribution at the suprana-
tional level. On this basis, we will derive the conditional subsidiarity principle for
redistribution under multi-level governance (Section 3.3).
There are two motivations for why one may want to advocate shifting
redistributive policies to a higher level of governance. The first of these has
already been discussed in Section 2. If you hold a theory of justice that calls for
redistribution beyond the boundaries of the principal level of political decision-
making –e.g. if you are a cosmopolitan living in a statist world –then you will
advocate rectifying this asymmetry by shifting fiscal competences up the ladder
of governance. Call this the normative motivation.
The second reason to advocate shifting redistributive policies to a higher
level of governance is invoked by the common approach to globalisation men-
tioned in the introduction. Increasing economic interconnectedness, so the
argument runs, tends to both increase inequalities and undermine the redistri-
butive capacity of the state. Because the state can no longer effectively fulfil its
redistributive role, this task has to be handed to a supranational body. Call this
the functionalist motivation. This argument presents us with a version of the
subsidiarity argument in the redistributive context. Note that this response to
globalisation is subject to the political feasibility constraint discussed in Section
2. Shifting redistributive competences up the ladder of governance while the
state remains the prime locus of political decision-making is a long shot.
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If this analysis of the impact of globalisation on redistribution were correct,
then we would indeed have to take that long shot. Yet, we submit that this
analysis is inadequate. Its error lies in the empirical premises. Is it really the
case that the state can no longer effectively play its redistributive role? What if it
could? In the next two sections, we will show that, in the realm of taxation, the
impact of globalisation on redistribution is in fact contingent on the regulatory
framework that the forces of globalisation are subject to.
3.1 Globalisation and national tax policies under the
regulatory status quo
In fiscal policy, globalisation manifests itself in the form of tax base mobility.
Once national economic borders are open, tax bases are in principle free to
leave. One reason for economic agents to shift tax bases elsewhere is to reduce
their tax bill. This in turn provides incentives for governments to offer tax
savings to such mobile factors. The result will be tax competition, that is, the
interactive tax setting by independent governments in a non-cooperative,
strategic way.
18
Among the three tax bases introduced in Section 1 –land,
labour, and capital –tax competition occurs primarily with respect to the
most mobile of the three, that is, capital. In what follows we will very briefly
describe how capital tax competition works, and what its distributive conse-
quences are.
19
We can distinguish between “virtual”and “real”tax competition. Under
virtual competition taxpayers do not actually have to move to the country with
the lower or zero tax rates, it is only their capital that changes jurisdiction. They
may enjoy the public goods provided in high-tax countries but pay the taxes of
low- or zero-tax countries –they behave as free riders. The corresponding
behaviour of governments trying to attract foreign tax base has been labelled
“poaching”by the OECD.
20
Two kinds of poaching are relevant. First, in the area
of portfolio capital, so-called tax havens have low or zero tax rates. More
importantly, they offer strict bank secrecy rules as well as certain legal
18 Wilson, John D., and David E. Wildasin, “Capital Tax Competition: Bane or Boon”,Journal of
Public Economics, 88, 6 (2004): 1065–91.
19 For a more detailed discussion of these issues, see e.g. Dietsch, Peter, and Thomas Rixen,
“Tax Competition and Global Background Justice”,Journal of Political Philosophy, Article first
published online: 23 April 2012, DOI: 10.1111/j.1467-9760.2012.00419.x, section I and Rixen,
Thomas, The Political Economy of International Tax Governance (Basingstoke: Palgrave/
Macmillan, 2008), chapters 4, 6 and 8.
20 OECD, Harmful Tax Competition: An Emerging Global Issue (Paris: OECD, 1998).
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constructs such as trusts that enable individuals to hide their ownership vis-à-
vis the tax administrations in their state of residence, where they are liable to
tax. Estimates of the wealth hidden in tax havens are as high as 21–32 trillion
USD.
21
Taxpayers’behaviour in these cases constitutes illegal tax evasion.
However, since under the current international tax rules there is no obligation
on governments to report foreign wealth held in their country to the investor’s
home country, unless the home country explicitly requests information and
presents specific initial evidence of tax evasion, this kind of competition to
attract tax evaders’money is possible.
