It may further be urged that a man owes certain duties to humanity, and if he fails to discharge the offices of citizenship at home, it is ethically allowable for a foreign government which can lay its hands on him, to force him to do his part towards the support of government.
Introduction: A ‘Fair Share’ in a Decentralised World
In the international tax debate, it is claimed that everybody should pay their ‘fair share’ of taxes. While this call has been raised in the first place to denounce a perceived lack of tax compliance by (multinational) businesses,Footnote 1 the concept of the ‘fair share’ has evolved into a general societal expectation towards individuals as well.Footnote 2 People – it is said – should not be in the position to avoid shouldering a tax burden commensurate with their ability to pay. This proposition is accompanied by large-scale empirical research meant to show the extent to which well-heeled and well-advised individuals are able to reduce their personal tax burden.Footnote 3 Today, the public movement for fair taxation to address (ever-growing) public needs seems to be omnipresent.
While it is relatively simple to express moral disdain towards those who avoid paying despite their high levels of wealth, income, and consumption, it is much more difficult to answer the fundamental question of where those people should pay their ‘fair share’. This issue has become even more complex in recent years as we observe an enormous increase in personal mobility on a global scale. With the rise of mobile high net-worth individuals, transient digital nomads, Olympic citizens,Footnote 4 itinerant workers, and more, it becomes increasingly difficult to determine which tax authority should prescribe and enforce tax claims against humans who have no substantial allegiance with a specific country. Which government can rightfully claim to tap a person’s financial capacity when it comes to the provision of public goods enjoyed in that country’s territory? And, when we talk about solidarity and redistribution as a primary goal of taxation, we must know more. Specifically, we must know to whom the presumed taxpayer should offer support.
Taxation does not exist outside the context of a specific state (or other public entity) that is responsible for both the implementation of distributive justice and the production of public goods. Robinson Crusoe on his island is not subject to a tax at all. We need an identifiable and organised community to establish taxation along different dimensions: public or ‘common’ goods require the delineation of the ‘public’ or the ‘community’ enjoying those goods, and redistribution requires a defined group of individuals of which the potential taxpayer is a ‘member’, thus enabling and justifying financial transfers within that community. How can we put into practice Richard Theodore Ely’s impressive and touching admonition that every person’s obligation to pay taxes is grounded in ‘duties to humanity’? His claim that everybody should ‘do his part towards support of government’ provides no guidance on the question of which government should impose that duty. To this day, there exists no ‘world government’ steering the whole of humanity, creating global public goods, and organising redistribution across all mankind.Footnote 5
But the problem runs deeper than the technical questions of which tax administration should levy a tax, and who should decide for what purpose the ensuing revenue should be spent. The global debate about tax justice is not only a debate about individuals (and businesses) trying to avoid financial sacrifice. The debate also concerns the right of states to abstain from taxation, i.e. the willingness of many states to use their fiscal autonomy to create a beneficial tax environment for mobile individuals, offering preferential treatment going as far as providing zero-taxation.Footnote 6 These policies are an important element of ‘tax competition’, a concept analysed in the past mainly in business taxation but which has emerged in recent years as a major factor shaping taxation of individuals as well.Footnote 7
Due to their fiscal autonomy and protected by general principles and treaties under international law, jurisdictions engaging in tax competition are to some extent able to prevent other countries from interfering with the beneficial treatment they award to these much sought-after individuals.Footnote 8 CriticsFootnote 9 complain about a lack of coordination between governments when it comes to ensuring the payment of the ‘fair share’ – but whose fault is this? Can we blame taxpayers for accepting offers from sovereign states to reduce or even wipe out their personal tax burden?
‘Everybody’ and Their Defining Features
As we begin the analysis, it seems necessary to define what is meant by the term ‘everybody’. One should exclude legal persons from this analysis and start from the assumption that ‘everybody’ in the context of this chapter means a human being, that is physically present somewhere on land and sea at all times, engages in consumption at his or her place of physical presence (and possibly in other places as well), and finances consumption by owning assets or deriving income.Footnote 10
What Does It Mean to ‘Pay a Tax’?
