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Just Harmonization

Tsilly Dagan, Bar Ilan University

UTIntroduction UTPart A. Taking Distributive Justice Internationally UTPart B. Decentralization as a Hurdle for Redistribution 8



UT1. Competition Hinders Political Distributive Justice


UT2. Competition Hinders Cosmopolitan Justice


UTPart C. Harmonization and Its Biases




UT2.Inter-Nation Disparities and Their Biases


UTa. A Cartel of (Only) Developed Countries?


UTb. The Need for Multilateral Negotiations


UTc. Asymmetric Negotiations


UT2. The Biases of a Well-Balanced Harmonization

Part UD. Just Harmonization




Tax is viewed as one of the main vehicles for wealth redistribution. This is why distributive justice is a key consideration in almost any normative discussion of tax policy. Ordinarily, such a discussion is held in the context of national policy, where we would like to think that the national sovereign designs tax rules in an efficient and just manner. It thus seems only natural to discuss questions of global or international distributive justice within the framework of international tax discourse. International tax seems like the obvious place for im- plementing international distributive justice and international distribu-

I would like to thank Ori Mendelevich for excellent research assistance, Itzhak Benbaji, Eyal Benvenisti, Kim Brooks, Adi Ayal, Tali Margalit, Guy Mundlak, participants at the 2008 Fiscal Footprints Workshop, McGill University, and the 2008 Law and Globalization Workshop at Tel




tive justice an inevitable matter of international taxation. The interna- tional setting, however, requires that we rethink our conception of dis- tributive justice and adapt it to the global sphere. Indeed, a growing number of scholars are maintaining that principles of distributive jus- tice should have a global purview, 1 thus challenging the traditional (national) discourse of distributive justice.

This scholarship, however, does not incorporate analysis of interna- tional taxation. 2 International taxation is crucial to understanding both the problems and solutions to promoting distributive justice in a glob- alized world. Accordingly, one of the central aims of this Article is to bridge the gap between political philosophers and international tax experts, to make international tax accessible to the latter as well as to examine the arguments raised in political philosophy discussions in the context of international taxation. To do so, I construct admittedly stylized versions of the stories of international tax competition and tax harmonization, thus providing a broader audience a taste of tax litera-

Aviv University for their helpful comments.

1 For a review of the literature, see Simon Caney, International Distribu- tive Justice, 49 Pol. Studies 974 (2001).

2 For a rare exception, see Alexander Cappelen, National and Interna- tional Distributive Justice in Bilateral Tax Treaties, 56 Finanzarchiv N.F. 424 (1999). Cappelen discusses the choice between the residence princi- ple and the source principle in international capital taxation from an inter- national equity perspective, arguing that the choice between the two prin- ciples is, to some extent, a choice between national and international inequality. He further takes the perspective of a global planner in arguing that, from such a perspective, the source principle might be superior since it reduces international inequity.




ture and facilitating the important dialogue between of distributive justice and international taxation.

The Article begins in Part A with a brief presentation of the current debate over the meaning of international distributive justice and the divergent views on this matter. The lack of consensus among political philosophers notwithstanding, distributive justice is often cited in sup- port of certain international tax policies. In particular, it is frequently argued that curtailing international tax competition by harmonizing

international tax rules is justified since it will facilitate redistribution. 3 The Article’s discussion will thus proceed to consider the validity of this claim, that harmonization is a distributively-just solution, and to suggest conditions for truly just harmonization. Part B will discuss the challenges faced by redistribution in conditions of decentraliza- tion. Part C will describe two potential biases of harmonization:

asymmetric negotiations, where developed countries enjoy superior bargaining power over developing countries, and the divergence in the effects of harmonization for various local groups within states, which are biased against labor in developing countries. Part D will conclude with an outline of how a truly just scheme of global harmonization could look like.


3 For a detailed description of the distribution and efficiency arguments supporting harmonization and a convincing critique, see Julie Roin, Com- petition and Evasion: Another Perspective on International Tax Competi- tion, 89 Geo. L.J. 543, 549-86 (2001).




Political philosophers mull over the question of international distribu- tive justice, proposing a wide variety of approaches to what global jus- tice means. The main controversy has arisen over the relevant scope of redistribution. Should we promote distributive justice on a national level or on a global scale? At the extreme end of the spectrum, de- voted cosmopolitans advocate worldwide redistribution, transcending national borders. 4 At the other end, there are those who emphasize the importance of national solidarity or the significance of political struc- tures. 5 Simon Caney divides the varying approaches into four catego- ries: 6 cosmopolitan, nationalist (political), society of states, and real- ists. Realists (or skepticists) view global justice as an unattainable ideal and, hence, leave distributive justice to the only arena capable of

promoting it—the state. 7 The society-of-states approach rejects this skepticism and holds that, although states are, indeed, responsible for their residents' welfare, the global community bears responsibility for ensuring adequate conditions for states to be able to achieve distribu- tive justice. Under this view, outsiders to the state have a duty to con-

4 See, e.g., Brian Barry, Charles Beitz, Thomas Pogge

5 See, e.g., Thomas Nagel, The Problem of Global Justice, 33 Phil. & Pub. Aff. 113 (2005).

6 See Caney, supra note 1.

7 See Charles R. Beitz, Bounded Morality: Justice and the State in World Politics, 33 Int’l Org. 405, 406-07 (1979), describing the works of Ma- chiavelli, Bodin, Hobbes and others:

International skepticism is based on a perception of a radical discontinuity between the normative order of domestic society and that of international relations. Skeptics seldom deny that in- dividuals in society should follow moral principles that require occasional sacrifices of self-interest; what they deny is that the domestic model applies internationally.




tribute only in special circumstances. 8 The other two approaches, po- litical justice and cosmopolitanism, are the polar ends of the spectrum

of global ideals of justice. Supporters of the latter view 9 argue that principles of distributive justice should be applied universally—to all

human beings across the globe. 10 Their reasoning, as Caney summa- rizes it, is "given the reasons we give to defend the distribution of re- sources and given our convictions about the irrelevance of people's cultural identity to their entitlements, it follows that the scope of dis-

8 See Charles R. Beitz, International Liberalism and Distributive Justice:

A Survey of Recent Thought, 51 World Pol. 269, 271-72 (1999):

David Miller, John Rawls, and John Vincent, among others, have set forth views of this kind. Although these views differ in important respects, they have two central elements in common. First, they hold that all societies should respect basic human rights, conceived as universal minimum standards for domestic social institutions that apply across variations in cultures and conceptions of social justice. (There is some disagreement, how- ever, about which rights count as "human" rights.) Second, they contend that the primary responsibility for satisfying these rights rests with a society's own government and people. Outsiders have a responsibility to contribute only under special circum- stances. As Miller puts it, for example, that occurs when there are extreme levels of deprivation which the local government is in no position to relieve and when foreign governments or other international actors can do so effectively without a morally sig- nificant sacrifice. 9 We can count Brian Barry, Charles Beitz, Thomas Pogge, and others among their ranks. 10 There are many strands to the cosmopolitan view. See Caney, supra note 1, at 975-76, referring to radical cosmopolitanism (principles of dis- tributive justice apply only on the global level, not on the national level) and mild cosmopolitan (distributive principles apply on the global and national level), institutional global justice (i.e., justice within institutions) and interactive institutionalism (in the context of individuals), and distri-




tributive justice should be global." Supporters of political justice, in

contrast, focus on the national rather than the global level. 11 Under

this approach, 12 justice is a political value, then, a good provided by

social institutions. 13 As a consequence, the fact that the international arena lacks a global sovereign presents both a practical hurdle and a substantive problem for the promotion of distributive justice on the global level. Indeed, this arena is not "an appropriate site for claims of justice. … [M]ere economic interaction does not trigger the height- ened standards of socioeconomic justice.” 14 Rather, states Nagel, "[j]ustice … is something we owe through our shared institutions only

bution among individuals and distribution among states. Moreover, the measures of distribution vary from approach to approach.