22
Second, governments compete for so-called paper profits. Through various
techniques, such as manipulating transfer prices (especially of intangible assets)
and thin capitalization, multinational enterprises (MNEs) can assign profits
made in high-tax countries to their subsidiaries in low-tax countries without
relocating real business activity. Such “tax planning”of MNEs generally con-
stitutes legal tax avoidance and is possible because the current system of taxing
multinational enterprises is based on the principle that national subsidiaries of
MNEs prepare their own tax accounts as if they were independent firms (sepa-
rate entity accounting). All empirical investigations into this issue come to the
same conclusion: the transfer of taxable profits is very sensitive to taxation,
companies make ample use of these possibilities, and governments compete for
the assignment of paper profits by lowering their nominal corporation tax
rates.
23
By contrast, under “real”tax competition, taxpayers actually have to relo-
cate to enjoy lower taxes. Countries compete for foreign direct investment (FDI)
in the form of real business activity, that is, they try to influence the location
decisions of MNEs. This practice may be called luring. Business decisions
depend on various factors such as the level of education, the costs of labour,
and the quality of infrastructure. But the effective tax burden also plays a role.
Empirical studies come to the conclusion that lowering effective tax rates
21 Tax Justice Network (TJN), “The Price of Offshore Revisited. New Estimates for Missing
Global Private Wealth, Income, Inequality and Lost Taxes”, http://www.taxjustice.net/cms/
upload/pdf/Price_of_Offshore_Revisited_120722.pdf (accessed 14 August 2012).
22 In fact, until recently tax havens were not even obliged to respond to requests for informa-
tion. Following the financial crisis, the G 20 and OECD pressured tax havens to accept a new
standard of information exchange where the requested state has to provide information, as long
as the request is specific enough. See OECD, “Tax Transparency 2011. A Report on Progress”,
2011. http://www.oecd.org/tax/transparency/48981620.pdf (accessed 18 February 2014).
23 De Mooij, Ruud A., and Sjef Ederveen, “Corporate Tax Elasticities: A Reader’s Guide to
Empirical Findings”,Oxford Review of Economic Policy, 24, 4 (2008): 680–97.
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increases the inflow of FDI.
24
Such real competition for FDI is possible because
under the current system of international taxation the corporation tax on the
profit earned is often the only tax due on that profit.
25
Both virtual and real tax competition have consequences for public
finances. In OECD countries, nominal corporate tax rates have fallen from an
average of 50% in 1975 to 25.7% in 2010. Over the same period, nominal top
personal income tax rates have fallen from 70% to 41.4%.
26
These rate cuts were
refinanced by broadening the bases on which taxes are applied (“tax cut cum
base broadening”). As a result, tax revenue as a percentage of GDP remained
stable, and the capacity of OECD governments to provide public goods has not
been compromised.
The situation is different in developing countries, largely because they lack
the administrative capacity to pursue revenue-stabilising policies.
27
A significant
part of the revenue loss is directly due to the shifting of paper profits. One study
estimates the annual revenue loss of developing countries from transfer pricing
to be US $ 160 billion.
28
In other words, globalization and tax competition make
it harder for developing countries to promote allocative efficiency through the
provision of public goods. Their experience is closer to the race-to-the-bottom
predicted by economic theory.
While the evidence on the impact of tax competition on the allocative
function of taxation varies with the stage of development of countries, the
verdict with respect to the distributive function is much clearer. The “tax cut
cum base broadening”policy affects the distribution of the tax burden among
different kinds of taxpayers. For one, there is an effect within the business
sector: highly profitable MNEs benefit, while nationally organized small- and
medium-sized enterprises are more heavily burdened. Second, the tax burden is
shifted from capital to labour. This is also visible in the general trend to increase
24 De Mooij and Ederveen, “Corporate Tax Elasticities: A Reader’s Guide to Empirical
Findings”.
25 If all countries operated a credit system without deferral, then tax competition among source
countries would be dampened, see e.g. Zodrow, George R., “Capital Mobility and Source-Based
Taxation of Capital Income in Small Open Economies”,International Tax and Public Finance,13
(2006): 269–94.
26 See OECD Tax Database at http://www.oecd.org/tax/tax-policy/tax-database.htm (accessed
18 February 2014).
27 Keen, Michael, and Alejandro Simone, “Is Tax Competition Harming Developing Countries
More Than Developed?”Tax Notes International, 34, 28 June (2004): 1317–25.
28 Christian Aid, Death and Taxes: The True Toll of Tax Dodging (London, 2008), http://www.
christianaid.org.uk/images/deathandtaxes.pdf (accessed 18 February 2014).