Before we can go into the details of our research question, one additional clarification is in order: what does it mean to ‘pay a tax’? From the legal perspective, this notion is related to the legal obligation to transfer financial means to the state authorities as required by that state’s fiscal legislation.Footnote 11 Going beyond this legal approach, which is mainly focused on direct taxes (income tax, net wealth tax, inheritance tax, etc.), the notion of ‘paying a tax’ has to be applied in the context of indirect taxes. These are taxes which are legally owed and formally paid by a taxable person (e.g., a seller or a service provider) but which are according to the intention of the legislator – meant to be borne by their counterparty. This is where nobody can fully escape the impact of taxation. One can even say that a country that tries to attract foreign individuals to migrate to that country will do so with the aim of incentivising the immigrants to spend money in that territory, to consume goods and services and to enable their counterparties – employees, independent contractors, and so on – to pay taxes.Footnote 12
Is this kind of factual taxation the answer to the ‘fair share’ debate? While it is true that the mechanics of tax incidence will prevent tax-exempt individuals from being completely ‘tax free’, one can imagine that this outcome will not satisfy those who plead for the ‘fair share’ being paid by highly mobile individuals. Any incidence-based tax burden inflicted on the migrant will not work on a ‘progressive’ basis as indirect taxes are typically levied at a flat standard rate and even the incidence of direct taxes paid by the tax-exempt person’s counterparties (e.g., taxes paid by service providers) will not consider the comprehensive income or all assets of a person.
Taking a closer look, it is fair to say that the underlying theme of the fairness debate is not the lack of any tax burden (legally and factually) on mobile individuals. It is rather the lack of a progressive direct tax system, which takes full account of income and wealth.Footnote 13
A Legal Obligation to Pay Taxes?
Example
D is a Dutch citizen, who attended school and university in the Netherlands. He left his home country thirty years ago and worked for an international organisation located in the United States, and in different developing countries after that. After retirement, he moved to Portugal, planning to grow wine grapes.
D’s pension will be taxed nowhere. The Netherlands will not tax it as D is neither a resident of the Netherlands nor does he derive income from Dutch sources. The United States will not tax him as the Double Tax Convention between the United States and Portugal allocates the right to tax pensions to Portugal. Portugal will not tax him as the Portuguese government has decided to attract foreigners by offering a scheme under which foreign income is tax exempt for ‘non-habitual residents’.Footnote 14
Home Country and Source Country
The Traditional Layout
In the world of direct taxation (income tax, net wealth tax, inheritance tax) a tax can be levied both in the home country of a person and in the source country, that is, the country where income is derived and assets are held.
Nevertheless, the very concept of the ‘home country’ is not unambiguous as the prerequisites of unlimited tax liability differ from country to country.Footnote 15 Unlimited tax liability can be imposed based on citizenship, a traditional concept stressing the ‘personal allegiance’ of a human being to a state that is wedded to the nineteenth century evolution of the nation-state but went out of fashion as the defining element for worldwide taxation in the twentieth century. Today, taxation according to citizenship is applied by the United StatesFootnote 16 and a few more countries, in particular Eritrea, which levies a 2 per cent ‘diaspora tax’ to fund a war,Footnote 17 and Hungary.Footnote 18 By contrast, most countries prescribe worldwide taxation on the basis of ‘residence’ which is by nature a fuzzy notion as it mingles a territorial element (residence) with a personal element (unlimited tax liability).Footnote 19
Moreover, the legal concept of home country affiliation is not necessarily a binary ‘black or white’ concept as some jurisdictions use a sliding scale that increases the tax as a person’s personal or economic attachments to the jurisdiction increase. A major example is the United Kingdom, under whose laws mere ‘residence’ has to be distinguished from ‘domicile’, which requires not only ongoing physical presence but also a willingness to make the United Kingdom one’s home country in the long run – without necessarily aiming at full citizenship.Footnote 20 As a result, under UK tax law, ‘resident’ taxpayers are treated more benevolently than ‘domiciled’ taxpayers with regard to their foreign income, which for resident taxpayers is only taxed on a ‘remittance basis’ for up to 15 years after taking residence.Footnote 21
The concept of ‘source’ – meaning the territorial attachment of income or assets as a basis for limited tax liability – is even more amorphous than the concept of ‘residence’, as it is meant to identify a specific link between a fiscal territory and an item of income or an asset.Footnote 22
The Impact of Tax Competition on Source Country Taxation and Home Country Taxation
It is a well-known fact that downward pressure on the level of income taxation, wealth taxation, and inheritance taxation is largely due to the rise of international tax competition. Tax competition has been widely examined in the context of business taxation or taxation of capital (income), which can both be conceptualised as taxation at source. But the demise of source country taxation cannot on its own fuel the current debate about individuals paying their ‘fair share’. This outcome requires not only a reduction in source taxation but also a waiver of residence taxation. One must fully realize that a defining feature of the current international tax order is the simultaneous erosion of home country taxation and source country taxation.Footnote 23 Non-taxation will result if neither the home nor the source country use their fiscal powers to tax a certain item of income or a certain asset. To the extent mobile individuals can benefit from this effect, international taxpayers may face less tax than domestic taxpayers or even no tax at all.
