Tax Sovereignty in the Age of Global Capital

In January 2019, Representative Alexandria Ocasio-Cortez found a perhaps unexpected vein of popular support when she proposed raising the top marginal tax rate from 37 percent to 70 percent for those with annual incomes of over $10 million.¹ Polling conducted by the Hill and HarrisX soon revealed that 59 percent of Americans supported this idea: 71 percent of Democrats, 60 percent of Independents, and, notably, 45 percent of Republicans.²

Even the populist Right seemed to want in on the action. That same month, Tucker Carlson emphatically denounced the market fundamentalism espoused by “ruling class” elites on his Fox News show.³ He would later criticize GOP tax policy as having been “far better for corporate America than it was for the middle class.”⁴

After a generation of political discourse dominated by free market ideology, when proposals for increasing taxes on the wealthiest Americans could easily be dismissed as unpatriotic “class warfare” or as making the country “uncompetitive,” it seems that the Overton window has moved to the left on taxation. Surging inequality, stag­nant wages, a hollowed-out middle class, and populist rage against elites all combined to bring about this shift. But the path between the articulation of a popular policy preference and its actual adoption as a governing agenda, much less its successful implementation and long-term institutionalization, is rarely straightforward.

One obstacle is established elite opinion: The reaction to 70 per­cent tax rates from the defenders of the status quo was pronounced and rather predictable. Attendees of the World Economic Forum at Davos reportedly found the idea “scary” and were heard to be “nerv­ously laughing” about it.⁵ One chief investment officer at a major firm expressed real concern: “By the time we get to the presidential elec­tion, this is going to gain more momentum, and I think the likelihood that a 70 percent tax rate, or something like that, becomes policy is actually very real.” But “Rich people,” he predicted, “will simply figure out ways to shelter their income, and that will be a drag on productivity.” A few billionaires felt the need to reassure their peers. “It’s not going to happen—trust me,” said one who refused to be identified. Silver Lake’s Glenn Hutchins, a major Democratic donor and friend of former president Obama, pointed out the available lines of defense: “You got to get something like that through the House . . . through the Senate, and then you have to get the president of the United States to sign it.”⁶

A more nuanced reaction came from Bill Gates, who said that AOC’s proposals missed the mark. The Microsoft tycoon explained that the very wealthy aren’t as affected by such a move as one might think because most of their income is in the form of capital gains, which are taxed differently than earned income: “They have income that just is the value of their stock, which if they don’t sell it, it doesn’t show up as income at all, or if it shows up, it shows over in the capital gains side.”⁷ Making clear that he shared the desire to make the U.S. tax system more progressive, he pointed to wealth taxes, estate taxes, and Social Security as more plausible places to begin the work of tax reform. But at the end of the day, Gates suggested, the rich aren’t as affected by tax rates or the U.S. tax system in general because of the cross-border mobility they enjoy with respect to their assets: “You do start to create tax dodging and disincentives, and an incentive to have the income show up in other countries and things.”⁸

The response most illustrative of conventional Republican think­ing came from supply-side stalwart, former Club for Growth presi­dent, and Trump adviser Stephen Moore. His editorials trotted out well-worn invocations of the Reaganite golden age and the JFK tax cut, along with unsubtle references to the Soviets, Mao, and Venezuela.⁹ The only alternative, according to Moore, is to recognize that there is no alternative to the central conservative policy dogma of the last four decades, namely more tax cuts like the 2017 Tax Cuts and Jobs Act.

This signature legislative achievement of the Trump administration, which Moore helped to design, significantly and disproportionately lowered tax rates for corporations and high-income earners with the goal of making America “competitive.” For those wondering how the tax bill translated intentions into results, Moore simply assured his readers that “it has worked magnificently.” After all, he reminded everyone, if we go the other way and increase rates, then “with a click of a computer button, trillions of dollars will escape across our bor­ders and beyond the grasp of the IRS, which will collect 70 percent of zero dollars.”¹⁰

Underlying the responses from Moore, Gates, and the Davos set is the sure knowledge that in the age of global capital, it would be quite easy for rich individuals, as well as for multinational corporations, to either evade or avoid taxes. The same mixture of nervous mockery and insistent naysaying greeted Senator Elizabeth Warren’s ambitious proposal, unveiled a few weeks later, to introduce the first American wealth tax. This proposal polled at 74 percent support among regis­tered voters—86 percent among Democrats and 65 percent among Republicans.¹¹

In a limited sense, the Davos crowd is right: There are, of course, myriad ways to shelter income through loopholes in the domestic tax code, such as making creative use of pass-through entities, shell com­panies, and charitable trusts. Failing that—should a future effort at tax reform ever get around to fixing those—there are any number of ways to have income and assets “show up in other countries and things,” as Gates put it, through transnational loopholes afforded by offshore schemes. Taken together, these issues seem to render any attempt to effectively raise tax rates on the rich and big business futile.

Unwinnable Tax Competition

Searching for a contemporary example of a major economy suddenly and dramatically increasing taxes on its wealthiest citizens will lead one to the ill-fated attempt of the François Hollande administration in France, which levied a 75 percent supertax on income above €1 million in 2012.¹² As one of Hollande’s own advisers and soon-to-be minister of economy and fi­nance said at the time, the change risked turning the country into “Cuba without the sunshine.”¹³ Indeed, tax evasion and capital flight exploded, investment slowed, revenues plum­meted (the supertax yielded a €14 billion budget shortfall in 2013¹⁴), and a small but celebrity-studded stream of “tax exiles” fled (or threatened to flee) the country for more accommodating places like Belgium, Swit­zerland, and Russia—where the actor Gérard De­pardieu was person­ally wel­comed by Vladimir Putin.¹⁵

Three years later, in 2015, the Socialist government abandoned its signature policy in a reversal that heralded a blow to left-wing “Pikettynomics.”¹⁶ Not only that, French voters had apparently learned their lesson and elected that same dissenting economy minis­ter to succeed Hollande as president in 2017. The new Emmanuel Macron administration proceeded to slash the preexisting “solidarity” tax in the name of making France more globally competitive. Macron wanted France to fall in line with a long-running trend among Euro­pean states, in which even social democratic paragons like Sweden, Denmark, and Finland have had to abolish national wealth taxes to prevent capital flight.¹⁷ Across the Atlantic, columnists at Forbes, the Wall Street Journal, and National Review watched with glee as these setbacks reaffirmed the old free market pieties.