11 Supporters of the national approach emphasize the moral relevance of membership in a nation. Again, national approaches vary. For a survey of these approaches see Caney, supra note 1, at 980-83.

12 Nagel, supra note 5, at 120:

Unlike cosmopolitanism, the second conception of justice does not have a standard name, but let me call it the political concep- tion, since it is exemplified by Rawls’s view that justice should be understood as a specifically political value, rather than being derived from a comprehensive moral system, so that it is essen- tially a virtue—the first virtue—of social institutions. On the po- litical conception, sovereign states are not merely instruments for realizing the preinstitutional value of justice among human beings. Instead, their existence is precisely what gives the value of justice its application, by putting the fellow citizens of a sov- ereign state into a relation that they do not have with the rest of humanity, an institutional relation which must then be evaluated by the special standards of fairness and equality that fill out the content of justice.

13 According to Nagel, supra note 5, at 130, justice should be national be- cause "[t]he state makes unique demands on the will of its members … and those exceptional demands bring with them exceptional obligations, the positive obligations of justice."




to those with whom we stand in a strong political relation. It is, in the standard terminology, an associative obligation." 15 The decentralized nature of international taxation poses a challenge for both cosmopolitans and advocates of political justice. As I will ex- plain in greater detail below, tax competition and the lack of a central global government make either conception of justice difficult to real- ize. Harmonizing international tax policies—curtailing competition and creating some kind of an international tax regime—seems like the textbook solution to these problems. In previous work, I implicitly as- sumed a skepticist view, arguing that international cooperation on tax matters is practically unattainable. 16 My skepticism was pragmatic, hence, In this forum I put it aside and assume instead the feasibility of some international action in tax matters. Given this assumption, I now consider which conditions this textbook remedy—harmonization— requires to advance the various types of distributive justice.

In what follows, I describe the problems entailed in promoting both the cosmopolitan and political justice conceptions of distributive jus- tice under conditions of tax competition. I explain the prevailing (al- though never empirically determined) argument that tax competition drives tax rates to the bottom, thereby preventing countries from redis- tributing wealth among their residents. I then present the solution of- fered by tax harmonization, namely, multi-national cooperation for the

14 Nagel, supra note 5, at 121.

15 Nagel, supra note 5, at 121.

16 Tsilly Dagan, National Interests in International Taxation, 18 VA. TAX REV. 363 (1998).




purpose of imposing taxes. My stylized discussion singles out one (admittedly ideal and far-reaching) type of harmonization, in which I all countries agree to implement a standard-form income tax at a rate that will cover the cost of each country's public goods (i.e., each coun- try will set a tax that is sufficient to supply its public goods) along with a uniform agreed-upon rate of tax to allow for redistribution of wealth within those countries. I argue that the procedure necessary for attaining such harmonization is biased in favor of developed countries. Presuming developed countries would use their superior negotiating position, this procedure could result in regressive agreements, with the collected tax revenues allocated more to the benefit of developed countries and less to that of their developing counterparts. Moreover, I show that even under the alternative assumption, whereby developed countries would not utilize their bargaining advantage in the negotia- tions and instead would negotiate an agreement where each country collects "its" taxes (i.e., tax revenues are allocated in line with pre-tax prices), the distributive results of such a "neutral" harmonization might benefit the poor of developed countries at the expense of the poor of developing countries. Finally, I conclude that only transfer payments between countries can ameliorate this outcome.


In the international tax arena, every state makes its own tax policy choices individually. Each state independently decides on whether and how to tax its own residents as well as foreign investors. There is no universal government or a multilateral organization with the authority




to make or even coordinate tax policy decisions. 17 Hence, instead of the lone, powerful sovereign we presume in discussions of distributive justice on the national level, on the international level we find some two-hundred or more sovereigns competing with one another: for in- vestments, for residents, for tax revenues. Since tax is one of the fac-

tors that people weigh in their investment and residence decisions, 18 it emerges as a competitive tool in the game states play in the global arena. Hence, the way states think of tax in the international setting is quite different from how they think about it in the internal context. In- stead of (to take the ideal case) setting taxes optimally for the realiza- tion of their efficiency and distributive goals, countries become—at

least to some extent 19 —"price takers," treating taxes as market prices, to be taken or left, when trying to attract and retain residents and in- vestors. This competitive setting can limit states in their pursuit of dis- tributive justice. Host countries struggle to attract investments by low- ering their tax rates on foreign residents; residence countries court foreign residents (individuals as well as multinational enterprises) by offering attractive taxing and spending deals. The result, it is often

17 Although some have argued for the emergence of an international tax regime (see, e.g., Yariv Brauner, An International Tax Regime in Crystal- lisation—Realities, Experiences and Opportunities,” 56 Tax L. Rev. 259 (2003); Reuven Avi-Yonah, International Tax as International Law; An Analysis of the International Tax Regime (Cambridge Tax Law Series, 2007)), there is no doubt that such a regime, even if it exists, lacks any enforcement power capability.

18 See James R. Hines, Jr., Will Social Welfare Expenditures Survive Tax Competition?, 22 Oxford Rev. Econ. Pol’y 330, 332 (2006) (and refer- ences therein).

19 Depending on the mobility of their residents and resources and on their




claimed, is the infamous “race to the bottom”: residence and host countries keep reducing their tax rates even—according to the theo- retical predictions—to the point of zero taxes, 20 thereby undermining their ability to redistribute wealth. Although empirical evidence does not unequivocally back up the zero tax prediction 21 and even though there are certainly other plausible scenarios, 22 it has gained a lot of support and has served to bolster policy recommendations endorsing harmonization. For my purposes here, I accept the race-to-the-bottom scenario, since, if competition were not to undermine the ability of states to advance redistribution, harmonization simply would not be required. Thus, in order to critically examine harmonization as an in-

political constraints.

21 Empirical evidence does not clearly indicate that the race to the bottom is a serious problem; see, e.g., Sijbren Cnossen, Tax Policy in the Euro- pean Union (CESifo Working Paper No. 758, 2001); Thomas Plümper, Vera E. Troeger & Hannes Winner, Why Is There No Race to the Bottom in Capital Taxation? Tax Competition among Countries of Unequal Size, Different Levels of Budget Rigidities and Heterogeneous Fairness Norms,



prediction of zero capital tax rates was not in line with reality when it was first formulated and it did not come true since." See also Hines, supra note 18, at 331.

arguing, "While it is certainly

22 See, e.g., Hines, supra note 18, at

possible that global competitive forces will ultimately erode significant social welfare systems in countries that have them, this outcome is far from certain. Another very realistic possibility is that globalization will

invigorate advanced economies, thereby making them better able to sup- port significant social welfare spending."







ternational tax regime, I focus on the scenario in which it is most com- pelling.

If the race to the bottom prediction is accurate, it is the decentralized, competition-based structure of international taxation, in conjunction with its inherent collective action problems, that are to be blamed for hindering states from pursuing either the cosmopolitan or political conceptions of distributive justice. Countries vying with one another for investments, residents, and tax revenues find it hard to collect suf- ficient taxes to sustain a redistributive tax system of a national scope. Countries operating individually cannot engage in a serious effort to promote cosmopolitan justice. For in the absence of a central forum for coordinating and enforcing redistribution, it seems improbable that wealth can be redistributed among individuals on a global basis. And since it is the competitive nature of the international arena that pre- vents states from pursuing their national standards of justice, it is fair to say that the society-of-states standard of justice—namely, the prin- ciple of refraining from standing in the way of national-level justice— is being thwarted as well. The following sections will elaborate on this.