A Non-Binary Status for Mobile Taxpayers?
The combined effect of tax competition at the level of source countries and home countries can result in ‘double non-taxation’. One can see this as problematic and call upon governments to refrain from such policies and to coordinate a ‘single-tax principle’ for individuals. But it would be overly simplistic to say that the governments of the involved countries are not behaving rationally. For the source country, attracting inbound investment might be worth giving up direct taxation of foreign investors; why should they – in particular ‘poor countries’ – care about meaningful taxation in the home country?Footnote 24 For the home country, attracting inbound migration of special groups might be worth the (same) sacrifice without having regard to a lack of fiscal burden in the source country. To give one example: An industrialised country, such as Italy, offers the most attractive tax waivers to people willing to relocate to small towns in Southern Italy and in ‘seismic areas’Footnote 25 – obviously a desperate move to stop the depopulation of large areas of the country.
This seems to lead to a paradigm shift in international taxation of individuals. The old principle that the home state will automatically make up for any deficiency in source taxation doesn’t hold any more. Home states now tend to create a new status for mobile individuals between mere source taxation (which is applicable to non-resident taxpayers) and unlimited tax liability (which is applicable to immobile residents). They allow mobile resident individuals to be taxed on a territorial basis or to pay a lump-sum tax on foreign income at least for a limited amount of time. In any case, these mobile individuals are not subject to comprehensive taxation of income and assets at the regular progressive tax rate applied to other resident taxpayers.
A new non-binary status of taxpayers thus has been created, who are (from a fiscal point of view) not yet full members of the local community of taxpayers.Footnote 26 But most states are not willing to maintain migrant taxpayers in this privileged ‘intermediate’ status in the long run. Under current legislative practice, these tax benefits are not only time-limited, they also only apply to foreign citizens and not to the jurisdiction’s own nationals or to persons who had spent a substantial amount of time in the country. The privileged treatment reflects the perception that these persons, while being (newly) fully resident in a country, do not (yet) fully belong to the local community of regular taxpayers.
A Moral Obligation to Pay Taxes?
States and Individuals and Moral Responsibility
Non-taxation of individuals requires interaction between two partners: states that offer tax exemptions and individuals willing to shape their behaviour to benefit from these exemptions. Thus, the question of whether non-taxation of an individual infringes on certain moral obligations can be addressed both to states and to individuals.
Most of the academic writing in this area looks to the states as moral actors. They are perceived as the mainstays of ‘social justice’, and the bone of contention is to what extent they are obliged to establish social justice only within their borders or whether they are obliged to contribute to an international tax order striving for ‘global’ tax justice. This issue of mutual obligations of justice between fiscal states has been raised under the heading of ‘inter-nation equity’.Footnote 27 Today there are two strands of the academic debate which focus on possible moral duties between states:
The debate on ‘tax competition’ which examines the morally acceptable ways and means available for countries to attract capital (including human capital) and to increase revenue. This debate also includes an assessment of the position of ‘tax havens’ as these jurisdictions undermine other states’ ability to apply ‘just’ tax systems involving a substantial amount of redistribution.Footnote 28
The debate on the allocation of taxing rights between developed and developing countries which examines the necessity to shift revenue towards developing countries to reach a ‘fair’ participation in the global benefits of international trade.Footnote 29
This chapter points in a different direction. It tries to answer the question of whether individuals have a moral obligation to pay a substantial amount of taxes, that is, a moral obligation to contribute to ‘social justice’ and reject available options to minimise individual tax payments – options that are offered to them by existing jurisdictions in a perfectly legal manner. This examination, which looks to individuals and their moral choices, takes the current international tax system for granted, which allows governments to act strategically and to shape their respective tax system in a manner that attracts mobile individuals. Must individuals refrain from playing the games to which the states invite them?
