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The Moral Rationale for International Fiscal Law

Abstract

A country's right to levy taxes is a fundamental aspect of its sovereignty. Without the power to tax, a government would be unable to redistribute resources among its citizens and provide public goods. The question of how tax rights should be distributed is therefore one of the oldest and most important problems of tax theory. Increased international economic integration has made this question even more important, as a larger share of economic transactions take place across national borders, giving rise to situations in which more than one country is able to tax the same base.

How such conflicts are resolved affects both the ability of countries to redistribute resources domestically and the international distribution of tax revenues. The allocation of tax rights therefore raises important questions of distributive justice, questions that require a normative theory of the right to tax. This essay seeks to evaluate the current distribution of tax rights by examining whether it can in fact be justified within the main approaches to distributive justice.

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1 Pires Manuel, International Juridical Double Taxation of Income (Boston/Dordrecht/London: Kluwer, 1989), chap. 6.

2 Taxes are also levied for other reasons, e.g., to correct for externalities or to stabilize the economy.

3 The distinction between redistributive and benefit taxes may not be as clear. One could also argue that at least some redistributive taxes could be understood as benefit taxes in the sense that wealthy individuals pay them for the benefits (e.g., lower crime rates, a better-educated workforce) that more egalitarian societies provide.

4 Biehl Dieter, “A Taxonomy of International Taxation Principles,” Public Finance 2 (1982), pp. 189205.

5 Knechtle Arnold A., Basic Problems in International Fiscal Law (Boston/Dordrecht/London: Kluwer 1979), p. 35.

6 Biehl , “A Taxonomy of International Taxation Principles,” p. 190.

7 The establishment of such tax treaties gained momentum after 1963 when the Organization for Economic Co-operation and Development (OECD) developed a model tax convention. Most tax treaties follow the structure of this convention. There are today in excess of 1,600 such treaties, and most of these are closely based upon the OECD model and its revised versions. In 1980 the UN published its own model adapted to meet the needs of developing countries.

8 These principles only provide a limitation of the conceivable connecting factors, and such limiting factors do not necessarily prevent international double taxation. Even when such limitations on the connecting factors exist, there might still be more than one jurisdiction with such connecting factors.

9 These are principles for taxation of income. Analogous principles for commodity taxation are the principle of destination (i.e., the country that imports a commodity has the right to tax it) and the principle of origin (i.e., the country that exports the commodity has the right to tax it). See Biehl, “A Taxonomy of International Taxation Principles,” for a general taxonomy.

10 When both countries are permitted to tax, the country of residence generally provides relief against double taxation. This can be done either by granting a credit for taxes paid in the country of source, or by granting an exemption for taxes on income that has been taxed in the country of source.

11 For an overview, see Frenkel Jacob A., Razin Assaf, and Sadka Efraim, International Taxation in an Integrated World (Cambridge: MIT Press, 1991).

12 This is because the source principle assures that the after-tax return to capital is the same in all countries, while the residence principle assures that the pretax return to capital is equalized.

13 See, for example, Musgrave Peggy and Musgrave Richard, “Inter-Nation Equity,” in Bird Richard M. and Head John G., eds., Modern Fiscal Issues (Toronto: Toronto University Press, 1972), pp. 4363; and Cappelen Alexander W., “National and International Distributive Justice in Bilateral Tax Treaties,” Finanzarchiv 56 (1999), pp. 424–42.

14 We use the term “special duties” in a broad sense, so as to include obligations that derive from voluntary agreements or contracts.

15 Hume David, Enquiries Concerning Human Understanding (New York: Oxford University Press, 1986), pp. 145–53; Rawls John, A Theory of Justice (New York: Oxford University Press, 1971), pp. 126–30; and Gauthier David, Morals by Agreement (London: Clarendon Press, 1985), pp. 1014.

16 Rawls , A Theory of Justice, p. 126.

17 Some writers argue that citizenship should be viewed as a cooperative enterprise for mutual benefit, but it is hard to see how this could be the case in the absence of these types of interaction.