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indirect taxes, such as consumption taxes. Last but not least, due to the back-
stop function of the corporate for the personal income tax a lower corporate tax
rate often spills over into a flatter personal income tax structure.
29
In sum,
governments feel compelled to pursue less redistributive polices than they
would otherwise have pursued. These trends hold for both developed and
developing countries and show that, indeed, globalisation undermines the
redistributive capacity of the nation state under the current regulatory
framework.
While less clear cut, a case can also be made that tax competition under-
mines the capacity of national governments to effectively exercise the stabiliza-
tion function. The various opportunities for tax arbitrage contribute to the waves
of hot money rolling around the globe in search of the best return on invest-
ment.
30
The mobility of this hot money exacerbates investment cycles. As a
result, we see more volatile business cycles with –at least in the case of
developing countries –fewer means available to smooth them.
To conclude, the lack of effective tax authority over capital that is induced
by globalisation can be shown to undermine all three traditional functions of
taxation at the national level. In addition, as developing countries are hit harder
by the forces of tax competition, it also increases inequality across countries.
3.2 An alternative regulatory framework for international
taxation
Elsewhere, we have put forward a regulatory framework designed to regulate tax
competition and to address both cases of poaching and of luring.
31
Here, we will
not set out this framework in detail, but limit ourselves to a brief summary to
show that the consequences described in the previous section are indeed con-
tingent on the existing rules of international taxation. The proposed regulatory
change could restore the redistributive capacity of nation states and also address
the inequalities between countries to some extent.
29 Loretz, Simon, “Corporate Taxation in the OECD in a Wider Context”,Oxford Review of
Economic Policy, 24, 4 (2008): 639–60, Schwarz, Peter, “Does Capital Mobility Reduce the
Corporate-Labor Tax Ratio?”Public Choice, 130, 3–4 (2007): 363–80, Ganghof, Steffen, and
Philipp Genschel, “Taxation and Democracy in the EU”,Journal of European Public Policy, 15, 1
(2008): 58–77.
30 For an analysis of capital mobility in this light, see Eichengreen, Barry, “The Global Gamble
on Financial Liberalization: Reflections on Capital Mobility, National Autonomy, and Social
Justice”,Ethics & International Affairs, 13, 1 (1999): 205–26.
31 See Dietsch and Rixen, “Tax Competition and Global Background Justice”.
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We call for two principles to regulate tax competition. First, we argue that
all natural and legal persons should be liable to pay tax in the state of which they
are a member. Bracketing various technical questions surrounding the definition
of membership, this membership principle is compatible with the internationally
accepted, but laxly enforced, principles of residence taxation for individuals and
taxation at source for multinational enterprises (MNEs). In effect, the member-
ship principle rules out all forms of poaching.
For individuals, this means that they cannot be resident in one country, and
shift part of their tax base to another country without paying tax on it at home. A
regulatory reform that would achieve this, which is in fact being implemented by
the European Union’s saving tax directive, is automatic exchange of information
about capital holdings between countries.
For MNEs, the membership principle means that the profits from an eco-
nomic activity have to be declared for tax purposes in the same jurisdiction
where the activity takes place. A system that would achieve this is unitary
taxation with formula apportionment.
32
Under this policy, corporate accounts
are consolidated internationally, before each country gets assigned a share of
the profits to tax on the basis of a previously agreed formula. Typically, the
formula in question will include assets, payroll, and sales. The European Union
is currently debating the introduction of such a scheme.
Second, and more controversially, we argue that some cases of tax competi-
tion for FDI are problematic from a normative perspective, too. Our second
principle, the fiscal policy constraint, states that tax competition for FDI is
illegitimate when it both is strategically motivated and leads to a reduction in
the aggregate level of fiscal self-determination of other states.
33
In other words,
some cases of luring should be prohibited. To implement this principle, we
propose to install a judicial review of tax policies, which could be organised
analogously to the dispute settlement procedure of the World Trade
Organization. Any state that thinks that the tax policies of another state violate
the principle could bring the case before a dispute settlement body that would
have the competence to make a final decision.
32 See Graetz, Michael J., Foundations of International Income Taxation (New York: Foundation
Press, 2003), 400–35.
33 Both elements of the fiscal policy constraint –the strategic intention and the autonomy-
reducing effect –are of equal importance. They have to be jointly satisfied for a case of luring to
be considered illegitimate. Providing precise criteria to operationalise the fiscal policy con-
straint lies beyond the scope of this article and will require the collaboration of international tax
lawyers. For more details on this issue, see Dietsch and Rixen, “Tax Competition and Global
Background Justice”.