In the face of this hard dose of fiscal reality, perhaps Moore was right not just in his criticism of progressive aspirations to tax the rich but in his prescription to stick to the tried and true orthodoxy of tax cuts now and forever. According to that view of the world, also known as “tax competition,” countries in a global marketplace ought to compete among each other by lowering their taxes, deregulating their markets, scaling back their public sectors, and crafting any number of preferential measures (e.g., exemptions and subsidies) in order to create the best business climate for globally mobile capital. The more a given society obeys these and other dictates—displaying the signs of “efficiency,” “fiscal responsibility,” “labor market flexi­bility,” and openness to “risk and disruption”—the more likely they will be able to induce growth by attracting capital in the form of private investment.

In a virtuous circle, societies will improve themselves and be im­proved in turn by the wisdom and beneficence of mobile capital flows. This is the alleged virtue of “competitiveness,” and it is in pursuit of this ideal that nearly all fashionable tax policy in the last thirty years has been designed. The Tax Cuts and Jobs Act of 2017 (TCJA) was no exception, and might even serve as a textbook exam­ple of the principles of tax competition.

As an attempt to attract global capital to reinvest in America on its own terms, the TCJA can be seen as representing the diametrically opposite approach to the aggressive tax increases advocated by the likes of AOC and Warren. In the lead-up to the next election, as incumbent Republicans prepare to defend their only major legislative accomplishment against the Left’s increasingly popular alternative of taxing the rich and spending the money on things like health care and education, it seems reasonable to ask whether the tax bill worked as “magnificently” as Moore claimed.

The TCJA was signed into law by President Trump on December 2, 2017. Among its key provisions was the reduction of the top corporate income tax rate from 35 percent to 21 percent,¹⁸ along with a lowered one-time repatriation tax for the offshore profits of multi­nationals.¹⁹ For individuals and households, the bill lowered rates for all income tax brackets but came with a number of changes that disproportionately benefited high-net-worth taxpayers. Those provi­sions included a doubling of estate tax exemptions,²⁰ increases in exemptions and phaseout thresholds to the alternative minimum tax (an anti-avoidance measure), and a 20 percent deduction for pass-through business income (roughly 70 percent of which flows to the top 1 percent of earners).²¹ Furthermore, much of the law’s individual tax cuts and credits are set to expire in 2025, while the corporate tax cuts are permanent.²² The TCJA is projected to cost $1.9 trillion over ten years.²³

These changes to the tax code were presented by the Trump administration and Republican leadership as a win-win for the rich and big business, certainly, but also for American work­ers, the middle class, and the economy as a whole. In the president’s own words, “This huge tax cut . . . will be rocket fuel for our econo­my. . . . The biggest winners from this transformation will be every­day families, from all backgrounds, from all walks of life, and our great companies, which will produce the jobs. They are going to produce jobs like you’ve never seen before.”²⁴ The bill’s promoters also claimed, in contrast to available projections of a $2 trillion price tag, that it would come at no cost to the public purse because it would spur enough growth to “pay for itself” through increased revenues. “Not only will this tax plan pay for itself, but it will pay down debt,” said Treasury secretary Steve Mnuchin.²⁵ Senate Majority Leader Mitch McConnell called it “beyond revenue neu­tral.”²⁶

More than a year and a half later, enough time has passed since the TCJA’s passage to measure its outcomes against these promises. Instead of investing in more jobs and higher wages for American workers or on innovation and capital expenditure, corporations overwhelmingly spent the billions they received through the cuts on share buybacks—the formerly illegal but now common financial practice whereby firms repurchase their own shares as a means to artificially boost the value of their stock. In fact, 2018 was a record-breaking year for amounts spent on buybacks, with a total of $1.1 trillion in buybacks by December.²⁷ This outcome produced a boon for the richest 10 percent of Americans, who own about 80 percent of stocks.²⁸

By contrast, wages after inflation grew at only 1.9 percent,²⁹ while job creation (with unemployment hovering below 4 percent prior to the cuts)³⁰ and overall economic growth (amounting to an underwhelming 2.9 percent in 2018 and actually falling short of CBO pro­jections)³¹ticked up at the same modest pace as before the TCJA—continuing a decade-long trend that had been in place since the post­recession recovery began⁠. The TCJA was hardly the economic “rock­et fuel” prom­ised by the president. At the individual level, the bill’s provisions ben­efited the top 1 percent, who received an average of $51,000 in tax cuts, while middle-income earners got an average cut of $900.³²

It also doesn’t look like the tax bill is about to pay for itself, as fiscal year 2018 yielded an increase in the federal budget deficit of $113 billion, or 17 percent, from the previous year (leading to a deficit equivalent of 3.9 percent of gross domestic product).³³ There was also a more-than-expected 31 percent drop in corporate tax revenues for 2018, alongside a 4 percent increase in individual tax payments.³⁴ These results appeared to confirm the trillion-dollar cost estimates over dubious Republican reassurances of a spectacular revenue wind­fall. In the future, GOP leaders can reliably be expected to cite the increasing deficit as reason to slash government spending or even cut Social Security and Medicare. Already there is talk of such a move from the likes of Senator John Barrasso: “We’ve brought it up with President Trump, who has talked about it being a second-term pro­ject.”³⁵

As one might expect, the cuts accomplished just what they were designed to do. They further inflated the assets of the rich and corporate America—to the exclusion of equivalent long-term gains for the great majority of wage-earners, middle-income households, and the U.S. economy overall. And poll after poll has shown that, since plans for the TCJA were unveiled, the American people have viewed the tax bill as a giveaway to the wealthy and well-connected.³⁶

What does it all mean, then? It would seem as if recent history has imparted contradictory lessons. Both the Hollande-Piketty policy of taxing the rich and the Trump-Moore approach of appeasing the rich have failed. From the point of view of governments and electorates around the world, you are damned if you raise taxes, damned if you reduce them, and damned even if you do nothing but hold on to the status quo.