Social Justice and Taxation
Reciprocity and Solidarity
When we talk about ‘fairness’ in a legal context – and this includes fiscal law – we focus on demands of ‘justice’.Footnote 30 Concepts like fairness or justice can be applied in a small setting (e.g., between two people contracting with each other) or within the framework of a larger social entity. As taxation does not exist outside the context of a society and of governments, the question of whether and where a person is morally obliged to pay taxes must be discussed not in isolation but in the larger context of ‘social justice’, which is a major building block of the moral fabric of a society.
Building on a traditional dichotomy, which can be traced back to Aristotle, one can distinguish between two major dimensions to social justice playing a role in taxation.Footnote 31
The notion of reciprocity (iustitia commutativa): under this notion, taxes can be justified as payments in consideration of public goods enjoyed. This line of thinking is strongly linked to the benefit principle as a foundation for direct taxation.Footnote 32
The notion of solidarity (iustitia distributiva): under this notion taxes can be justified as an unrequited contribution to public goods and as a means of redistribution. This line of thinking is strongly related to the idea that a tax is a sacrifice for the benefit of a community to which the taxpayer belongs. This implies in particular that taxes are levied on the basis of ability to pay, as the ability-to-pay principle tries to establish horizontal and vertical equity within a given community of taxpayers.Footnote 33
Statist or Cosmopolitan View?
Both dimensions of social justice require the identification of a ‘collective’, which provides the framework to produce public goods and to arrange for redistribution. ‘Social justice’ goes beyond general humanitarian obligations and expectations which we all owe towards all human beings. One needs a ‘special relationship’ between a person and a state or society to justify moral demands vis-à-vis that person to transfer financial means to the ‘collective’.Footnote 34
Two major approaches inform the philosophical debate on social justice.Footnote 35 While the traditional ‘statist view’ applies the concept of social justice only in the context of a given state or society,Footnote 36 the ‘cosmopolitan view’ regards the whole world as home to one ‘global community’, which in turn justifies (financial) demands of worldwide solidarity.Footnote 37 An intermediate position is occupied by ‘internationalists’ who extend the concept of social justice beyond national borders – not unconditionally but in line with the unfolding development of international commercial relationships and international institutions.Footnote 38
In this chapter, the focus is on the relevance of these views for whether ‘everybody is morally obliged to pay taxes somewhere’. On closer inspection, each of those approaches suffers from a major disadvantage when it comes to its application in the field of taxation.
From the cosmopolitan perspective, the main deficiency of the current international tax order is the lack of a truly global tax authority entrusted with prescribing and enforcing ubiquitous tax obligations irrespective of where people are.Footnote 39
From the statist perspective, the missing element of the current international tax order is the lack of any ‘natural’ prerogative by any of the involved states to lay hands on the financial means of an individual, not to mention the lack of any obligation for a state to levy taxes from all persons, assets, or events under its jurisdiction.
Both issues deserve a closer look.
Global Tax Justice?
Cosmopolitan View
From the ‘cosmopolitan’ perspective, the notion of social justice requires the creation of global common goods and the redistribution of financial means across the whole of humankind. It is evident that this does not happen in real life. There is no worldwide tax legislation, no worldwide tax authority, and no worldwide budget, not to mention the lack of a ‘world government’, that would appropriate global tax revenue to certain global public goods or measures of global redistribution.Footnote 40 One might even – after giving the matter some thought – conclude that the creation of such a ‘world government’ would be a nightmare.Footnote 41
Does it make sense then to assume that – as long as there is no global government – each person should pay a meaningful amount of taxes to one of the existing countries to contribute indirectly to those global arrangements. The argument would be that, by financing one individual government, one contributes to the public sector in general,Footnote 42 thus enabling states around the world to pursue common goals together and to distribute financial means beyond territorial boundaries.