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To put these principles and the reforms they entail into practice, we call for
the creation of an International Tax Organization (ITO), whose task it would be
to enforce the respect of these principles, to act as a dispute settlement body in
case of violations, and to provide a forum for discussing the harmonization of
fiscal ground rules across countries. Note that none of this implies harmoniza-
tion of tax rates on capital across countries, nor does it entail that the ITO
should be given the power to levy taxes itself. On the contrary, fiscal sovereignty
stays in the hands of states, while the purpose of the ITO is to ensure that states
can exercise this sovereignty more effectively than under the tax competition
that marks the status quo.
In what sense does this proposal promote effective tax authority over
capital? First, ruling out poaching does not limit the mobility of capital, but it
imposes the condition that the capital cannot be separated for tax purposes from
the membership of its owner in a particular state. In effect, this means that the
reach of the fiscal authority of the state where the taxpayer is a member does not
stop at the border. Second, ruling out some instances of luring offers an addi-
tional layer of protection for the effective taxation of capital. Under certain
conditions, states have a legitimate complaint against the fiscal policies of
other states that have triggered “real”capital flight.
Note that even when both of our principles are respected, the tax authority
of states over capital is not absolute. Under capital mobility, different demo-
cratic choices about tax structures in different states are bound to generate fiscal
externalities. However, the proposed regulation of tax competition reduces these
externalities to a minimum. Tax authority over capital is as effective as it can be
under conditions of globalisation.
3.3 The conditional subsidiarity principle for redistribution
Someone might raise the following objection to our reasoning in the two pre-
vious sections. We object to supranational tax and transfer schemes on feasi-
bility grounds, but then call for institutional reforms that also require
supranational cooperation. Is the latter not subject to the same feasibility con-
straints? In this section, we will first respond to this objection and subsequently
attempt to draw a general lesson about redistributive policies.
Our response to the objection relies on the distinction between supranational
redistribution on the one hand and other forms of supranational cooperation that do
not involve direct redistribution on the other. As we have argued in Section 2, tax and
transfer arrangements that amount to direct redistribution between states face
important feasibility constraints ceteris paribus. Whether this direct redistribution
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be administered by a supranational authority with an independent right to tax, or
whether it be administered nationally, there is strong resistance to such proposals
given the current motivational and political landscape.
Arguably, the feasibility constraints on certain kinds of supranational coop-
eration, as opposed to direct redistribution, are weaker. Consider the regulation
of tax competition proposed in the previous section as an example. Would it not
be in the interest of all states to have their effective fiscal sovereignty protected
by the principles we propose? The objector might remain sceptical at this stage.
After all, regulating tax competition, like any institutional reform, will produce
winners and losers. Predictably, tax havens will be adamantly opposed to our
reform proposals. So why should it be more feasible to pass this reform than to
push through a form of direct redistribution?
Granted, regulating tax competition does not represent a mutually advanta-
geous form of supranational cooperation. There will indeed be winners and losers.
However, the following considerations lead us to believe that this regulation
compares favourably with direct redistribution as far as feasibility is concerned.
First and foremost, institutional reform requires a thinner normative consensus
than redistribution at the supranational level. The latter presupposes that a suffi-
cient number of individuals have internalised the theory of justice that underpins
the required redistribution to make it politically feasible. By contrast, the former
merely requires consensus on the idea that all states should have effective control
over their tax base. Even if disagreement exists about what effective control
entails, this is not as ambitious a goal as the consensus on a theory of justice.
Second, while some tax havens would clearly lose out under the proposed
reform, for many states the question of whether they would win or lose in the
aggregate is less clear-cut. Take the United States. While the United States
figures high on lists of tax havens due to, for example, the tax treatment of
corporations in the State of Delaware, tax competition also contributes to its
sizable tax gap.
34
From the latter perspective, the United States clearly has an
interest to support our proposed reform.
Third, once a rudimentary coalition for reform exists, it is possible to apply
pressure on other states to come on board an institutional reform like regulating
tax competition, in the extreme through economic sanctions. In the context of
redistribution, applying such pressure seems more difficult. Even though the
moral obligation of the state that poaches tax base from others covers both
promoting institutional reform and redistribution, such states are more likely to
appeal to their sovereignty in the latter case and argue that no one has a right to
interfere with how they spend “their”tax receipts.