1. Competition Hinders Political Distributive Justice

Tax competition has been blamed for undermining national-level dis- tributive justice. In conditions of tax competition, countries strive to draw (and keep) investors and residents by offering, among other




things, attractive taxing and spending packages. 23 This means, on the

one hand, lowering taxes on the most mobile elements 24 and, on the other hand, offering those public goods and services that will most in- terest them. Investors for example will seek services that the govern- ment can supply more efficiently than the free market (such as infra- structure, security, and rule of law). Presumably, they will be less interested in governmental functions aimed at assisting the weaker segments of society (such as welfare, public health, and, perhaps, edu-

cation). 25 Hence tax competition pushes states to lower taxes on capi- tal and curb services targeting non-investors. 26

23 Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Pol. Econ. 5 (1956).

24 For a detailed analysis of the phenomenon of tax competition, see Reu- ven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1573, 1575-1603 (200). It has been argued that tax competition will drive tax rates down to a suboptimal level, where states are forced to under-provide public goods. For a formal model supporting this argument, see G.R. Zodrow & P. Mieszkowski, Pigou, Tiebout, Property Taxation, and the Underprovision of Local Pub- lic Goods, 19 J. Urban Econ. 356 (1986). Although it is unclear what ex- actly constitutes the "optimal" level of public goods (see Roin, supra note 3), it is pretty clear that redistribution would be reduced.

25 Some differences may arise between features that are attractive to pro- spective residents (clean environment, public parks, etc.) and those that interest future investors (who might find lower environmental standards attractive, for example). But such discrepancies are immaterial to the dis- cussion in this Article, whose point is that neither potential residents nor investors are interested in the redistributive functions of tax.

26 Other factors may have the opposite effect (which is why, some ex- plain, tax rates don't actually race to the bottom). See Plümper et al., su- pra note 21, arguing that while tax competition does, in fact, drive tax rates downwards, other factors—budget rigidity and fairness norms— have a counter-influence.




Residents, too, are mobile. Thus, they also may be sensitive to tax and welfare policies. Assuming elasticity in residents' decisions, countries can compete for mobile residents also through attractive tax and bene- fits packages. Under the classic Teibout Model, 27 countries compete for residents with different packages of public services and prices (the taxes they have to pay for those services). This competition may have problematic distributive effects as well if, as seems plausible, resi- dents who benefit from the welfare state have a stronger preference for it than those who do not derive any benefit therefrom (or are at lower risk of requiring its benefits). Indeed, rich taxpayers who are supposed to be on the contributing side of redistribution will likely prefer less distribution to more distribution (even if they are altruistic, they may prefer to fund charities of their own choice rather than gov- ernmental redistribution). Taxpayers on the receiving end of redistri- bution will presumably have a preference for greater redistribution. 28 But higher taxes, which are required to finance the welfare state, might push the wealthy away. If this presumption is true, it would force the government to choose between either keeping taxes high and risking losing the wealthy (if they were indeed to leave, it would mean, in practical terms, shifting taxes to mid-level taxpayers) or re- ducing taxes (and welfare) and keeping the wealthy.

27 Supra note 23 .

28 The federal system had interesting issues with regard to welfare at the state level. Unlimited mobility of residents turned states with an extensive welfare system into “welfare magnets.” This significantly decreased their ability to sustain their welfare systems. See, e.g., Roderick M. Hills, Pov- erty, Residency, and Federalism: States’ Duty of Impartiality toward Newcomers, 1999 Sup. Ct. Rev. 277 (1999).




In the extreme case, driving down tax rates on mobile residents and on the mobile factors of production will shift the tax burden to the less mobile factors (most importantly, to low skilled labor), 29 lead to a re- duction in tax revenues, and undermine the ability to sustain the wel- fare state and, in particular, redistribution. But even under the less ex- treme scenario, tax competition indisputably puts pressure on countries to reduce their taxes and limit redistribution or else to pay the (political and overall welfare) price. 30

2. Competition Hinders Cosmopolitan Justice

Cosmopolitan justice—redistributing wealth among individuals on a global level by collecting taxes from the world's rich and transferring the revenues to the lesser-off—requires a significant degree of interna- tional coordination. Specifically, it would entail the establishment of a central administration that would design or at least coordinate policies

29 Avi-Yonah, supra note 24, at 1624, stating that “a shift in the tax bur- den from capital to labor tends to render the tax system more regressive. Such a tax system is also less capable of redistributing resources from the rich to the poor.”

30 Plümper, supra note 21, at 22:

[H]olding everything else constant, countries in which govern- ments are least restricted by fairness considerations implement the lowest tax rates on mobile capital and become capital im- porters. This result remains valid for the opposite case: gov- ernments which are most restricted by fairness norms implement the highest tax rates on mobile capital and become capital ex- porters. Accordingly, fairness norms come at a price; the price a country with an egalitarian electorate has to pay is highest when fairness norms are weaker in other countries.




so as to facilitate transfer of wealth from the better-off to the lesser- off. Recent years have witnessed a considerable extent of transnational

coordination through various "soft law" mechanisms of international law, 31 and it has been asserted that international tax, too, is undergoing

a convergence through similar mechanisms. 32 It seems, however, that

a cosmopolitan mechanism of redistribution requires far more than

mere coordination of unilateral actions, and such broad cooperation would be extremely hard to achieve in the framework of a decentral- ized regime. Without a central mechanism to evaluate the abilities and needs of individuals and to administer transfer payments, cosmopoli- tan justice seems a virtual impossibility.


The obstacles created by tax competition for redistribution of wealth have led many to advocate harmonization of international taxation as

the best means of achieving distributive justice. 33 Indeed, as discussed above, harmonization seems like the textbook response to both the co-

31 This was true to some degree even in the international tax arena. See, for example, the ECOFIN tax package—the ECOFIN Council Conclu- sions 12671/97 recommending a code of conduct on business taxation, a directive regarding the taxation of savings, and a directive regarding cross-border interest and royalty payments.

32 See Avi-Yonah, supra note 17.

33 For a detailed description of these arguments and a convincing critique, see Roin, supra note 3, at 549-86. For more recent work, see Eduardo Baistrocchi, The Use and Interpretation of Tax Treaties in the Emerging World: Theory and Implications, 2008 British Tax Rev. 352, arguing that collective action among developing countries, absent a central authority, prevents them from collecting taxes on FDI.




ordination difficulties entailed in cosmopolitan justice and the need to curtail tax competition in order to facilitate political justice. The basic idea is that either form of international distributive justice requires that countries cease to compete (and stop driving tax rates to the bottom). Instead, the claim goes, countries must cooperate—in setting and en- forcing a high enough rate of tax—so that all are able to sustain their welfare state or towards instituting the even more ambitious coopera- tive scheme of global redistribution.

Consider first cosmopolitan justice. Although cosmopolitans have yet to fully develop a specific plan for international redistribution through taxation, 34 international cooperation seems essential for achieving or even promoting the justice they advocate: one, to limit tax competition (so as to avoid the problem of taxpayers evading any taxation) and, two, to facilitate some kind of international regime with the power to design, collect, and enforce taxes. An international scheme of redistri- bution of this kind obviously would necessitate significant cooperation and coordination among nations. Similarly, political justice—albeit to a lesser degree than cosmopolitan justice—seems to require interna- tional cooperation to overcome the problems posed to intra-national redistribution by tax competition. Indeed, harmonization, in curtailing the competition, could be the cure for this problem, enabling countries to collect enough taxes to sustain (or restore) the welfare state, as is often suggested.