Taking a closer look, this calculation doesn’t add up.Footnote 43 First, demands of worldwide social justice would go beyond and may run opposite to demands of social justice as currently applied in the respective local setting. To give an example regarding the clash between global and domestic measures of redistribution, most countries show hugely different standards of living across all levels of society. A ‘poor’ national or resident of Germany or the United States may be much better off (in terms of nutrition, housing, education, cultural amenities, working opportunities, public security, etc.) than a relatively ‘rich’ person in Chad or Mali. Implementing global social justice according to the people’s needs would therefore require ‘poor Germans’ or ‘poor Americans’ to transfer financial means to relatively ‘rich’ citizens of the Chad or Mali. But, as things stand today, simply paying more taxes in Germany or the United States will mainly lead to more public goods for those better off anyway (i.e., the inhabitants of Germany and the United States) and to the implementation of some redistribution policies in Germany or the United States, but not beyond.Footnote 44 Moreover, the aim to use tax revenue for local expenditure comes naturally with democratic decision-making within the respective communities which cannot easily be ignored under the heading of global justice.Footnote 45
Against this background, Ayelet Shachar has proposed to introduce a special levy on citizenship that is meant to compensate for the enormous advantages a person derives from being born into a wealthy and civilised society. The winners of the ‘birthright lottery’ – this is her claimFootnote 46 – should share these undeserved benefits with those people who grew up in a poor environment, as the place of birth was allocated to them by chance, which is not a morally acceptable justification.
While Shachar’s proposal carries clear arguments from the perspective of global social justice, it runs contrary to the traditional role of the state as an institution to look after the needs of its citizens, and it is also inconsistent with current international tax practice. Following traditional rules of international tax law, citizens and residents of a country are legally obliged to pay taxes only in their state of citizenship or residence or in source countries where they own assets that generate income. Against this background, traditional residence and source countries might find it ‘somewhat objectionable’Footnote 47 if the tax revenue goes to citizens of a developing country that is not involved in the creation of the taxable income or wealth. Thus, to establish a system that would implement a truly global mode of redistribution, one needs a completely new institutional framework. And this leads us back to the moral position of the individual. If there does not exist an institutional framework linking tax payments effected in ‘rich’ countries directly to subsidies for the ‘poor’ in developing countries, what can a single person do? It is not possible for an individual to implement global social justice in the tax area without the necessary legislative and institutional framework.
If there is any moral obligation here, one might – irrespective of taking sides in the controversy between statists and cosmopolitans – appeal to the general humanitarian duties of all (rich) people to make voluntary donations directly supporting the most deserving poor, for example, via non-governmental organisations.Footnote 48 But this is a different avenue outside the context of social justice and should not distract from the fact that there cannot be a moral obligation to pay new taxes, which could be justified under the ‘birthright lottery’ scheme but have not yet come into existence.
There is a second argument rejecting the view that the individual should contribute ‘somewhere’ to global public goods and global redistribution: tax payments never reach ‘the poor’ directly. There are at least two intermediate players: the government of the ‘rich’ state where a person pays their taxes and the government of the ‘poor’ state where the deserving poor should benefit from those tax payments. The question of if and to what extent tax payments arising in industrialised countries can and will reach the world’s poorest human beings by way of development aid very much depends on choices made by the respective governments.Footnote 49 Inter-nation equity does not result mechanically in inter-individual equity.Footnote 50 Therefore, as Johanna Stark has emphasised in a recent article,Footnote 51 the allocation of taxing rights and revenues at the ‘collective level’ of states does not automatically translate into distributive measures between rich people and poor people. It only re-arranges the fiscal powers of the respective governments with respect to their relative shares in the global ‘tax pie’.Footnote 52 But this does not tell us anything about the way the money will be spent by the local governments. It might even be – and this happens frequently – that (non-democratic) governments of ‘poor’ countries spend additional revenue on that country’s elite, for example, by corrupt practices or targeted subsidies for a limited group of large businesses.Footnote 53
The first step to achieve international social justice should therefore be to support democratic and equitable decision-making in the respective ‘poor’ states.Footnote 54 The attempt to rearrange the international tax order can only bring about – as Dietsch and Rixen call it – a limited degree of ‘background justice’Footnote 55 which enables sovereign states to implement social justice within their respective jurisdiction. If this cannot be achieved at state level, it is not the task of individuals to establish their private channels of social justice.