34 See http://www.irs.gov/uac/The-Tax-Gap (accessed 15 January 2012).
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For all these reasons, we think that the feasibility constraints facing institu-
tional reform are weaker compared to those facing redistribution at the suprana-
tional level.
35
Importantly, note that while institutional reform of the kind
proposed in Section 3 does not explicitly aim at redistribution, it nonetheless
has egalitarian side-effects. The regulation of tax competition would signifi-
cantly curtail the inegalitarian impact this phenomenon has. It would do so
both at the national level by restoring the redistributive capacity of the state and
at the global level by ensuring that developing countries get a share of the global
capital tax revenues, too.
36
Would such a reduction in global inequalities be
incompatible with a statist theory of global justice? No, because it would be
achieved by regulatory means rather than through direct redistribution. On the
contrary, statists should welcome the restoration of fiscal sovereignty envisaged
by our proposed institutional reform.
For redistributive policies up to a certain threshold, we have a choice
between two approaches. We can either go for direct redistribution at the
supranational level or we can promote institutional reform that will have an
equivalent redistributive effect partially by reversing some of the inegalitarian
effects of the current way the forces of globalisation are regulated and partially
by restoring the redistributive capacity of the state. On the basis of the feasibility
considerations just discussed, we should go for the institutional reform option in
such cases. The same may be true in other policy areas –monetary or trade
policy for instance –that we have not discussed in this article.
This brings us back to the question we started out with. Can we make any
general statements about the level of governance at which redistributive policies
should be pursued under multi-level governance? Based on the argument devel-
oped in this section, we put forward the conditional subsidiarity principle for
redistribution: When the case for supranational redistribution arises from the
alleged incapacity of states to redistribute, our first instinct should be to try and
restore this capacity through institutional reform before turning to direct supra-
national redistribution.
It is important to emphasise once again that this priority for institutional
reform is justified exclusively on grounds of feasibility. This article has only
argued for this principle in detail in the context of taxation. However, we have
35 An anonymous referee for this article stated that he was “not convinced that a regulation of
international tax competition will easily win the support of many countries.”We do not defend
this claim. We argue that such regulation will more easily win the support of many countries
than a scheme of direct redistribution between them.
36 See Section 3.1.
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reason to think that parallel arguments apply in other policy areas. Due to space
limitations, we cannot engage in this exercise here.
4 Proposals for global taxation and the
subsidiarity test
In the previous section, we have argued for a conditional principle of subsidiar-
ity under multi-level governance. Before calling for redistribution at the supra-
national level, we should use regulation to check the forces of globalisation that
make it harder to redistribute at the national level. While doing so requires
supranational regulation, it stops short of direct supranational redistribution.
While in theory producing the same distributive outcome, the regulatory
approach favoured here is subject to a weaker feasibility constraint than direct
supranational redistribution.
In this last section, our goal is to see whether some of the existing policy
proposals for global taxation pass the subsidiarity test as formulated above. Due
to space constraints, we can only discuss two reform proposals here. We have
selected the global resource dividend (GRD) as well as the financial transaction
tax (FTT), partly because they have received widespread attention, and partly
because they allow us to present some interesting distinctions when applying
the subsidiarity test. We should add an important disclaimer up front. The
discussion that follows cannot do justice to the nuances of the policy proposals
at hand. The sole objective here is to adequately present those features that are
necessary to see whether they pass the subsidiarity test or not.
4.1 A global resource dividend
The GRD “is based on the idea that the global poor own an inalienable stake in
all limited natural resources.”
37
According to Pogge as one of its principal
advocates, the status quo is morally problematic not just because the poor do
not have access to their inalienable stake, but because our economic and legal
institutions deny them this access. The “uncompensated exclusion [of the poor]
from the use of natural resources”
38
grounds a negative duty for those who
uphold these institutions and benefit from them to remedy this situation.
37 Pogge, Thomas, World Poverty and Human Rights (Cambridge: Polity Press, 2008), 202.
38 Ibid., p. 205.
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Pogge stops short of an egalitarian argument concerning the ownership of or
benefits from natural resources, but instead makes the case for a minimal
negative duty.
39
“Proceeds from the GRD are to be used toward ensuring that
all human beings can meet their own basic needs with dignity.”
40
Pogge
explicitly presents the modesty of his proposal as a concession to political
feasibility.
