Taxation is amongst the most hotly debated and politically contentious issues of the twenty-first century. It has long been an important component of state policy for funding public services and managing inequalities. Recently, it has increasingly been under the spotlight in virtue of international concerns – worries about multi-national companies shifting profits to low-tax jurisdictions and wealthy individuals exploiting tax loopholes, often to the effect of reducing state tax revenues. Such realities raise important questions about the ethics of taxation in a globalised era and have been the focus of much work by Université de Montreal philosopher Peter Dietsch across his work in The Journal of Political Philosophy, Review of International Studies, Moral Philosophy and Politics, Ethical Perspectives, and the volume Global Tax Governance – What is Wrong With It and How to Fix It (co-edited with Thomas Rixen). In 2015, Peter published a book – Catching Capital: The Ethics of Tax Competition – on these issues and, when the opportunity presented itself, we took the chance to interview Peter about this work and heard some of his interesting reflections on the subject:
Lisa Herzog: The Panama Papers have brought the issue of international tax evasion to everyone’s attention. But you have worked on international tax justice for a long time. What got you interested in the topic?
Peter Dietsch: I have always been interested in issues that lie at the intersection of philosophy and economics, and questions surrounding taxation easily peak this interest. A progressive income tax is widely acknowledged to represent the main tool by which a society implements its ideal of justice. Yet, the actual workings of taxation are rarely investigated and they can pose important normative questions that complicate its use as a tool of justice.
The prime example of this kind is tax competition. The efforts of states (and also of other levels of government) to attract various types of capital from elsewhere create pressures both to lower tax rates and to relax one’s regulatory framework, for instance by tolerating a high level of secrecy in financial matters. Tax competition undermines the fiscal autonomy of states and exacerbates inequalities in income and wealth. These are challenges to the fiscal state as we know it that political philosophy and political economy cannot afford to ignore.
LH: If a country lowers its tax rate simply in order to attract capital from neighbouring countries, this seems intuitively unfair. But what if a country simply wants to have low tax rates, and thereby happens to attract capital from other countries?
PD: For the principles to regulate tax competition that I have developed with Thomas Rixen (Universität Bamberg), intentions do indeed matter. Our normative starting point is fiscal autonomy – we deem it important to protect the capacity of polities to attain the level of public goods and redistribution they prefer. It makes a difference whether this autonomy is undermined by another polity that designs its fiscal policy with the explicit goal of attracting capital or by a polity that independently pursues its conception of social justice. When the Irish strategically design their tax system to lure in capital from abroad, this is problematic. By contrast, if the UK really does have a political preference for a smaller state and lower levels of redistribution than, say, the Swedish, then the Swedes do not have any grounds to complain about the capital outflow to the UK that results.
LH: So what would be a better system for international taxation than the one we currently have?
PD: In my book, I propose two important lines of change. One concerns ‘virtual’ tax competition, where states poach the tax base of another state by allowing individuals or companies to locate their wealth or profits in the state without registering their residency or undertaking any economic activity there. Swiss bank secrecy or corporate tax deals in Luxembourg are prime examples of arrangements that facilitate this kind of behaviour. A just system of international taxation would get rid of poaching altogether through increased transparency and by introducing a consolidated corporate tax base.
A second line of change concerns ‘real’ tax competition, where actual economic activity is lured from one state to the next. An example here is the foreign direct investment in Ireland lured by the fiscal incentives mentioned above. A just system of international taxation would also impose some restrictions on luring that could take a variety of forms, such as banning tax reforms that are strategically motivated or imposing minimum rates of capital taxation.
LH: These proposals are quite ambitious. What would it take to put them into practice?
PD: I see three requirements that need to be met for effective change. First, we need to address both poaching and luring simultaneously (unlike current OECD and EU efforts that are limited to poaching), because any effective crackdown on poaching will lead to a significant increase in luring. Imagine a world in which the likes of Google, Starbucks, or Volkswagen can no longer produce in one place while paying (or not paying) their taxes in another. Their incentive to relocate would grow. This means finance ministries in rich countries today must choose between tolerating virtual tax competition to keep the economic activity of multi-national enterprises or cracking down on poaching at the cost of losing jobs. For this reason, we must address the problems with a combined strategy.
Second, we need an International Tax Organisation with a strong mandate to enforce tax justice. Current organisations involved in tax justice lack either legitimacy (the OECD and the EU, which are clubs of rich countries) or teeth (the UN, which does not have the power to implement effective reform).
Third, those who lose out under the status quo of tax competition need to mobilise. Individuals with no or little capital as well as small- and medium-sized enterprises that do not have foreign subsidiaries to shift their profits to, taken together, represent a majority. Left-of-centre parties have not done nearly enough to harness their voice for change.
LH: Publishing this book is, I guess, the culmination of your research on international tax justice. What comes next?
PD: There is lots of work still to be done here. One of the potential ways to tackle the problematic issue highlighted in response to the last question, for instance, is by analysing international taxation not in isolation but in conjunction with international trade. As the parallel between luring foreign direct investment and the paying of subsidies highlights, the two are closely intertwined. I am interested in exploring this link to ask what constitutes a global level-playing field in economic matters.
In parallel, I have started to work on normative questions in the context of monetary policy. As in the case of taxation, the monetary policies of countries (or monetary zones) create externalities for individuals elsewhere. Should central banks take these spill-over effects into account when designing monetary policy and, if so, how? Similarly, the post-2007 unconventional monetary policies launched by central banks have been shown to have important effects on the distribution of income and wealth. With monetary policy playing an ever more important role in the macroeconomic policy mix, these questions deserve more attention.