In the years between Hollande’s supertax and the Trump tax cuts (2012–17), the true nature of that status quo became glaringly evident: the middle of the decade saw a steady trickle of sensational tax leaks, with names like “LuxLeaks,” “Swiss Leaks,” the “Panama Papers,” and “Paradise Papers.” These leaks and others cast light on the vast and unchecked scale of offshore activity and the ubiquitous, institutionalized nature of global tax evasion and avoidance. As these scan­dals made clear, billions in untaxed wealth flow to offshore accounts as a matter of course. Capital escapes across low- and high-tax juris­dictions alike, enabled by entire industries of specialized lawyers, planners, and accountants. There have also been “tax shaming” scan­dals in which big name brands like Starbucks, Google, Apple, and Amazon were revealed to be paying little to nothing in corporate tax­es. These routine dissimulations in multinational accounting prac­tices are re­flected in the overrepresentation of tax havens in U.S. in­bound FDI.³⁷

Just as arresting are the available estimates of global offshore wealth reported over the last decade, which range from $8.2 trillion³⁸ to $32 trillion.³⁹ A 2017 study by tax specialist Gabriel Zucman sug­gests that up to 10 percent of world GDP is held in offshore accounts,⁴⁰ even under historically low tax rates and an international political climate most favorable to business.

During a period in which the world was supposedly in the midst of a healthy and universally beneficial “tax competition,” tax dodging scandals laid bare at least two distortions that corrupt the logic of the system. First, the rhetorical premises of tax competition are largely baseless if globally mobile capital is able both to pressure states toward “competitively” lowering their taxes and to circumvent those lowered rates through offshore evasion and avoid­ance.

The second, related distortion has to do with the assumptions underlying the model of “voting with your feet”—the argument that “competition among jurisdictions leads to an efficient allocation of public funds as individuals self-select into different states according to the match between the various tax expenditure packages on offer and their fiscal preferences.”⁴¹ This argument is often presented as a jus­tification for tax competition. The exemplar here, at least for the pur­poses of illustrating how this model works, is Gérard Depardieu, who voted with his feet when he severed all formal attachments to his native France and moved to Russia, where he became a citizen.⁴² Yet while Depardieu can be accused of many things, he cannot be accused of “free riding.” Unlike many individuals and companies implicated in the tax scandals, he does not continue to enjoy the benefits of French citizenship while also enjoying the lower tax rates offered by Russia.

Most tax-avoiding companies and individuals do not deign to make a choice between their usual jurisdictions and the offshore jurisdictions whose tax rates and tax laws they have adopted as their own. In President Trump’s estimation, these are “smart” people who have figured out how to have it both ways. Many are wealthy indi­viduals who not only enjoy the benefits of citizenship but who are positively overrepresented in terms of political influence. Indeed sev­eral of them were presidents, prime ministers, and cabinet secretar­ies in their countries, yet were at the same time able to shirk one of the most basic obligations of citizenship—paying taxes. The economist James S. Henry has characterized this dissonance as a sort of “rep­resentation without taxation.”⁴³ The situation for multinational cor­porations is analogous. These firms make billions in profits (and often accept billions more in subsidies) in the largest markets, such as the United States or the United Kingdom, but somehow regularly claim their income in the smallest ones, such as Luxembourg, Bermuda, or the British Virgin Islands.

This is a description of life under tax competition as Stephen Moore and the grandees at Davos would have it: the holders of capital may evade and avoid their taxes with impunity, even as they craft laws and regulations in their favor, but popular demands for greater economic fairness are to be met with the stern reply of experts that “the market won’t have it.”

Adverse tax policy outcomes, however, have less to do with immu­table laws of economics and more to do with the existence of an elaborate set of financial networks and fiscal arrangements that facili­tate the global movement of capital far above the heads of voters and elected officials. Our fatalism about markets—a determinism not shared by the largest market participants—merely serves to distract us from this fact.

These circumstances call for a reassertion of the right of sovereign nations not merely to formally set rates of taxation for their citizens, and the multinationals that make a profit within their borders, but to have a realistic expectation that those rates will actually take effect and the corresponding revenues will be collected. Such an outcome would by no means entail an end to tax competition—so long as the nations of the world are economically interdependent, there will be some degree of tax competition. Rather, we might hope for some correction of tax competition’s distortions, as well as the introduction of restraints on its most absurd excesses. The same might be said for capital mobility. Barring the widespread reimposition of capital con­trols, there will be capital mobility, but it need not be so extreme as to restrict the freedom of states to decide their own fiscal poli­cies.

The majority of Americans desire a more decent and equitable country, in which the rich and corporations pay their fair share—either through the rising democratic socialism of the Left or the economic nationalism of the Right. Any future politics that seeks to break the impasse and give expression to this desire must take into account the scale of the problems of tax evasion and avoidance in an era of global capital mobility. What is needed is a new politics of self-determination in the fiscal sphere. Only such an approach will moti­vate change at the policy level and dislodge the free market dogmas that prop up the corrupt regime of international taxation that calls itself “tax competition.”