41
Moreover, he qualifies the GRD as a remedial measure that needs
to be complemented by ideas “about how the injustice of the global order might
be diminished through institutional reforms that would end the need for such
remedial measures.”
42
While Pogge delegates the technical details of the GRD to
international lawyers and economists, the potential implementations he dis-
cusses indicate in what sense we are talking about a global tax here. As an
example, he examines “the likely effects of a $3 per barrel GRD on oil extrac-
tion.”
43
Such a harmonised levy, even if it were to be administered nationally,
clearly requires states to surrender aspects of their fiscal sovereignty and
amounts to direct redistribution at the supranational level.
We contend that the GRD is unlikely to pass the subsidiarity test. To the
extent that the GRD calls for direct cross-border redistribution from the (often
illegitimate) owners of resources, the extractive industries and end consumers of
those resources
44
to the global poor, the GRD faces feasibility constraints that
are relatively strong compared to those faced by a series of institutional and
regulatory reforms. Our proposed regulation of tax competition is one example
for such a regulatory reform. In the context of natural resources itself, Leif
Wenar’s work on restoring popular resource sovereignty over natural resources
represents another.
45
Wenar calls for trade embargos against regimes that use
natural resources for personal enrichment. While the indirect, inequality-redu-
cing impact of his proposal may be equivalent or even more important than the
39 Some commentators see a tension between Pogge’s earlier cosmopolitan egalitarianism and
this minimalist position. See for instance Kelly, Erin I., and Lionel K. McPherson, “Non-
Egalitarian Global Fairness”,inThomas Pogge and His Critics, ed. Alison M. Jagger
(Cambridge: Polity Press, 2010), 103–22.
40 Pogge, World Poverty and Human Rights, p. 203.
41 Ibid., pp. 210–14.
42 Ibid., p. 30.
43 Ibid., p. 211.
44 While the tax will presumably be levied on the extractive industries, part of the burden will
be passed on to end consumers, and may also depress prices for the rights of exploitation that
resource owners can charge. The exact incidence of the tax will depend on the elasticities of
supply and demand.
45 See Wenar, Leif, “Clean Trade in Natural Resources”,Ethics & International Affairs, 25, 1
(2011): 27–39.
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redistributive effect of a GRD, it does not require the kind of direct redistribution
that we know to be subject to particularly strong feasibility constraints.
In sum, whereas Pogge in the above quote characterises the relationship
between the redistribution of the GRD and regulatory reform as complementary,
our argument claims that from the perspective of political feasibility, regulatory
reform should receive priority. None of this questions the moral validity of the
GRD as a policy proposal, but it suggests that it is not the best place to start.
4.2 A financial transaction tax
In the case of an FTT, we shall see that it is more ambiguous whether or not it
passes the subsidiarity test. The idea of the FTT was first launched by the economist
James Tobin in 1972. Following the collapse in 1971 of the Bretton Woods regime of
fixed exchange rates that had governed the post-war period, Tobin asserted that the
new regime of flexible exchange rates “does not satisfactorily solve all the pro-
blems.”
46
In particular, and it is worth quoting Tobin at length here,
[u]nder either exchange rate regime the currency exchanges transmit disturbances origi-
nating in international financial markets. National economies and national governments
are not capable of adjusting to massive movements of funds across the foreign exchanges,
without real hardship and without significant sacrifice of the objectives of national eco-
nomic policy with respect to employment, output, and inflation. …Likewise, speculation
on exchange rates, whether its consequences are vast shifts of official assets and debts or
large movements of exchange rates themselves, have [sic!] serious and frequently painful
real internal economic consequences.
47
These considerations underpin Tobin’s case for throwing “sand in the wheels”of
international financial markets. In its original formulation, what has become
known as the Tobin tax referred to “an internationally uniform tax on all spot
conversions of one currency into another, proportional to the size of the transac-
tion.”
48
Tobin muted the possibility of a 1% tax. Contemporary versions of the
tax usually call for a lower rate, but frequently propose the extension of the tax
base to include other financial instruments “such as derivatives and other hedge
products.”
49
The policy objectives of the FTT thus conceived were a “modest
46 Tobin, James, “A Proposal for International Monetary Reform”,Eastern Economic Journal,4,
3–4 (1978): 153–59, p. 158.
47 Ibid., p. 154.
48 Ibid., p. 155.
49 Wachtel, Howard, “Tobin and Other Global Taxes”,Review of International Political
Economy, 7, 2 (2000): 335–52, p. 340.