From this we can draw the interim conclusion that the current international tax system is not in the position to provide a framework under which tax payments – in whatever state – can be morally required to contribute to global common goods or to global redistribution. For the time being we must live in a world where states apply local tax regimes and taxpayers mainly finance local public goods and distributive measures. If states fail in implementing supranational structures to establish a worldwide tax order or to coordinate in a fashion that ensures a ‘single-tax-principle’ for individuals or to organise global modes of redistribution, it is not the obligation of the individual to compensate for this deficiency, if indeed it is a deficiency.Footnote 56 Thus, even those cosmopolitans who would regard a general moral obligation to pay taxes to be part of everybody’s moral framework would have to concede that the lack of implementation and infrastructure renders this obligation meaningless.
In a widely cited paper, Ilan Ben-Shalom has proposed a middle ‘internationalist’ path. Rejecting an outright cosmopolitan view, he nevertheless emphasises the benefits taxpayers draw from international trade, which in his view results in transnational ‘relational duties’ between private economic actors in different countries. Yet he rejects the theoretical option to organise direct social transfers between individuals cross-border and supports the view that the respective home state must act ‘as an aggregate of its citizens’ relational duties’.Footnote 57 For the individual, the main result lies in their duty to ‘help establish just institutions’ at the domestic level.Footnote 58 But this does not immediately result in paying a ‘fair share’ of taxes. Rather, this approach aims at collective decision-making in the respective country and the individual’s democratic involvement in how to allocate public revenue. A similar result is reached by Christians and van Apeldoorn,Footnote 59 who emphasise mutual ‘duties of assistance’ between states. They propose to secure minimal subsistence rights for the poor to be funded by a new approach to source taxation. But also, in their view, it is the states and not the individual whose behaviour is regarded as ‘just’ or ‘unjust’.
Statist View
The statist view does not start from the assumption that social justice aims at the creation of global public goods or the implementation of global redistribution.Footnote 60 This perspective assumes that social justice can and must only be achieved in the context of a given state and its society. Within that state, it is up to democratically elected legislatures to decide on the size of the public sector, the choice of which public goods to provide and the level of redistributive efforts.Footnote 61 For the resident individual, this does not result in moral obligations going beyond their legal obligations as they will be told by law how much and who to pay.
Looking a bit closer, also note that if social justice can only be applied and social behaviour required within certain well-defined communities, the individual’s choice of which community to belong to is not in itself an issue that can be morally judged.Footnote 62 There are – in principle – no ‘good’ or ‘bad’ communities as such. This is important for our considerations as it means that mobile individuals have a right to choose which community to join, that is, where to live and where to earn and spend money and where to be taxed – if at all. The concept of social justice, in particular the notion of solidarity, only enters the picture under the statist view once a person has joined a certain community (or is just born into that community). But this choice is – morally speaking – neutral. It cannot be criticised as being ‘unfair’ or ‘immoral’. It might even be an infringement on their liberty to make them part of a certain community against their will.
State of Origin and State of Destination
State of Origin
The first candidate for a morally grounded entitlement to receive tax payments from an individual is the ‘state of origin’, meaning the state where a person was raised, went to school, enjoyed public services, and benefitted from redistribution. One might therefore argue that this state can – based on the notion of reciprocity – expect a person to contribute in the future to those public goods which that person previously enjoyed.Footnote 63 One might also claim – based on the notion of solidarity – that having citizenship or residence in the country of origin constitutes membership in a community, which requires financial solidarity in the long run.Footnote 64
But is it ‘unfair’ if a person who grew up under benevolent circumstances, benefitted from redistributive measures, was well educated and well prepared for economic success, leaves the country to earn their living or to spend their wealth in a low-tax environment? Would we morally require that person to ‘stay put’ to contribute to public revenue? One can extend this question to those states where the individual spent their working life. Is it immoral to leave a country on the date of retirement after many successful years of participation in that country’s economy?