For a Politics of Fiscal Self-Determination

The excesses of capital mobility and tax competition have not gone completely unnoticed. Academic work in public finance, political philosophy, and international relations has produced insights that may be useful for the unfolding ideological turn on taxation. Multi­lateral institutions like the OECD have conceived a number of ambi­tious and far-reaching policy responses to the problem, and national governments have been willing to sign on and put these plans into effect. Some countries, like the United States, did not bother to wait for a global consensus to form and decided to go ahead with unilateral action. Indeed, anyone following the progress of the last decade might marvel that what had been proposed initially as highly idealistic schemes for countering the worst abuses of tax noncompliance have come to fruition, such as “automatic information exchange,” “coun­try-by-country reporting,” and “beneficial ownership transparency.” A whole new world of tax governance has opened up in recent years.

As the technical, wonkish-sounding names of the above policy items suggest, however, these discussions mostly exclude the average citizen or taxpayer, or even the average elected official. There remains a critical gap in comprehension between the specialized, technocratic space of international tax enforcement and the everyday debates about tax policy and public finance that take place within national political discourse. In order to bridge that gap, a new paradigm must take the place of tax competition.

As a means of giving expression to emerging popular fiscal policy preferences, this paradigm should set new terms of political debate that go beyond the straitjacket of “competitive” versus “uncompeti­tive.” Once equipped with an expanded frame of reference, and per­haps a new conceptual vocabulary, electorates and their representatives should then be able to grasp the various policy options and pro­spective institutional arrangements hitherto reserved for the consideration of experts. This much is needed if na­tional polities are ever to become capable of wielding the formidable tools and fiscal ca­pacities that are required in the race against quick­silver global capital.

The scholarly literature in public finance has produced two notable ideas that could be of use in filling in this sought-after new paradigm: namely fiscal self-determination and tax sovereignty. These interrelated concepts have been most thoroughly explored by political philoso­pher and economist Peter Dietsch in his 2015 monograph, Catching Capital, and in his earlier research coauthored with Thomas Rixen.

The first of these terms, fiscal self-determination (also called the autonomy prerogative by Dietsch) is simple enough. It has two com­ponents: (1) the ability of a state to determine the size of its public budget, that is, the level of revenues and expenditures; and (2) the ability of a state to decide the question of relative benefits and bur­dens, that is, the extent of redistribution among its citizens.⁴⁴

The review of recent history undertaken here has already shown how capital mobility constrains the first component. National gov­ernments are still formally able to set tax rates and decide levels of spending, but deliberations on these choices are too often made under what could be described as “conditions of duress,” or the constant threat of disinvestment and capital flight. These conditions are made yet more pernicious by the tax evasion that take places as part of the status quo. Should a particular state be so bold as to call capital’s bluff by enacting a more redistributive fiscal policy, capital is just as easily able to undercut that decision through the increased exploitation of transnational loopholes (illicit evasion) as through any sub­stantive relocation of investment and business activity (licit capital flight). This is what happened after Hollande’s supertax, and what Stephen Moore and others have threatened will happen should AOC’s pro­posal be adopted.

The choice is thus reduced to either tolerating a terrible situation or, in attempting to fix it, instead watching that terrible situation get worse. In the first case, we accept perpetual low taxes on top earners and anemic revenue intake in addition to a normative (though not negligible) amount of tax evasion and avoidance. If we raise taxes on the rich, it is said, then we risk the wrath of capital, and an uptick in financial outflows. In this bind, the supposedly sovereign state and its democratic electorate cannot be considered to be making choices freely. This shows how the first component of fiscal self-determina­tion has been damaged by capital mobility.

In light of capital’s emancipation from the bounds (and burdens) of the state, it necessarily follows that the second component of fiscal self-determination has been undermined as well. Prior to the widespread abolition of capital controls and withholding taxes in the 1970s and ’80s, it could be said that capital, along with labor and consumption, constituted a largely sedentary tax base. This meant that states had much more effective say over both aspects of fiscal self-deter­mination—the size of the public budget and the distribution of bur­dens and benefits.⁴⁵ Since then, the cross-border mobility of capital encouraged by neoliberal economic integration has changed the equa­tion dramatically. It has triggered a regressive shift of the tax burden onto immobile factors like labor and consumption, as well as onto small- and medium-sized businesses that do not have the offshore arbitrage capabilities of large multinationals.⁴⁶

This shift was manifested in the worldwide trend toward the adop­tion of broad-based national consumption taxes that began in the late 1960s and peaked in the 1980s and ’90s,⁴⁷ a timeframe that roughly coincides with the measures that brought about global capital mobili­ty. The one notable exception is the United States, which remains the only OECD country without a standard value-added tax (VAT) or goods-and-services tax (GST), continuing to rely instead on state-based retail sales taxes. This system has not, however, insulated Americans from the global trend toward regressivity. Consider the Institute on Taxation and Economic Policy’s research showing the distributional impact of state sales and excise taxes: “On average low-income families pay 7.1 percent of their incomes, middle-income families pay 4.8 percent of their incomes, and the top 1 percent pay 0.9 percent.” In other words, “Poor families pay almost eight times more as a share of their incomes in these taxes than the best-off families, and middle-income families pay more than five times the rate of the [wealthy].”⁴⁸ The status quo in an era of capital mobility is that multinationals and high-net-worth holders of capital are able to shop across borders for the most convenient tax rates, while labor, con­sumers, and small businesses are left to foot a larger portion of the overall tax bill.⁴⁹ For an illustration of the direction of private wealth flows since the advent of global capital mobility since the 1960s, see the following chart.

The downward shift of the tax burden has at times provoked pop­ular insurrections against regressive shifts in fiscal policy. Most nota­ble are the 1990 poll tax riots that rocked the United Kingdom and helped bring an end to Margaret Thatcher’s premiership, as well as today’s gilets jaunes movement in France that formed in opposition to Em­manuel Macron’s proposed fuel tax increase. These were protests against governments that chose to radically cut taxes for the rich and corporations while raising taxes that disproportionately affected low­er-income and working-class constituencies, all while lecturing about the need for fiscal discipline and balanced budg­ets.