34 But see Branko Milanovic, Worlds Apart: Measuring International and Global Inequalities (2005) (calling for the levying of taxes on the world’s rich by an international authorized body).




However, harmonization’s likely effectiveness in curtailing competi- tion comes at a cost. It should come as no surprise that harmonization entails efficiency costs, for we frequently acknowledge the efficiency costs of redistribution and often excuse them as the costs of living in an equitable society. What is interesting—and perhaps unexpected—is that harmonization involves certain distributive distortions as well.

Cooperation for the purpose of harmonization entails change. The in- visible hand of the tax competition markets allows states to pursue their own interests independently, reaching some kind of market equi- librium. Harmonization would shift that equilibrium, generating both collective benefits and costs of cooperation alongside a change in the distributive equilibrium. There would be two dimensions to the change in the equilibrium. First, harmonization would alter the worldwide level of taxes collected, by increasing tax rates for coun- tries that were previously pushed by competition to lower their tax rates. Second, it would alter the distribution of tax revenues and wel- fare among states and within them. This new equilibrium should, in turn, generate concerns as to its own justifiability. Specifically, atten- tion should be directed at any disparity in the outcomes it would yield for developed and developing countries due to the inherent asymmetry between the two groups.

In what follows, I argue that there are serious concerns as to how just the harmonization regime—and the new equilibrium it would estab- lish—are. In fact, the new equilibrium under harmonization could be




disturbing to proponents of cosmopolitan justice as well as proponents of political distributive justice, if not due to the ideal type of justice it promotes then to the kind of justice it is likely to achieve under the current international tax regime. I point out two main reasons to ques- tion harmonization: First, on the inter-nation level, the power dispar- ity between developed and developing countries could mean that har- monization, in replacing the market equilibrium, would enable developed countries to exploit their superior bargaining power so as to tilt the new equilibrium to their benefit at the expense of developed countries. Second, the new distribution created by harmonization would not necessarily promote distributive justice either internally or globally.

It is, therefore, my claim that the promotion of distributive justice re- quires that special emphasis be placed, in the harmonization negotia- tions, on protecting developing countries and their weaker residents. A truly just harmonization should include transfer payments from devel- oped to developing countries; absent such transfers, the harmonized solution will likely result in less-than-ideal distributive results. Even worse, the new, harmonized equilibrium could have more detrimental distributive effects than is currently the case under the prevailing re- gime. It will, in other words, yield a regime of unjust harmonization.






Any international tax regime comprises two basic components: the combined level of tax imposed on each transaction and the way the tax revenues are allocated among countries. Harmonization must address both components. In order to harmonize the taxes of residence coun- tries, residents of all countries should pay the same rate of tax (after reducing the value of public goods provided to taxpayers). In order to harmonize the taxes of host countries, hosts should also impose an identical tax rate (after reducing the value of public goods provided to taxpayers). All countries should implement the same mechanism for preventing double taxation so as to avoid creating any advantage or disadvantage for cross-border transactions. Otherwise, some countries will be more attractive as residence countries or hosts than others be- cause of a more favorable mechanism or the existence of a unique loophole.

Different mechanisms for the prevention of double taxation will allo- cate tax revenues among countries differently. If residence countries offer no alleviation from double taxation, hosts will have to collect no taxes to prevent double taxation. Alternatively, if residence countries offer a full tax credit, hosts will collect all the tax revenues. Obvi- ously, there are any number of mechanisms for allocating tax revenues that countries can opt for. Which country gets to collect which part of the tax revenue pie will be the outcome of a power struggle among the participating countries. Since states are asymmetrical in their relative market and bargaining powers, a variety of possible equilibria can be expected, allocating tax revenues among countries in many possible ways.




As noted above, in the framework of this Article, I assume coopera- tion towards one specific kind of harmonization: where countries agree to collect a fixed agreed-upon tax rate, beyond benefits taxes (i.e., beyond the costs of public goods and services provided to tax- payers) and where double taxation is prevented.



Inter-Nation Disparities and Their Biases

One important concern regarding harmonization is that the new equi- librium it would produce could affect developing and developed coun- tries differently, with the latter benefiting at the expense of the former. In light of the asymmetry between developed and developing coun- tries in terms of relative market power, as well as their respective typi- cal roles as residence and host countries, a concern arises that the cho- sen mechanism of harmonization (in particular, the way it allocates tax revenues) could benefit developed countries to the detriment of developing ones.

a. A Cartel of (Only) Developed Countries?

The extreme case of this asymmetry would emerge if only developed countries were to cooperate towards harmonization—which is not an unlikely scenario in light of the differences between the two groups of countries. To understand this possibility, assume that developed coun- tries could agree to a uniform residence-based tax (after reducing the




value of public goods provided to taxpayers) with no alleviation of double taxation. Given such a policy on the part of residence coun- tries, host countries would have incentive to lower their taxes in order to attract foreign investments from residents of the developed coun- tries. 35 Under this scenario, harmonization would protect residence countries from tax competition among themselves but would drive taxation in host countries to the bottom, in preventing them from col- lecting taxes from foreign investors. Thus, developed countries can be best understood here as operating as a cartel of capital suppliers—and transferring the costs of harmonization to developing countries. 36

Such harmonization would suffer from the problem of instability in- herent to cartels, for each individual country would have incentive to lower its taxes to be more competitive in the market for residents. However, assuming the cartel is successful, developing countries would stand to lose if they were to fail to make a united effort to counter the cartel, for they would attract less FDI (due to the imposi- tion of residence-based taxation in the residence/developed countries) and collect no taxes.

I set out from the presumption that such cooperation among residence countries as a group—and not among hosts as a group—is not incon-

35 Since residence countries' taxes are constant, any reduction in host taxation would provide an incentive for FDI.

36 I have described a similar phenomenon in the context of bilateral tax treaties, where prevailing tax treaties create an equilibrium that benefits developed countries at the expense of developing countries. Tsilly Dagan, The Tax Treaties Myth, 32 NYU J. INTL L. & POL. 939 (2000) .




ceivable. Why might developed countries be more likely to join to- gether as a stable cartel? And why might developing countries be less likely to cooperate together to fight such a cartel? There are a few reasons to support this premise.

To begin with, harmonization is more in the interest of developed countries—to protect their welfare state—than of developing coun- tries, which might have other, more urgent needs. This would make it more likely for developed countries to make the first move towards cooperation. 37 Once that step has been taken, each developing country working individually can do little about it. They could, however, try to unite towards negotiating a more favorable allocation of the tax reve- nues collected between them and developed countries. 38 Yet such co-

37 For the importance of the first move in setting the agenda and in pro- moting the agenda of powerful states, see Eyal Benvenisti & Geporge W. Downs, The Empire's New Clothes: Political Economy and the Fragmen- tation of International Law, 60 Stanford L. Rev. 595, 607 (2007):

Weingast's stylized game possesses two features that correspond to important aspects of the contemporary international system— and its impact on international law—as well as the domestic context of an earlier era. The first is that the sovereign possesses a notable first-mover advantage. This corresponds to the agenda- setting power that hegemons and coalitions of powerful states frequently enjoy at the international level, where the final out- come of multilateral negotiations is usually strongly anchored to their initial bargaining position. 38 The first move taken by developed countries puts developing countries at a strategic disadvantage. A successful strategy on the latter's part re- quires cooperation among themselves and a shift to a repeated game. For a coherent explanation of this in international law contexts, see id. at 608:

For our purposes the significance of Weingast’s game lies in the message that a hegemon (or small group of powerful states) in- terested in preventing weaker states from cooperating should use




operation is not very likely to be successful. Unlike developed coun- tries, which enjoy a longer tradition of cooperation and, hence, incur greater reputation costs in defecting, developing countries have less to lose from defection in this respect. Moreover, developed countries are better organized as a group, and their governments generally seem more transparent than those of developing countries; thus, defection on the part of the former might be easier to detect than in the case of the latter. And finally, developing countries compete almost exclu- sively for capital, whereas developed countries compete to a signifi- cant degree for residents. Residents are a far less mobile resource than capital. Consequently, the tax competition among developing coun- tries can be expected to be stronger and the costs of cooperation higher. Since residents are much less likely than capital to move, they can be taxed more effectively (through residence-based taxation). As a result, acting as a group, developed countries are more likely to be able to function as a cartel of capital suppliers; working in unison, they might be able to raise capital prices worldwide by increasing taxes on their residents' capital. Developing countries, in contrast, are less likely to be able to effectively cooperate so as to counter such car- tel-like effects.

b. The Need for Multilateral Negotiations

its first-mover advantage to 1) limit the perception of weaker parties that they are involved in a repeated game, and 2) limit the opportunities that weaker states have to resolve the differences in their preferences.




It could be argued that there is no real risk that harmonization would benefit developed countries as a group at the expense of developing countries, since it can only be achieved through explicit negotiations involving developing countries and there is no reason for the latter to agree to an arrangement that undermines their interests. However, as we shall see, although negotiations are indeed required for harmoniza- tion, they in no way guarantee the fair treatment of developing coun- tries. 39

To begin with, consider why explicit negotiations are in fact required for achieving international cooperation in establishing a harmonized tax regime and, to an even greater extent, in creating a mechanism for cosmopolitan redistribution. It has been claimed that an international

tax regime is "in crystallization," 40 that "a coherent international tax

regime exists," 41 and that countries are actually already cooperating, even if tacitly, towards its sustainment. It is hard, however, to imagine (and I don't think that supporters of harmonization suggest this) that the complex form of cooperation I consider above would evolve (or be sustained) without explicit negotiations. 42 The first significant hurdle

39 The bilateral analogy, again, is telling. In the bilateral context, develop- ing countries sign treaties that are worse than the available unilateral solu- tions.

40 Brauner, supra note 17, at 1.

41 Avi-Yonah, supra note 17, at 1.

42 Unlike other collective efforts, where a critical mass is enough to make cooperation beneficial, here, cooperation by some makes defection all the more beneficial for others. The European experience in attempting har- monization is a telling point in case. Since at least the Ruding Report, harmonization has been seriously discussed—although never agreed




would be achieving coordination among all countries to adhere to a single rate of taxation beyond the costs of public goods and to a single mechanism for alleviating double taxation. Since countries differ in their economic and political characteristics as well as in their expecta- tions of their tax systems, and since countries’ decisions regarding tax rates are deeply rooted in the divergent characteristics and beliefs (and, sometimes, simply the means) of their citizenry and leader-

ship, 43 collective agreement on one single solution appears problem-

atic at the very least. 44 Furthermore, even if such coordination could

upon—within the EU. Full-scale harmonization efforts were replaced by much more subtle attempts to coordinate tax bases and tax rules—but never tax rates or cross-country redistribution.

43 The various interest groups affected within each country by its tax rates and policies complicate the picture even further. Generally, the greater the number of players, the lower the chances of cooperation evolving, unless interest groups in different countries cooperate in pro- moting a certain policy. For an analysis of the influence of interest groups on inter-nation conflicts, see Eyal Benvenisti, Exit and Voice in the Age of Globalization, 98 Mich. L. Rev. 167 (1999). A thorough analysis of their influence is beyond the scope of this Article. 44 See Dagan, supra note 16, at 379; Roin, supra note 3, at 557-61. See also Katharina Holzinger, Tax Competition and Tax Co-Operation in the EU, The Case of Savings Taxation, 17 Rationality & Soc’y 475, 497, de- scribing the strategic results of the heterogeneity of countries as a possi- ble explanation for why the EU could not agree on a harmonized system for taxing savings, and modeling the interaction as an asymmetric di- lemma:

[T]he strategic constellation is an asymmetric dilemma. This does not only tell us that we need co-operative institutions and binding contracts, but also that we face a negotiation problem in trying to find a co-operative agreement. In the asymmetric di- lemma it is more difficult to find an agreement in the first place. Some governments have a strong incentive to negotiate a fully coordinated solution based on a harmonized system, for exam- ple, that all apply a withholding tax, all use the same tax rate, or




be achieved, it is difficult to see how it could be sustained in the ab- sence of explicit detection and sanctioning mechanisms. 45 Even if overall world welfare would increase were countries to cooperate, any given country could derive even greater economic benefits from de- fecting 46 since lower taxes would attract residents and (depending on

the applicable double taxation mechanism) investors. 47

A more ambitious redistribution plan envisioning a global mechanism for collecting taxes and subsequent transfers of payments to the world's poor would apparently entail even greater coordination; it is

all use an information exchange system. Other governments have an incentive to resist full co-ordination. Even if they prefer full coordination over tax competition, their most preferred solu- tion is non-coordination. 45 Preventing defection requires sensitive monitoring mechanisms as well as a willingness on the part of all participants to submit to and observe the set sanction for defection. The price of monitoring defection may be very high since it requires on-line inspection of the tax laws and public expen- diture programs of all nations as well as any concessions made either on an individual basis or simply by not enforcing existing norms. 46 Defection can take place by imposing less tax than cooperatively agreed upon in order to attract residents and investors (as in the tax ha- vens case), by providing more public goods without raising the tax rates, or by providing specific economic benefits. Charles I. Kingson, The Co- herence of International Taxation, 81 Colum. L. Rev. 1151 (1981). 47 Holzinger, supra note 44, describes this as a "weakest link" game, where no critical mass exists to make all other countries prefer coopera- tion to defection. This, in turn, makes spontaneous cooperation unlikely. "The dilemma and the weakest-link character imply that co-operative in- stitutions or binding treaties among all potential tax havens are necessary to resolve the problem." Id. 497 Another option for strategically manipu- lating the distributive results would exist if some countries (say, devel- oped countries) were to cooperate in order to push the international coop- erative mechanism towards promoting their own interests. I will discuss this alternative further in the context of the negotiation scheme below.




thus even less likely to emerge without explicit negotiations being conducted. First, it is far more administratively complex to design the bureaucracy of such a system. Second, distributive justice requires that actors forego (some) of their own individual interests for the sake of a more equitable society (be it an international or national society). While behind a veil of ignorance—unaware of their relative status in society—actors are likely to support redistribution, perhaps even viewing it as furthering their own interests, bargaining away the bene- fits they already own seems less likely. Within the confines of one's country, supporting redistribution may be viewed as promoting one’s own long-term interests (perhaps as a form of insurance against ex- pected future harms); worldwide redistribution, however, is harder to justify on grounds of self-interest, since people already know at least part of their status as members of an affluent society or, alternatively, a disadvantaged one. It seems to require a certain level of altruism or at least a strong belief that this is "the right thing to do" and a sense of trust that all others who are similarly situated will also participate in this laudable endeavor, for otherwise, by redistributing away their own wealth they would simply join the ranks of the underprivileged without significantly alleviating their situation. I suspect that not all those who are better-off would willingly agree to put their wealth in the common pool, if faced with a reasonable alternative. Moreover, the same problem would arise not only in the negotiation stage but also in the agreement's application: even if such world-wide redistri- bution were agreed upon, absent a coordinated enforcement effort, certain individuals would be likely to evade the noble duty to pay taxes. And, what’s more, some states would likely have an interest in




assisting them. The bottom line is that while under certain conditions, cooperation could, indeed, become the interest of the better-off (e.g.,

if it were to become a social norm to help the needy), this is in no way

a self-evident outcome, quite the contrary. Hence, it is hard to expect

that such cooperation would prevail absent explicit negotiations.