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national autonomy in monetary and macroeconomic policy”
50
and, closely
related, promoting financial stability by reducing the volatility on foreign
exchange markets.
When defended as serving these two objectives, the FTT does pass the sub-
sidiarity test. If one accepts that a return to capital controls is not desirable,
51
then
the phenomenon of hot money swirling around the globe plausibly represents a
constitutive facet of globalisation. Since this phenomenon cannot be met by
unilateral national regulation, supranational action is required. By taxing capital
flows of various kinds, the FTT reduces the corrosive impact of hot money in the
international economy. It is an instrument of regulating financial markets.
However, this is not the end of the story. Many contemporary advocates of
an FTT defend the policy on different grounds. Commenting on the idea again in
1996, Tobin himself pointed out that the tax “has been discovered by a non-
economics constituency, those looking for ways to finance the United Nations
and other international agencies when the demands upon them are exploding
and the member nations are stingy in supporting them.”
52
There is now “a
growing constituency of advocates of the tax for its revenue-raising potential,
not its incentive effects.”
53
When conceived in this way, the FTT is likely –
depending on how its proceeds are spent –to become a tool of direct redis-
tribution at the supranational level. Let us call this version of the idea FTT
R
,
where R stands for redistribution.
For the reasons set out in Section 2 of this paper, FTT
R
faces stronger
political feasibility constraints than its cousin that is justified along the original
Tobinian lines. It also faces stronger feasibility constraints than other, institu-
tional reforms like for instance the instauration of minimum investment periods
for stocks and other securities or, again, the regulation of tax competition
proposed in Section 3. Therefore, FTT
R
fails the subsidiarity test. To conclude,
the question of whether the FTT passes the subsidiarity test depends on the
policy objective it is designed to serve.
54
50 Eichengreen, Barry, James Tobin, and Charles Wyplosz, “Two Cases for Sand in the Wheels
of International Finance”,The Economic Journal, 105, 428 (1995): 162–72, p. 163.
51 See for instance Edwards, Sebastian, “How Effective Are Capital Controls?”NBER Working
Paper No. 7413, November 1999 (1999).
52 Tobin, James, “A Currency Transactions Tax, Why and How”,Open Economics Review 7
(1996): 493–99, p. 493.
53 Ibid., p. 497.
54 This opens the door for political instrumentalisation of the grounds on which the FTT is
defended, but this complication is bracketed here.
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5 Conclusion
We have argued that we should think twice before calling for direct redistribu-
tion at the supranational level to compensate for reduced redistribution within
states. Not because these calls for justice lack normative foundation, but
because they face serious feasibility constraints. Instead, the political focus
should lie on regulatory reforms that restore the capacity of states for internal
redistribution and, as a by-product, lead to indirect redistribution between
states, too. While such reforms require supranational cooperation, they do not
require direct supranational redistribution, which makes them more feasible
politically. This priority for redistribution both through regulatory reform and
through national fiscal policy has been expressed in the conditional subsidiarity
principle for redistribution.
We have illustrated this argument with an investigation of international
taxation. Here, regulating tax competition would indeed shore up the effective
control states have over their tax base and, by eliminating the pressure to favour
regressive fiscal policies, reduce inequalities both within states and across
borders.
Finally, we should emphasise that this article does not imply that we should
abandon the political struggle for direct supranational redistribution. Most
likely, there is some level of global equality that could not be attained without
it. However, up to a certain threshold of supranational redistribution, we have a
choice between two ways of promoting it. This article argues we should favour
indirect redistribution through institutional reform over direct redistribution to
do so. The outcome will not be a world with a just distribution of income and
wealth, but one with a more just distribution than we have now.
Acknowledgments: Previous versions of this article were presented at the Centre
for Advanced Studies “Justitia Amplificata”at the Goethe-Universität Frankfurt
as well as at the workshop Global Tax Governance at the ECPR Joint Sessions at
the Universität Mainz. Thank you to Gillian Brock, Kim Brooks, Barbara Buckinx,
Allison Christians, Richard Eccleston, Rainer Forst, Stefan Gosepath, Mattias
Iser, Lyne Latulippe, Miriam Ronzoni, Christian Schemmel, Peter Schwarz,
Laura Seelkopf, Laurens van Apeldoorn, and Richard Woodward for their help-
ful comments. Thank you also to Gillian Brock, Tom Campbell, and Thomas
Pogge for putting together this special issue on global taxation.
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