The distinction between opposition to regressive taxation and opposition to all taxation is important here, lest the momentum of these popular movements be appropriated by free market ideologues for libertarian ends. In a feat of transatlantic astroturfing, Grover Norquist’s Americans for Tax Reform has tried to depict the gilets jaunes as a Tea Party à la française, shamelessly ascribing to them a shared worldview while recycling some old rhetoric from Tax Day 2009: “Politicians, no matter which country they represent, are al­ways looking under every rock to impose new taxes on hard-working people. The rise of the Yellow Vest movement puts money-hungry politicians on notice.”⁵⁰

Only in the distorted fun-house mirror of free market fundamentalist dogma can a mass movement determined to resist the regressive pressures on public finance, imposed by an aggressively pro-business administration, be fancifully reimagined as sympathetic to the “starve the beast” agenda of the kind advocated by Americans for Tax Reform. Never mind that the gilets jaunes also call for an increase in the minimum wage⁵¹ and a return to the wealth tax⁵²—Grover Norquist will see what he wants.

Although they are not about to trade in their signature yellow vests for tricorn hats and faux eighteenth-century finery, the gilets jaunes may well be considered representatives of a longing for self-determination at least as old as 1789. In this case, the fight is not against an imperious monarchy or a decrepit aristocracy, but against a far more agile and amorphous foe—hypermobile global capital and its no less imperious and intellectually decrepit agents in the business and political establishments. It is in this respect that the gilets jaunes are closer to the Greek, Spanish, and Italian anti-austerity movements, Occupy Wall Street, and analogous forces on the anti-neo­liberal populist right than they are to anyone with a fellowship at a free market think tank.

Conceptualizing Tax Sovereignty

The older struggle for political self-determination, from which these popular movements can trace descent, was intimately related to an­other enduring idea, that of sovereignty. Historically, the two went hand in hand, as the many national liberation movements ignited by the ideals of the French Revolution aspired to the achievement of state sovereignty as the fullest expression of their quests for self-determination. It is on the basis of this sovereignty that states now claim many of the basic prerogatives of national governance and international relations, such as the right to tax and regulate commerce that crosses their borders, to conduct diplomacy, and to enter into treaties with one another. At the most basic level, it is as sovereign entities that states command the allegiance of citizens and secure compliance with their laws.

But what of the present search for fiscal self-determination? What notion of sovereignty would that correspond to and what institutional forms might it take? In light of the astronomic sums of revenue that states routinely hemorrhage away to tax havens, this could be the “$32 trillion question” of the age. The answers, while hardly easy, are certainly simpler than either the theory or practice of “tax competition.”

What, then, is tax sovereignty? With multiple potentially conflicting understandings at hand, the question might be recast as, what conceptualization of sovereignty can best preserve, sustain, and de­fend (both components of) the fiscal self-determination of states in a world of capital mobility?

In his review of the different facets of sovereignty with respect to fiscal policy, Dietsch draws attention to the self-undermining tenden-cies of the Westphalian concept of sovereignty, defined as a principle of “non-intervention in the internal affairs of other states” and linked to a guarantee of “the autonomy of the domestic political authorities over a state’s territory.”⁵³ In an economically interdependent world, the extremes of tax competition and the absence or relative weakness of tax cooperation mean that, as countries “struggle to preserve their Westphalian sovereignty” through strategic attempts at attracting and retaining globally mobile capital, “arbitrage becomes possible and the erosion of [fiscal self-determination through low fiscal flexibility and regressive pressures on public finance] results.”⁵⁴ Dietsch proposes that, as things are, “Westphalian sovereignty is no longer adequate, or even logically possible. If the policies of [one state] affect other states in ways that, although not directly exercising authority over their policies, nevertheless indirectly undermine the effectiveness of these policies, then Westphalian sovereignty is compromised.”⁵⁵ Furthermore, the continuing rise in capital mobility might necessitate new forms of institutional cooperation between states that could further conflict with the ideal of Westphalian sovereignty.⁵⁶

Dietsch makes a comparison with individual liberty and appeals to “the idea that sovereignty, just as much as liberty, entails not only rights but obligations.”⁵⁷

The parallel with individual liberty is once again instructive here. We do not conceive of individual liberty as absolute, but my liberty is limited by guarantees of the same fundamental liberties for everyone else. Establishing these guarantees re­quires cooperation and the surrender of some individual liber­ties to the state. Calling for individual liberty to be absolute would result in a meaningless, merely formal conception of liberty, and the right to liberty would lose its effectiveness. Any substantive conception of individual liberty is one that is necessarily limited.⁵⁸

As with the liberty of individuals living together in a community, so too with the sovereignty of states.

In light of the considerable advantages that states derive from the exchange of goods and services, knowledge and ideas, values and cultural heritage, to name but a few, the suggestion that the privileges of being a member of the international community comes with certain strings attached is hardly radical.⁵⁹

Dietsch is thus able to formulate “tax sovereignty” as having a “two­fold conditional nature,” consisting of a state’s right to fiscal self-determination bundled with a “responsibility to respect” the fiscal self‑determination of other states. This is the conceptualization of sovereignty required to protect the fiscal self-determination of states in an era of capital mobility, which might in turn serve as the alterna­tive paradigm-in-waiting to succeed the increasingly discredited nar­rative of “tax competition” as the basis for a new regime of tax policy.

What might such a regime look like in practice? One need look no further than the United States, which is already far ahead in getting other nations to respect its fiscal self-determination. In 2010, the United States unilaterally imposed the Foreign Accounts Tax Com­pliance Act (fatca) that requires foreign financial institutions (FFIs) to submit the financial accounts information of American citizens and resident taxpayers to the Internal Revenue Service, with the threat of a 30 percent withholding tax on U.S. source income to be imposed on FFIs that fail to comply.⁶⁰ This historic piece of legislation and its global consequences serve as a concrete example of a state demanding that other states recognize its sovereign right to collect revenue from its tax base, albeit in a rather heavy-handed way, by compelling for­eign actors to provide assistance to its revenue agency. More could be done to improve fatca, but it’s a start.