It is reasonable to assume, therefore, that explicit negotiations are re-

quired for achieving cooperation among states on redistribution— political or cosmopolitan. Yet, I maintain that the results of harmoni- zation—even if explicitly negotiated—are likely to be unjust.

c. Asymmetric Negotiations

Although negotiations might be perceived as serving the interests of all the parties involved, they can, in fact, result in troubling outcomes. Negotiations seem like a neutral procedure, since countries are free to choose whether or not to participate. But in actuality, the shift from competition to negotiations is not a trivial move; replacing tax compe- tition with negotiations entails costs for some of the parties and bene- fits for others. In multilateral negotiations, countries are no longer relatively small players guided by the invisible hand of the market; rather, their relative bargaining power is impacted by many other fac- tors (including their respective cultural, diplomatic, and army strength). Hence, developed countries, which enjoy greater political and economic power than their developing counterparts, can use these non-tax strengths to exert pressure on the latter in negotiations to- wards a multilateral agreement. It may not be worth it for a develop-




ing country to defend its tax position when, for example, its national security is at stake.

Furthermore, isolating the issues that are up for negotiation (tax, envi- ronment, labor standards, etc.) and negotiating them one at a time fur- ther bolsters the bargaining power of developed countries vis-à-vis developing countries. For the isolated cost of compromise on each in- dividual issue is worth paying relative to the benefits of becoming a member of the “civilized” world. It might not be important enough for a developing country to defy the will of that so-called civilized world so as to preserve its low taxes. The most significant potential counterweight available to developing countries in negotiations with developed countries is their possible competitive power. This power can be considerable in the framework of a wide spectrum of measures (IP, labor laws, environmental protection, and tax), but the individual- gains from competition in each area taken separately may not be sig- nificant enough to enable developing countries to reject the offer to join "the club."

In a multilateral bargaining process, moreover, developed countries are not only likely to wield greater power than developing countries, but as a group, they also are likely to better cooperate than the group of developing countries. This recalls the cartel scenario described above. Upon first glance, it does seem that a multilateral bargaining process could be successful in resolving the collective action problem




among developing countries. 48 Multilateral negotiations could, in the- ory, motivate developing countries to cooperate and pursue their (col- lective) interests. In reality, however, I expect that the asymmetry would, again, prove to be an obstacle to this—and developed countries would have the upper hand in cooperating with other similarly- situated countries for the good of their common self-interests. As mentioned earlier, developed countries' longer tradition of coopera- tion, their superior organization as a group, and relative transparency make any collective endeavor less susceptible to defection. They should thus be able to maintain a stronger and more unified front in negotiations. Moreover, the superior cooperation powers of devel- oped countries are even more pronounced when each issue is negoti- ated separately, since they are able to prevent developing countries from logrolling. 49

48 Two conflicting arguments rely on such a collective action problem to support their claims. First, it has been argued that developing countries engage in tax competition against their own interests (to collect taxes) for strategic reasons, making it beneficial for each indi- vidual country to defect and try to attract more investments at the ex- pense of its developing counterparts. See Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1573, 1583 (2000). In the context of bilat- eral investment treaties, see A. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int’l L. 63 (1998). Second, it has been argued that the reason why developing countries sign bilateral treaties that are to their detriment (because they deprive them of FDI for too small a part of tax revenues) is the collective action problem among them: they are in race with one another to become part of the treaty network. See Baistrocchi, supra note 33, at 376. 49 See Benvenisti & Downs, supra note 37, at 610:

Powerful states are drawn to [the strategy of creating a large number of narrowly focused agreements] because they know




As a result of this superior bargaining position, individually and as a group, developed countries might be able to push developing countries into agreements that better serve the former’s interests. If they take those interests to include treating developing countries fairly and, cer- tainly, if they include redistributing wealth from developed countries to their developing counterparts, redistribution could, indeed, be pro- moted within the framework of the harmonization agreement. If how- ever, developed countries were to consider only their self-interest— and assuming redistributing their wealth to other countries is not one such interest—they could be able to use their cartel-like position to secure a larger share of the tax collectively levied—a result that does not seem to serve distributive justice to any extent. 50

In any event, since the cooperative mechanism required for the achievement of harmonization may incorporate—as one of its built-in features—an advantage for developed countries, a truly just procedure should not merely assume negotiations to be fair and inevitably result-

that weaker states are not only more numerous than they are, but they are also far more diverse with respect to size, wealth and their level of development. This diversity makes it difficult for weaker states to agree on any particular issue … [T]o the extent that powerful states can isolate the negotiation of different agreements from each other, they can reduce the likelihood that weaker states will be able to create a countervailing coalition by logrolling. 50 This is similar to the prevailing results under tax treaties, where devel- oped countries are able to achieve preferable distributions of the revenue pie as compared to the no-treaty outcome. For a comprehensive analysis, see Dagan, supra note 36.




ing in equitable outcomes. Rather, measures should be taken to guar- antee the generation of fair results from the negotiations procedure.

2. The Biases of a Well-Balanced Harmonization

But even assuming that the potential biases and power disparities could be overcome in negotiations and even assuming a level playing- field in the negotiations procedure, two issues regarding harmoniza- tion still raise serious distributive issues. The one matter is the very imposition of a harmonized tax—which may benefit some countries and others not. The second issue is the shift in internal distribution within countries post harmonization.

Harmonization that facilitates distribution requires that countries co- operate (and curtail tax competition) in order to collect at least a cer- tain level of agreed-upon taxes beyond the actual costs of providing public goods. In contrast to the prevailing rhetoric (branding tax com- petition as "harmful" and praising harmonization as cooperative and, therefore, commendable), such harmonization may not work to the benefit of all players.

First, a tax increase of this kind might not be the optimal solution for all the countries involved. Some might prefer higher taxes and redis- tribution because of their particular political/social values and/or po- litical, social and economic constraints; others might resist raising tax rates as they may even have more pressing needs than establishing a social welfare net or simply because they value more the benefits of




an unobstructed inflow of capital than greater tax revenues. 51 For the latter, lowering tax rates, especially if this would attract more invest- ment into the country, could prove more beneficial than collecting more taxes. 52 Hence, harmonization would benefit countries that pre- fer higher taxes (typically developed countries) and harm those that benefit more from tax competition (typically developing countries).