The answer is ‘no’. First, the right to leave a country is a deep expression of personal freedom and as such morally not only acceptable but fully justified.Footnote 65 The concept that a person ‘belongs’ to a state and must work for that state all their life was part of (enlightened) absolutism in the eighteenth century and has been abandoned since.Footnote 66 In 1815, as part of the Final Act of the Vienna Congress, the full right of emigration was established as a general principle (and has remained a human right ever since).Footnote 67
Second, countries are not powerless when it comes to setting and enforcing ‘prices’ for emigration.Footnote 68 There can be an ‘exit tax’ on latent gains when it comes to a person moving out who owns appreciated assets.Footnote 69 Some countries apply a ‘trailing tax’ on emigrating citizens for a limited number of years after emigration.Footnote 70 There can even be a ‘brain drain tax’ on human capital as has been proposed by theorists of development economics.Footnote 71 But if a country does not apply one of these devices to emigrating people, the person should not be obliged to stay put and to show solidarity in the home state just because there would be no other way to implement social justice. Rather, if countries have decided against those fiscal schemes, these countries and their voters have shown that they value the personal or economic benefits of international mobility higher than the fiscal benefits of an exit tax or a trailing tax or a similar device.
In the European Union, higher-ranking law constrains the power of national tax legislators to erect substantial tax obstacles to intra-EU migration.Footnote 72 This is part and parcel of the joint decision of the EU Member States to give precedence to the Internal Market and its features over territorial fiscal goals. Given this unanimous political commitment expressed by the Member States, the freedom of emigration – including tax-driven emigration – cannot be set aside by general moral considerations.
In this context it may be somewhat surprising that most countries have abandoned worldwide income and wealth taxation based on citizenship and replaced it with unlimited taxation of residents. The argument in favour of taxation based on residence is that resident foreigners (like resident citizens) have a closer relationship with the local community than citizens living abroad. Nevertheless, citizenship taxation is admissible under international law as it is true that citizenship as such is a valuable good – given that it provides diplomatic protection by the home state and the right to return on a continuing basis. Moreover, it may serve as community membership.Footnote 73 Therefore, ongoing taxation of foreign-based nationals based on citizenship is a valid policy choice for each country.Footnote 74 It also prevents taxpayers from cherry-picking or enjoying beneficial fiscal rules abroad while still having a ‘lifeline’ to their country of citizenship if the situation in the host state becomes uncomfortable. But if a state decides not to apply unlimited tax liability to its citizens living abroad, people are free to move to other countries and to become part of the host country’s fiscal collective without having to renounce citizenship in their home country.
State of Destination
What about the state of destination, that is, the future host state of the taxpayer? As this is the state where the individual will establish himself or herself, the fact that they are invited to enjoy a tax-exempt or preferential status compared to domestic residents or citizens creates the specific moral problem. The question therefore seems to be whether it is ‘immoral’ for the immigrants to enjoy tax benefits which are not available to their (future) local neighbours.Footnote 75
In this respect, we must start from the fact that these inbound individuals are – given the mandatory nature of tax law – not allowed to pay higher taxes if the local tax code requires beneficial taxation (e.g., taxation on a purely territorial basis or a lump-sum basis) for specific groups of mobile individuals. There seems to be no ‘choice’ at all to be made by the individual that is subject to a moral assessment. But even if this beneficial treatment is dependent on the taxpayer making a deliberate election (e.g., by ‘checking a box’ on the tax declaration form to benefit from tax breaks offered to inbound individuals), it is not easy to claim that this is an immoral act vis-à-vis other taxpayers who do not benefit from that treatment.