By applying the lens of “tax sovereignty” to the significant but still quite rudimentary progress toward global tax governance that has come into being over the last decade through fatca and the OECD’s multilateral initiatives, it is now becoming possible to imagine a more refined and systemic institutional architecture of international tax cooperation. The excesses of capital mobility and tax competition can be combated by furthering forms of interstate tax cooperation that are firmly grounded in and strictly delimited by the principles of fiscal self‑determination and the sovereignty of states. This delimitation would entail an acceptance of the necessary role of international co­operation, through which states can agree to set and enforce a mini­mum standard of rules and behavior geared to the protection of each other’s tax sovereignty, but a rejection of proposals to cede, “pool,” or aggregate the fiscal policy-making powers and prerogatives of states to any new tier of supranational government.

One can envision a near future where sovereign states are endowed with newfound fiscal capacities and powers of enforcement that would allow them to effectively track and tax the globally mobile seg­ments of their tax base. This delimited institutional architecture would enable the redomestication of borderless capital within the bounds of state sovereignty. What follows is an appraisal of the ad­vances made so far and a few ideas on where things could be improved.

The Alphabet Soup of Tax Governance

In 2010, the United States passed fatca in response to the previous year’s tax scandal involving UBS, in which the Swiss banking giant was found to be abetting U.S. citizens in the nonpayment of taxes through the maintenance of financial assets in secret accounts.⁶¹ Switzerland had long been known as a premier destination for this kind of tax evasion, and it should have been no less of a surprise to discover that America’s wealthiest taxpayers had been abusing the secrecy offered by the Swiss banking system. Perhaps it was the political atmosphere engendered by the recent financial crisis that helped to push through such legislation. Whatever the cause, global tax governance would never be the same.

Fatca represented a major shift from the previous regime of self-reporting of tax fraud by financial institutions to one of compulsory, automatic exchange of financial information. The new regime would be built on a collection of bilateral intergovernmental agreements (IGAs) signed by the United States with foreign jurisdictions (though fatca theoretically covers even jurisdictions that have not signed an IGA with the United States, as noncomplying FFIs in these places are still subject to the law’s withholding penalty provisions).⁶² The advent of fatca as a unilateral American policy for countering offshore tax evasion soon galvanized the OECD to enact a multilateral equivalent for the rest of the world—the Common Reporting Standard (CRS). Under CRS, a reciprocal automatic exchange of information (AEOI) regime for over one hundred signatories of the Multilateral Competent Authority Agreement (MCAA) would come into effect. Fatca came into force in July 2014 while the first information exchanges under CRS took place among the initial batch of MCAA signatories in September 2017, followed by the second batch in September 2018.⁶³

At least in theory, participating tax administrations around the world should now be able to sift through the information received from other jurisdictions, match the figures on the foreign accounts of taxpayers with their own records, and proceed with leads on tax evasion. Authorities should then be able to recover lost revenues and collect penalties. Just as important, the system created by fatca and CRS should act as a strong deterrent against tax evasion in the first place, making it easier for governments to enact changes in fiscal policy without fear of being frustrated by increased tax evasion. But, as always, there will be some distance between the principles that might inform a policy and its implementation.

Studies performed using data on U.S.-bound investment flows and revenue intake in the years after the enactment of fatca show mixed results. On the one hand, a 2019 study of investment data has shown “that the amount of equity investment into the U.S. from tax havens declined by 21.2 percent from 2012 through 2015, consistent with U.S. investors moving financial assets out of tax havens”⁶⁴ post- fatca. On the other hand, an earlier 2017 study that looked at the IRS’s attempts at offshore revenue collection under fatca showed that “except for the extraordinary penalties assessed, little additional tax has been collected. In comparison to the annual budget spending by the U.S. government, the actual amount of tax collected by fatca is statistically insignificant.”⁶⁵

With respect to the OECD’s CRS, preliminary evaluations look promising but the earliest reports come from the organization’s own secretary general’s office, which of course has reason to play up the positive aspects of the program’s performance. According to that office’s recent report to the G20 Finance Ministers, since implementation in September 2017, forty-seven million offshore accounts have been exchanged, and an estimated total of €95 billion in lost revenues and penalties has been collected among the hundred or so signatory jurisdictions of the MCAA.⁶⁶ This is a good start, but only just a start, given that the projected amounts of offshore wealth run into the tens of trillions. It is difficult for third parties to independently exam­ine and verify the results of CRS, as the OECD has declined to publish statistics on these first automatic exchanges of information, despite calls to do so.⁶⁷ In any event, it is probably still too early to make comprehensive evaluations of the multilateral standard.

It is, however, worth addressing the myriad loopholes that have already been identified in the tax reporting regime under both fatca and CRS. It would also be good to follow up on the progress made in improving the capacities of national tax administrations to process the massive troves of financial account information that will now routine­ly fall into their laps under AEOI. Many of the available loopholes involve holding undisclosed assets in various kinds of entities that fall outside of fatca and CRS’s reporting requirements.⁶⁸ Account hold­ers driven out of traditional tax havens by AEOI might also find new places to park their wealth in the category of nonparticipating juris­dictions that either do not have a reciprocal IGA with the United States or are not signatories to the MCAA. These mostly include developing countries whose viability as the next generation of tax havens would depend on factors like the reliability of their domestic banking and financial sectors, a consideration that might rule out large chunks of the Global South.⁶⁹

Alternatively, for these temporarily stranded streams of globally mobile capital, there is one jurisdiction not subject to the reporting requirements of either fatca or CRS, and which has a perfectly reliable banking industry, at least from the perspective of clients look­ing for “financial privacy”—namely, the United States. Owing to the unilateral and only partially reciprocal nature of fatca, U.S. financial institutions are generally not required to share certain elements of foreign account holders’ information with their respective tax admin­istrations (such as account balances and beneficial owners). As “the rest of the world provides the transparency that the U.S. demanded, the U.S. is rapidly becoming the new Switzerland,” a situation that prompted a Bloomberg editorial to remark that “[s]huttering foreign tax shelters only to steal their business is a bad move.”⁷⁰

Indeed, the ironic twist by which a Swiss banking scandal spurs the United States to pass sweeping anti-evasion measures—only to later become Switzerland’s effective replacement by the end of the decade—is illustrative of the perverse dynamics at play under global capital hypermobility. It also reveals the shortcomings of attempts to constrain capital mobility that are, like fatca, largely improvised, uncoordinated, and inconsistent. For American tax evaders, the pres-ent system could just mean that it would be easier to conceal their wealth in onshore accounts rather than go offshore.