18 This possibility is particularly important in situations where so-called brain drain is a problem or when migration patterns are systematically related to different life stages, known as lifetime migration. These phenomena might undermine the possibility of financing public goods, such as health care and education, given this feature of international fiscal law.

19 Miller David, “The Ethical Significance of Nationality,” Ethics 98, No. 4 (1988), p. 648.

20 Most communitarians would accept that there exist moral constraints on our behavior with respect to persons outside our group, but maintain that these are of a different or less extensive kind than those toward members of our community.

21 What constitutes permanently leaving a country may vary. Often the criteria for residence are such that a person is considered a resident in two countries at the same time.

22 It has been argued that the so-called Lockean proviso, important in the derivation of property rights in some traditions, implies some distributive obligations irrespective of any voluntary agreement, but I shall not consider this argument here.

23 Nozick Robert, Anarchy, State, and Utopia (New York: Basic Books, 1977), p. 320.

24 This argument would then support the widely held view that taxation without representation is illegitimate.

25 Beitz Charles R., “Justice and International Relations,” Philosophy & Public Affairs 4, no. 4 (1975), pp. 360–89; Beitz , Political Theory and International Relations (Princeton: Princeton University Press, 1979); Pogge Thomas W., Realizing Rawls (Ithaca: Cornell University Press, 1989); and Pogge , “An Egalitarian Law of Peoples,” Philosophy & Public Affairs 23, no. 3 (1994), pp. 195224.

26 See Beitz , Political Theory and International Relations.

27 Nozick , Anarchy, State, and Utopia, pp. 320–23.

28 Consequentialists such as Peter Singer and Robert Goodin embrace the assignment approach. Some variants of the entitlement approach, such as those proposed by Beitz and Pogge, might justify equally extensive duties since they argue that we have a morally relevant relationship to all individuals due to interdependence or shared institutions.

29 Goodin Robert E., “What Is So Special About Our Fellow Countrymen?” Ethics 98, no. 4 (1988), p. 678.

30 See Goodin , “What Is So Special About Our Fellow Countrymen?”Goodin and, Utilitarianism as a Public Philosophy (New York: Cambridge University Press, 1995).

31 Goodin , Utilitarianism as a Public Philosophy, p. 282.

32 See Shue Henry, “Mediating Duties,” Ethics 98, no. 4 (1988), pp. 687704.

33 See Alexander W. Cappelen, “Redistribution and the Size of Jurisdictions” (discussion paper presented at the Norwegian School of Economics and Business Administration, November 2000).

34 See Scheffler Samuel, “Families, Nations, and Strangers” (the Lindley Lecture, given at the University of Kansas, 1994); and Scheffler Samuel, “Relationships and Responsibility,” Philosophy & Public Affairs 26, no. 3 (1997), pp. 189209.

35 Goodin , “What Is So Special About Our Fellow Countrymen?” p. 685.

36 See Cappelen , “National and International Distributive Justice in Bilateral Tax Treaties.”

37 See Pogge Thomas W., “A Global Resources Dividend,” in Crocker David A. and Linden Toby, eds., The Ethics of Consumption: The Good Life, Justice, and Global Stewardship (New York: Rowman & Littlefield, 1998); and Tobin James, “A Currency Transactions Tax, Why and How,” Open Economies Review 7 (1996), pp. 493–99.

38 See Cappelen , “National and International Distributive Justice in Bilateral Tax Treaties.”

39 See Brennan Geoffrey and Buchanan James W., The Power to Tax: Analytical Foundations of a Fiscal Constitution (New York: Cambridge University Press, 1980).

* I want to thank Christian Barry, Herman Cappelen, Andreas Føllesdal, Raino Malnes, Hilde Nagel, Ole Gjems-Onstad, David Lyons, Thomas Pogge, Agnar Sandmo, and Samuel Scheffler for valuable comments on earlier versions of this paper. Financial support from the Norwegian Research Council (the Ethics Program) is gratefully acknowledged.

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Ethics & International Affairs
  • ISSN: 0892-6794
  • EISSN: 1747-7093
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