When it comes to the moral assessment of inbound tax-driven migration, one should not overlook that the relevant tax benefits have in most cases been introduced by a democratically elected legislature. This means that the electorate of that country – which represents the majority of taxpayers – has (indirectly) agreed to the introduction of this kind of ‘split’ tax regime, which distinguishes between regular domestic taxpayers and a privileged group of immigrants. Again, the valid background consideration on the side of the government can be the expectation of positive spill overs arising from the attraction of high-net worth individuals or economically useful specialists.Footnote 76 If local taxpayers do not agree with this legislation, in many countries they have the right to challenge any tax privilege for foreign migrants in a local constitutional court.Footnote 77 This is where the issue of equal treatment under the relevant provisions of the respective constitution can be raised. But if the tax privilege is legitimate in terms of democratic input and in line with the framework provided by the respective constitution, why then should an individual be morally criticised for accepting this offer? This does not mean that one should not plead in the political arena for a different tax policy agenda – namely abolishing any ‘price discrimination’ between mobile and immobile taxpayers. But this is a decision which the relevant collective must make along the lines provided by the domestic constitution.Footnote 78
This outcome is confirmed when we take a closer look at the two dimensions of social justice relevant in this context:
When we look to iustitia commutativa in a superficial manner, the benefit principle seems to go against granting access to the amenities of living in the host country to foreign migrants without them having to pay the same price as other inhabitants. But is this the right description of what’s happening here? One can also say that the government has simply realised that ‘on the margin’ the extra expenditure by the government to finance another bit of public goods provided to the mobile individual is lower than the welfare benefit for society at large that can be captured once the mobile individual enters the country, bringing along consumption power and maybe even valuable human capital.Footnote 79 Thus, the outcome of the preferential tax scheme can still be a bargain for the taxing state.Footnote 80 The benefit principle is simply not sufficiently granular when it comes to these ‘marginal’ effects of adding new residents to a jurisdiction.Footnote 81
When we look to iustitia distributiva, the ability-to-pay principle seems to demand that any person living in a country must contribute to the public coffers according to their financial means, which would require full inclusion of income and wealth without any exemptions for foreign income or assets.Footnote 82 But this conclusion also fails. One must take into consideration that the mobile individual, when he or she makes the decision to enter the country, is not yet a member of the local society and as such is not obliged to any sacrifice under the auspices of ‘membership’ in the local community. There is no bond of solidarity at this decisive point in time between the individual and the country’s existing residents and therefore the mobile individual is free to accept the offer of the local government to enter the country at a ‘lower price’.Footnote 83 But the relevant social bond can evolve in the course of time and therefore it is fully justified that those countries who create tax breaks for immigrants regularly set an expiration date for those benefits to account for the ongoing integration of the respective taxpayers into the local community. But again – it is up to the democratically elected government of that country to decide on the limitations governing the relevant tax exemptions.
Conclusion
The outcome of our analysis can be summarised as follows.
Is there a legal obligation to pay taxes somewhere? No, there are more and more cross-border situations where mobile individuals neither pay tax in the source country nor in the home country (as described in the Preface to this book). This is due to a paradigm shift at the level of international taxation, as both source countries and home countries reduce the scope of taxation to attract investment or individuals.
Is there a factual obligation to pay taxes somewhere? Yes, everybody does factually pay some taxes. Being exempt from direct taxes does not liberate people from the economic effects of taxation as other taxpayers will be in the position to shift their (indirect or direct) tax burden towards the tax-exempt individuals whenever these persons consume or generate income or assets. But this does not mean that tax-exempt individuals are burdened in the same manner as taxpayers who are personally subject to mainstream income tax, wealth tax or inheritance tax. These mobile individuals are not subject to a progressive tax burden on their comprehensive income or wealth, a feature which is regarded by many to be the core of any truly ‘fair’ tax system.
Is there a moral obligation to pay taxes somewhere? Again, this answer is no. At the global level there exists no mechanism to finance global public goods or to organise worldwide redistribution which requires all people living on the earth to contribute. Taxation exists only at the level of individual states. But if neither the country of origin nor the country of destination nor the relevant source countries activate their taxing rights towards a certain group of mobile individuals, it is not up to these individuals to make up for or to reject policy choices legitimately made by local governments.
Where does this leave us? Whoever complains about the rise of double non-taxation in the case of individuals should in principle not go after the persons accepting attractive tax packages from governments around the world. Rather, one should take a critical look at those governments who design tax packages and undercut offers made by other jurisdictions. But again, one should think twice and always ask whether countries have good reasons for their policy choices, for example, to incentivise local investment and local consumption, to improve the workforce or to create a market for local suppliers of goods and services. Any measures countering this kind of competition for mobile individuals would require international coordination comparable to the BEPS Project initiated more than 10 years ago which made the ‘single tax principle’ of business profits front and centre. Thus, BEPS Project 2.0 for individuals may be on the horizon, but it should be handled with care given the large impact on states’ policy choices and individuals’ personal lives.