There is one piece of legislation being considered in Congress that could help reverse America’s slide into the status of a secrecy jurisdic­tion, and that is the Corporate Transparency Act of 2019. The biparti­san bill would help to prevent the incorporation of anonymously owned “shell companies” of the kind commonly used for tax fraud and money laundering by requiring the disclosure of a firm’s benefi­cial ownership information to FinCEN, the government’s financial intelligence arm, with the intention that the collected data be “avail­able only to law enforcement.”⁷¹ This measure could represent a major step forward in the ability of the United States to act against both internal and international tax evasion in addition to a host of other financial improprieties. But the bill is still essentially a conservative one compared to the emerging global standard of corporate trans­parency. It features no proposal for a public beneficial ownership registry of the kind adopted by the United Kingdom under a center-right government in 2016, by the entire European Union in 2018, and even by a growing number of developing countries after the 2016 London Anti-Corruption Summit.⁷²

The rationale behind a public beneficial ownership registry, as opposed to a closed-circuit system of reporting, would be to optimize the speed and efficiency with which potentially relevant information can be spotted, verified, and acted on (as well as strengthening the deterrent effect). Privacy concerns can be met by separating out sensitive data (to be reserved for tax authorities) such as a beneficial owner’s personal address, contact information, or tax identification number, from publicly searchable elements, such as an owner’s tax residency, the extent of ownership over a corporate entity, and the nature of control. The ubiquity of shell company use as a means of tax evasion also underscores the need for the integration of beneficial ownership reporting standards into fatca and CRS, a development that would complement the information received under AEOI and give tax authorities a more complete picture of the sum of a taxpayer’s assets at home and abroad.

The question of how tax administrations around the world are supposed to process all this data is, needless to say, vital to the success of AEOI. It remains to be seen whether participating revenue agencies will have the capacity to effectively utilize the volumes of information they will be receiving under CRS and, in the American case, whether the IRS can improve on its implementation of fatca. Public sector innovations will be required to produce the data analyt­ics capacities needed to automatically match foreign accounts infor­mation with internal taxpayer records as well as to trace ultimate beneficial ownership and control through complex linkages of corporate entities.

With AEOI in place, the task ahead in the campaign against individual and small-scale tax evasion of the kind encouraged by bank secrecy and tax competition for liquid portfolio capital might best be described as one of consolidation. The basic structures have already been set up by fatca and CRS, and all that needs to be done is to further improve their efficacy and perhaps introduce plans to progres­sively merge them into a universal reporting standard as a means of eliminating the gaps between the two systems.

It is worth noting here, however, that even with the persistence of loopholes, individual tax evasion at this level is significantly more difficult today than it was a decade ago. Should France try once again to impose a supertax, for example, or should AOC or Elizabeth Warren succeed in raising income or wealth taxes, the resulting tax evasion problem would not be as severe as some of the naysayers might suggest.

The Mendacity of the Multinationals

With respect to tax dodging at the corporate level, on the other hand, there is much more work to be done, since existing efforts to address this side of the problem have not been as far-reaching or comprehensive. Many of the structures needed to deal with aggressive tax plan­ning on the part of multinationals (which generally takes the form of legal tax avoidance) have yet to be established.

The most significant effort on the corporate avoidance front has been the OECD’s Base Erosion and Profit Shifting initiative (BEPS), which sought to plug loopholes in the “arm’s length principle” while essentially preserving it as the reigning standard of corporate taxation. The “arm’s length” principle, however, is where a lot of the present abuse stems from, since it rests on the fiction that multinationals are only loosely connected sets of independent subsidiaries that must adopt an “arm’s-length” approach when conducting intracompany transactions with each other. In fact, it is widely known that multi­nationals aggressively plan and coordinate the transactions between their subsidiaries through complex profit-shifting mechanisms. In these arrangements, gaps between tax regimes, internal invoices, and transfer prices (often on intangible assets) are manipulated to ensure that profits can be booked at the most convenient tax haven jurisdiction. The following description of how Google makes use of the infamous “Double Irish” and “Dutch Sandwich” maneuvers exemplifies the sheer mendacity of multinational accounting practices:

Google Ireland collects most of the company’s international advertising revenue and then passes this money on to Dutch subsidiary Google Netherlands. A Google subsidiary in Singa­pore that collects most of the company’s revenue in the Asia-Pacific region does the same. . . . The Dutch company then transfers this money on to Google Ireland, which has the right to license the search giant’s intellectual property outside the US. That company is based in Bermuda, which has no corporate income tax. The use of the two Irish entities is what gives the structure its “Double Irish” moniker and the use of the Nether­lands subsidiary as a conduit between the two Irish companies is the “Dutch Sandwich.”⁷³

Starbucks, Microsoft, Apple, and Amazon, among other multinationals, have been known to partake in some variation of this pattern of profit-shifting in addition to related arbitrage actions like “corporate inversions” as part of routine business practice. If these are its results, the arm’s length principle ought then to be replaced rather than simp­ly patched up.

The recent conflict between the United States and France over the taxation of digital giants also highlights the imperative to institutionalize tax cooperation. Though Presidents Trump and Macron were eventually able to reach a settlement at the August 2019 G7 Summit,⁷⁴ this pattern of fiscal brinkmanship followed by a round of reactive dealmaking risks putting the reform of corporate taxation on the same haphazard “two steps forward, one step back” trajectory that charac­terized the highly uneven development of fatca and CRS.