Second, a multilateral tax agreement can have diverging impacts for different local groups within the participating states. While some fac-

51 See Mark Gersovitz, The Effects of Domestic Taxes on Foreign Private Investment, in The Theory of Taxation for Developing Countries 615 (David Newbury & Nicholas Stern eds.,1987). (explaining why, for a small country, the optimal policy is to collect zero taxes from foreign in- vestors). 52 Holzinger, supra note 44, discusses the strategic interaction of hetero- geneous countries in the context of saving tax in the EU. She distin- guishes between two types of countries: revenue-oriented governments that value tax revenues from savings taxation more than financial market benefits (for example, because they face severe budget deficits or because the financial sector is less important in terms of size in the given country) and financial market-oriented governments that see greater value in po- litical benefits from the financial sector (for example, because, in terms of the national product, the share of the financial sector and/or its share in corporate tax revenue is large—since the sector is very active in lobbying or there are no budgetary problems—and the savings tax is thus not con- sidered of great importance). Modeling this asymmetric game, she finds "a unique and sub-optimal Nash equilibrium … where only… the finan- cial market-oriented government has a dominant strategy not to tax; the revenue-oriented government prefers to levy the tax, if [the other country] does as well; but it prefers not to tax, if [it] does not." Id. at 493. After considering the size of the country as well, she concludes, "Governments of large countries and/or those which value tax revenue more highly than financial sector benefits prefer tax co-operation; governments of small countries and/or those which value financial sector benefits more highly prefer tax competition." Id. at 497.




tors of production in certain countries might gain from tax harmoniza- tion, others might lose if harmonization curbs cross-border invest- ment. Taxation restricts such investments, thereby creating welfare loss that affects local groups within each country differently. In par- ticular, the outcomes of harmonization would diverge in their impact on local groups between capital-exporting and capital-importing coun- tries. In both types of countries, tax harmonization would enable the government to collect more taxes than under a regime of tax competi- tion, but the groups that would benefit or lose from this taxation would likely differ in the two. 53 In capital-exporting (residence) coun- tries, the multilateral agreement would bolster the government’s tax collecting ability and the taxes collected would reduce benefits to capital owners (thus making it possible for a redistribution of wealth). A different outcome would arise in capital-importing (host) countries, for there, local factors of production (most importantly, labor) are the

sector that benefits most from foreign investment. 54 Local owners of capital in developing countries—assuming they lack the elasticity to move elsewhere—actually lose from a higher supply of capital from

53 A similar phenomenon is described by the Stopler-Samuelson theorem, which shows that when all factors are mobile (in the long-run) there can be no am- biguity about which factor gains and which loses through the imposition of a tariff. The mobility of capital and labour ensures that there will be no divergence between sectors in either the real return to capital or the real wage rate. Labour will gain and capi- tal will lose if the country is capital-rich, capital will gain and labour will lose if it is labour rich. Bo Södersten & Geoffrey Reed, International Economics 235 (3d ed.


54 Id. at. 463-64.




foreign investments. A tax imposed on cross-border investments (and the tax wedge it would create) would reduce the level of foreign in- vestment—thus buffering local capital owners. At the same time, it would prevent larger gains from reaching the hands of the host coun- try’s local factors of production (i.e., labor). The end result could be that developed countries would be able to redistribute wealth among their own residents, but at the expense of labor in developing coun- tries.

The precise distributive implications of this depend, of course, on how the two types of countries allocate the increased tax revenues collected between them. Although tax revenues would likely increase due to tax harmonization (and the elimination of tax competition), total welfare might not. Assuming a tax (and the tax wedge it creates) decreases the amount of cross-border investments, the combined gains from trade for both countries (including taxes) will fall. The gains that were—in the absence of this tax—distributed between the host's factors of pro- duction and the residence’s factors of production will not only de- crease but also will be distributed between those local factors of pro- duction and the governments of both states.

There is no single answer to what such an allocation of tax revenues might look like since, as I mentioned earlier, harmonization is likely to be achieved through negotiations. This could result in a variety of outcomes, depending on the relative bargaining positions of the parties involved. Countries of residence could certainly—if they were to so desire—relinquish (at least part of) their tax revenues and agree to al-




location mechanisms that benefit host countries (and their factors of production). 55 But if—due to the problems I have discussed above— no effort were to be made to benefit developing countries, 56 a harmo- nized tax regime would likely end in host countries' collecting tax revenues that are lower than the gains labor could have amassed from

greater foreign investment. 57

It is important to note that a decision on the part of residence countries to forego revenues to the benefit of host countries could come at a

55 Moreover, since residence countries benefit more than hosts from har- monization, one could assume they would have to offer generous alloca- tion of revenues in order to secure cooperation. See, e.g., Holzinger, supra note 44, at 496:

In the asymmetric dilemma it is more difficult to find an agree- ment in the first place. Some governments have a strong incen- tive to negotiate a fully co-ordinated solution based on a harmo- nized system, for example, that all apply a withholding tax, all use the same tax rate, or all use an information exchange system. Other governments have an incentive to resist full co-ordination. Even if they prefer full coordination over tax competition, their most preferred solution is non-coordination. Thus, a negotiated solution to an asymmetric dilemma can take three forms: The first is full co-ordination of strategies (T; T). This requires com- pensation for those countries that prefer tax competition. The second solution is non-coordination of strategies (T;_T). This requires compensation for those countries that prefer co- operation. The third solution might be a compromise, which is neither full co-ordination, nor clearly non-coordination.

56 That is, assuming revenues would be allocated among hosts and resi- dence countries according to their participating factors of production.

57 This conforms with the view of governments as rent-seekers, seeking first and foremost to maximize their revenues. For the classic presenta- tion of this view, see Geoffrey Brennan & James M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution I-33





significant cost. If residence countries were, indeed, to give up (at least some of) their revenues, it could limit their ability to finance their welfare state. Countries of residence are thus faced with a tough choice: either they benefit host countries—and constrain their internal national wealth redistribution—or else they refuse to allocate more revenues to host countries—in order to maintain redistribution within their own states. If residence countries refuse to benefit host coun- tries, tax harmonization will likely limit the latter’s gains from FDI and enable their governments to collect taxes from such activities in order to redistribute income. The most problematic aspect of this out- come derives from the fact that labor in particular—the group hurt by the imposition of cross-border taxation—is precisely the sector most in need of redistribution. Even if the government were to funnel all of the tax revenues it collects to redistribution and pay them back to la- bor, labor as a group would lose, because it would have gained more had the tax not been levied to begin with. Put differently, redistribu- tion in developed countries might be paid for, at least in part, by labor in developing countries.

How does this result measure up in terms of distributive justice? Un- der the assumption that increased tax revenues in each country would be distributed to those most in need within the given society, political distributive justice would be promoted in developed countries (where redistribution would become feasible). The results for developing countries, however, would be more ambiguous. Although increased tax revenues might be distributed to the poor, if the poor are also those who actually pay a price for the imposition of taxes, no real redistribu-




tion would occur and overall benefits to labor would decline. Hence, proponents of political justice might resist harmonization, based on the possible internal distributive results it would yield in host coun- tries. 58 From the perspective of cosmopolitan justice, this bottom line would no doubt be disturbing, for the redistribution to the poor in de- veloped countries would come at the expense of the poor in develop- ing countries. The latter, from a cosmopolitan justice perspective, are those globally most in need of redistribution (and under no conception of justice should they be those who support the poor in developed countries).

