Thomas Rixen

From double tax avoidance to tax competition: Explaining the institutional trajectory of international tax governance

This article presents a history of international tax governance and offers a rationalist reconstruction of its institutional trajectory. As an unintended consequence of its institutional setup, the tax regime, which originally only dealt with double tax avoidance, endogenously produces harmful tax competition. Despite this negative effect there are only incremental and partial changes of the regime, which are insufficient to curb tax competition. I argue that this development can be explained by considering the properties – and the sequence in which they come up – of the collective action problems inherent in double tax avoidance and tax competition. First, in double tax avoidance, a coordination game with a distributive conflict, governments did not want to endanger the solution they had institutionalized long before tax competition became virulent. Second, governments are unable to resolve the emergent asymmetric prisoner’s dilemma of tax competition due to conflicts of interest among big and small country governments and successful lobbying of corporate capital. As a result, the institutional trajectory is characterized by the simultaneous occurrence of stability in the core principles and indirect and incremental changes of the rules in the form of rule stretching and layering.

Bilateralism or Multilateralism? The Political Economy of Avoiding International Double Taxation

Why do states cooperate bilaterally or multilaterally? This article addresses the issue using the example of international double tax avoidance. It is argued that double tax avoidance exhibits the strategic structure of a coordination game with a distributive conflict. The distribution of tax revenues depends on the asymmetry of investment flows between treaty partners. Since investment flows are defined dyadically, bilateral bargaining can best accommodate countries’ concerns for the distribution of tax revenues and other economic benefits connected to the tax base. Moreover, because there are no serious externality problems with bilateral agreement, this solution is also viable. At the same time, there is a need for a multilateral organization to disseminate information and shared practices in the form of a model convention that provides a focal point for bilateral negotiations. This solution minimizes transaction costs. Since agreements are self-enforcing in coordination games there is no need for third-party enforcement. Instead, the Mutual Agreement Procedure (MAP) is a device to address problems of incomplete contracting.

Tax Competition and Inequality - The Case for Global Tax Governance

In this article I present the normative case for global tax governance. I argue that, contrary to an influential part of the literature, national tax policy choices cause significant externalities for other nation states. Focusing in business taxation, I show that tax competition undermines the integrity and distributive principles of domestic tax systems, and aggravates the inequality between developed and developing countries. Further, I demonstrate that the effects of international tax competition are unjust irrespective of whether a globalist or less demanding internationalist perspective on justice is adopted. The minimum requirement of justice is to devise global rules which ensure that national tax systems remain capable to implement distributive justice as they see fit. Finally, I present and discuss a concrete proposal for the global governance of business tax competition, namely, unitary taxation with formula apportionment.

Putting path dependence in its place: toward a Taxonomy of institutional change

Stalled progress on explaining institutional change is, in part, the result of two conceptual challenges that hinder effective theory building: concept stretching and concept proliferation. These problems affect a hallmark concept of institutional change, path dependence, whose usefulness has been curtailed by the variety of meanings attributed to it. This article seeks to remedy concept stretching and proliferation by developing a taxonomy of institutional change explanations. Starting with the core attributes of path dependence, increasing returns and endogeneity, we use the procedure of ‘negative identification’ to derive a logically complete set of possible change explanations. The result is a taxonomy in which the scope of path dependence is delimited vis-à-vis other change explanations. We illustrate the usefulness of the taxonomy by assessing stretching in the literature.

How Effective is the European Union's Savings Tax Directive? Evidence from Four EU Member States

This paper examines the strategies employed by individual investors to evade cross-border capital income taxation, and it evaluates the effectiveness of the EU Savings Tax Directive (STD). Using data for four European countries our results are as follows: First, individual investors adapted to the institutional changes implemented by the STD before it became effective in 2005. Second, we find that the strategy of reallocating assets from debt to equity products in the same country is more important than shifting portfolio capital out of cooperating countries into third countries. Third, countries opting for a retention tax did not experience an outflow of portfolio capital, whereas countries engaged in information exchange lost capital relative to third countries outside the scope of the STD. Finally, there is considerable heterogeneity across countries. While we find strong behavioral responses by French investors, we did not find evidence of cross border tax evasion by Italian investors, which may be explained by the absence of a national automatic reporting system on capital income in Italy. Overall, our findings show that the STD does not effectively prevent tax evasion and thus lend support to calls for tightening the directive.

Bargaining Over the Avoidance of Double Taxation: Evidence from German Tax Treaties

Previous empirical studies have mainly analyzed tax competition, neglecting the role of tax cooperation in international taxation. We focus on German double taxation agreements (DTAs) and show for up to 45 tax treaties that the bargaining outcomes depend on investment asymmetries between the countries. A transition from a purely symmetrical country pair to a situation where foreign direct investment (FDI) flows in only one direction would increase on average the negotiated withholding tax rate by roughly 5 percentage points. We also show that bargaining over DTAs is not only about withholding tax rates, but also about the definition of a permanent establishment (PE). Our results are robust with regard to the concept of investment asymmetries (either in shares or levels) and different operationalizations (FDI stocks or sales).

Politicization and Institutional (Non-) Change in International Taxation

This paper explores the institutional changes of international tax governance in response to growing politicization and contestation of international direct tax issues. I show that politicization – which is a very recent phenomenon in international taxation – results from a governance gap. The traditional setup of international tax cooperation has an unintended consequence in the form of harmful tax competition. In reaction to this problem, civil society groups have begun to question the effectiveness and fairness of the minimal international tax order, lobbying national governments and international organizations for more effective international regulation of tax issues. Thus, in contrast to existing hypotheses, societal politicization does not result from the increasing scope and authority of international institutions, but rather from the lack thereof. However, civil society demands have so far not led to institutional changes in international taxation. Instead, we can only observe indirect and incremental change, which falls short of what would ultimately be needed to address harmful tax competition effectively.

Redistribution, Globalisation, and Multi-level Governance

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

International Taxation and Multi-Level Governance

This paper gives an overview of the institutional arrangements of international taxation and shows that they can be understood as a structure of multi-level governance.

Double Tax Avoidance and Tax Competition for Mobile Capital

There are two largely distinct bodies of literature and corresponding research areas in international taxation. On the one hand, there is the big and continuously growing body of theoretical and empirical literature on tax competition, mainly in the field of economics; on the other, there is a large body of mostly legal literature dealing with international double tax avoidance. Only very few contributions address both issues at the same time. This article narrows this gap. Specifically, we explain why measures of double tax avoidance may actually act as instruments of tax competition. We outline the principles and rules of international double tax avoidance and explain how they can be used for purposes of tax arbitrage. Moreover we outline why double tax avoidance rules can provide an important institutional foundation for tax competition. After that we review the empirical literature suggestive of the role of double tax avoidance rules in tax competition. Finally, we draw some preliminary policy conclusions.