Developing a credible alternative to the “arm’s length” approach that is consistent with the principles outlined in this essay points to a system known by a rather unwieldy name that nonetheless reflects a refreshingly simple logic: unitary taxation plus formulary apportionment, or UT+FA. Under this model of corporate taxation, multinationals would submit a single consolidated figure of annual global profits and be taxed by a national jurisdiction in proportion to the percentage of those profits earned there, based on a formula of sales, assets, and/or payroll attributable to said jurisdiction.

The OECD’s present model of country-by-country reporting (CbCR) could serve as a solid foundation for a shift to unitary taxa­tion. Under that standard, multinationals are already required to report figures and details of their activities in every country, such as “revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities.”⁷⁵ An expanded and more transparent version of CbCR would serve to make UT+FA all the more plausible. As to what the precise apportionment formula should be and how it will take into account the complexities of the digital economy or differences between developed and developing economies, those are questions that will have to be decided in a future con­versation among governments, corporations, stakeholders, and citi­zens. But once in place, such a system of corporate taxation would come the closest to aligning multinational tax receipts with actual economic substance. It would take away the incentives that lead to corporate inversions, transfer-pricing abuse, and double nontaxation, among other financial dissimulation practices, and thereby help cor­rect the distortions in capital flows discussed above.

Already used to apportion taxes at the subnational level (such as between U.S. states and between Canadian provinces), formulary apportionment would have the benefit of a record of real-world experience for policymakers and administrators to draw from in adapting it to the global level. There is also a prodigious literature of plans and blueprints for international UT+FA, ranging from years worth of academic and policy papers to a comprehensive proposal on the part of the European Union, known as the Common Consolidated Corporate Tax Base (ccctb).⁷⁶ All of which means that, in addition to a wealth of practical antecedents, there will also be consid­erable theoretical support for a future transition to UT+FA. So long as it is implemented properly, there is every reason to believe that the transition to formulary apportionment will be a smooth one.

Global Institutions, National Imperatives

The policies detailed here, centering on AEOI and UT+FA, would radically reduce opportunities for tax evasion, avoidance, and arbi­trage. The progress of the past decade has been notable, but as this appraisal has shown, there is yet more work to do. It will likely require the active participation of all those who stand to benefit from reining in global capital, whether they call themselves progressives and democratic socialists, conservative economic nationalists, or the great middle swath of Americans for whom such labels mean little.

For the uninitiated among them—those without CPAs, LLMs, MPAs, or MBAs—wading through the alphabet soup of global tax governance might be a grueling experience. But concerned citizens and their elected representatives can rely on the north stars of fiscal self-determination and tax sovereignty to help them get through to the desired destination: a world in which electorates and governments may freely decide their fiscal policies without the undue pressures and imbalances caused by capital hypermobility. Given demands around the globe, many governments will almost certainly converge on raising taxes in the near future, and should these proposals come to pass, it will be possible for them to collect revenues and enact a greater degree of compensatory redistribution after decades of aus­terity, inequality, and wage stagnation.

Yet the institutional architecture of global tax governance has other implications that go beyond the merely redistributive features of fiscal policy and that touch upon an even deeper question at the heart of the dysfunctions of contemporary globalization, namely the allocation of capital. Once states newly empowered by the recognition of their tax sovereignty are able to expand the effective reach of their taxing authority over the vast hordes of idle capital currently held in tax havens, the possibilities for new modes of public finance and fiscal policy begin to come into view. These include not only direct tax-and‑spend measures—though those would certainly be possible and in many cases necessary—but rather states might also adopt more flexible carrot-and-stick approaches.

The carrot, here, would take the form of inducements for the owners of offshore capital to make productive and patriotic use of their wealth by invest­ing it in the long‑term capacities of the national economy. Appropriate measures might include the creation of infra­structure banks, scale-up and seed funds, and innovation-based part­nerships between gov­ernment and industry—in addition to any number of other measures to channel private capital toward broad national goals. Whether taking political shape as a “Green New Deal” to modernize the economy along progressive lines or a nationalist-oriented push to restore industrial strength and outpace strategic competitors, the effect of the shift to a new paradigm would be a reinvigorated econo­my on the path to reindustrialization, in which investors reap hefty returns amidst burgeoning national prosperity.

But the holders of global capital could also refuse the carrot and instead mount an Ayn Rand–style revolt of the rich by finding ever-more remote offshore spaces and escape hatches through which to sequester their wealth—cryptocurrency being the likely next frontier of twenty-first-century tax evasion. In this case, governments might respond by launching a “fiscal war of attrition,” to be declared in the name of tax sovereignty and to be waged with the full arsenal, or the stick, of global tax governance.

There is a chance that while international tax cooperation could someday serve as a pillar of the new settlement to be built over the ruins of neoliberal globalization, it might first be a front in the new class war, one in which the public bureaucracies of the sovereign state, under the command of reformist administrations, do battle with the private “mercenary” bureaucracies of corporate accountants, tax law­yers, and wealth managers in the pay of global capital to determine the parameters of public finance. The outcome will depend on the talents of the ascendant generation of populist and post-neoliberal leaders from Left and Right alike: it is they who must marshal the considerable political force needed to foil the resistance of recalcitrant elites, and the campaign could be a long one requiring a profound and sustained popular mobilization.

This is not to say that, as global tax governance takes on a more politically agonistic and democratic cast, it could or should lose its essentially technocratic character. Tax policy at this level will always remain a technocratic endeavor and competent, credentialed experts must have a central part to play. But given what is at stake for citizens and the concept of sovereign government, it can at least be said that taxing global capital is too important to be left to the technocrats alone.

This article originally appeared in American Affairs Volume III, Number 4 (Winter 2019): 54–81.

Notes