As I have noted, developing countries could gain more in taxes than they would lose from decreased FDI were developed countries to give up (at least part of) their tax revenues. Under this scenario (assuming the dead-weight loss for the developing countries from imposing the tax is smaller than the revenues they collect), redistribution from de- veloped to developing countries would prevail. 59 Such redistribution,

58 Would the fact that distribution in developed countries would be pro- moted and distribution in developing ones not disturb supporters of politi- cal justice? This question that was not addressed directly by Nagel but since—in the eyes of political justice advocates—one country is not re- sponsible for the underprivileged residents of another, it seems that this result would not be particularly troubling under political justice. 59 For similar suggestions in the treaty context, see, e.g., Kim Brooks, Tax Treaty Treatment of Royalty Payments from Low-Income Countries: A Comparison of Canada and Australia’s Policies, 5 J. Tax Research 169 (2007) (Michigan Issue) (proposing, in the specific context of the taxa- tion of royalty payments, that high-income countries should further the cause of reducing global inequality by ensuring that, in their tax treaties with low-income countries, they do not usurp needed revenues by reduc- ing low-income countries’ ability to collect tax on income with a source




however, would differ from the types of redistribution propounded by the two concepts of justice I have chosen to focus on here. Under the political justice approach, the question arises as to whether developed countries are required to make such transfer payments and whether supporters of political justice in developed countries should be at all concerned with conditions in developing countries. If harmonization were to emerge as the cause of increased poverty in developing coun- tries, I suspect that this might be of considerable dismay to political justice advocates in developed countries even if the level of poverty does not amount to extreme humanitarian distress. 60 Yet, transfer payments could raise a problem where they come at the expense of redistribution within developed countries. Transfer payments could promote cosmopolitan justice if, indeed, such payments were to be al- located among the neediest in developing countries. However, there is

in the low-income country). 60 This can be inferred, for example from Nagel, supra note 5,, at 131:

This minimal humanitarian morality governs our relation to all other persons. It does not require us to make their ends our own, but it does require us to pursue our ends within boundaries that leave them free to pursue theirs, and to relieve them from ex- treme threats and obstacles to such freedom if we can do so without serious sacrifice of our own ends … . This moral mini- mum does not depend on the existence of any institutional con- nection between ourselves and other persons: It governs our rela- tions with everyone in the world. But see there remains a clear line, according to the political concep- tion of justice, between the call for such institutions and a call for the institution of global socioeconomic justice. Everyone may have the right to live in a just society, but we do not have an obligation to live in a just society with everyone. The right to justice is the right that the society one lives in be justly governed. Any claims this creates against other societies and their members are distinctly secondary to those it creates against one’s fellow citizens.




still the risk that the host governments would not be particularly effi- cient in redistributing the revenues to those who need them the most and that they would use the funds to the benefit of other groups and not necessarily the needy.

In sum, then, harmonization would not necessarily support distributive justice. There is the chance that tax revenues would be distributed regressively among the participating countries (if developed countries were to use their superior bargaining position). There is the chance that although developed countries would be able to finance their wel- fare state, it would come at the expense of developing countries' most needy sectors. And there is the chance that developed countries would subsidize developing countries—but by sacrificing a significant pro- portion of their own welfare states. And finally, there is the danger that such transfer payments would not be equitably allocated among the poor in developing countries.


This analysis can serve as the basis for evaluating a rather wide array of international tax arrangements, from anarchic tax competition to complete harmonization. As we have seen, in contrast to conventional rhetoric that harmonization is the (distributively) just solution, the pic- ture is not that clear. Let me sum up what we have seen thus far and consider how the different solutions rank on the scales of the various conceptions of international distributive justice.




If tax competition does, indeed, drive tax rates to the bottom and seri- ously limit national redistribution, this should obviously be of concern to advocates of political justice. Cosmopolitans, too, will oppose it, as it fails to create any mechanism for redistributing wealth on a global basis (although they might prefer the distributive outcomes of tax competition to those of harmonization). However, tax harmonization does not necessarily offer a flawless solution either. First, although a harmonized solution will most likely be negotiated rather than emerge spontaneously and although, presumably, a negotiated solution should benefit all parties at the table, the procedure is likely to be tilted in fa- vor of developed countries and, thus, could result in regressive agree- ments that benefit them at the expense of their developing counter- parts. Cosmopolitans would surely object to such a result (as global disparities would widen). If, indeed, negotiations were to yield such a regressive arrangement, it might still promote political justice in de- veloped countries. This may seem sufficient for supporters of political justice. 61 If it comes at the expense of developing countries, however, it may be disconcerting for supporters of any kind of justice. 62

61 See Nagel, supra note 5,at 140:

[State institutions represented in international networks] are re- sponsible to their own citizens and may have a significant role to play in the support of social justice for those citizens. But a global or regional network does not have a similar responsibility of social justice for the combined citizenry of all the states in- volved, a responsibility that if it existed would have to be exer- cised collectively by the representatives of the member states. Rather, the aim of such institutions is to find ways in which the member states, or state-parts, can cooperate to better advance their separate aims, which will presumably include the pursuit of domestic social justice in some form.




Alternatively, even were developed countries to refrain from exploit- ing their bargaining position and, instead, negotiate a seemingly unbi- ased agreement, whereby each country collects "its" taxes (i.e., tax revenues are allocated in line with pre-tax prices), this could still be problematic for cosmopolitans and some advocates of political justice some advocates of political justice. 63 The reason is that such "neutral" harmonization could benefit the poor of developed countries at the ex- pense of the poor in developing countries. Such a result would be un- desirable in the eyes of cosmopolitans, as the poor of developing countries are poorer than the poor of developed countries, and for po- litical justice proponents (at least those in developing countries), as distributive justice would be promoted only in some (that is, devel- oped) countries.

I have thus argued that a truly just harmonization scheme must include a substantial component of transfer payments between developed and developing countries. Such transfers could certainly be justified from the cosmopolitan justice perspective. Political justice theory might also condone transfers. This would certainly be the case if harmoniza-

62 As explained, however, such national redistribution might not be at- tained in developing countries (as the increased taxes and the limitation on foreign investments it entails might work to the advantage of capital in developing countries and to the disadvantage of labor, thus widening the gaps between them). 63 Although it may suffice for "society of states" standards (since, at least presumably, the international community supports states' ability to pro- mote their own policies).




tion in itself were to constitute a political institution, one that is capa- ble of subjecting its participants to redistribution, but presumably even if promoting harmonization were to increase poverty in developing countries.


Harmonization in itself is not necessarily a solution for a just global redistribution of wealth. The outcomes of harmonization could come into direct conflict with cosmopolitan standards of justice as well as political justice at least in some of the countries involved. What is more, the potential results raise some doubt as to the sufficiency of political justice insofar as international tax is concerned. For the stan- dard of political justice—protecting intra-national distributive jus- tice—could promote, in the context of international tax, distributive justice in developed countries on the backs of the weakest segments of developing countries.

The problematic intra-national distributive effects of harmonization give cause to wonder whether harmonization per se meets the condi- tions of an international political institution that imposes a duty on de- veloped countries to share their wealth with developing countries. As- suming harmonization does constitute such an institution and thus imposes a duty to share on developed participants, transfer payments between developed and developing countries might be a possible way of fulfilling that duty.




If political justice and redistribution within states is what we strive for,

then—assuming tax competition drives tax rates to the bottom— countries do, indeed, need to coordinate their tax policies in order to prevent this race. Such harmonization, however, might benefit some (probably developed) countries while harming other (probably devel-

oping) countries. If, rather, cosmopolitan justice is what we seek, then

a mechanism of cooperation far more elaborate than simple harmoni-

zation is required, whereby countries not only coordinate their tax

rates and policies but also design a system for administering payments

to welfare recipients.

Yet this analysis demonstrates that although harmonization could meet

the requirements of political justice within developed countries, there

is still a lingering uneasiness as to its potentially harmful impact on

developing countries. Though the harmonization arrangement could be designed to rectify the harm by way of transfer payments, this

transfer of wealth could, in fact, undermine political justice, in entail- ing that developed countries compromise redistribution among their own residents as well as their well-being, in order to support the weak

of developing countries.

A choice between tax competition and harmonization thus confronts

nations with a true dilemma: Should they promote redistribution

within their own countries even at the expense of developing countries

or should they combine harmonization with redistribution from devel-

oped to developing countries, in an effort to reduce global disparities, even if at the expense of their own needy?