Neoliberalism, The Rise of Tax Arbitration, and the Structural Power of Business

Pleased to share my new article with @martinhearson on The Neoliberal Turn to International Tax Arbitration, out now from @PoPpublicsphere. Post on what this piece is and why it matters.

International corporate tax policy is incredibly arcane, but it’s hugely consequential. Recent estimates by @TaxJusticeNet find that governments lose out on $245 billion Every. Single. Year. From abusive profit-shifting to tax havens. (taxjustice.net/2020/11/20/427…) That’s revenue governments could spend on priorities like boosting workers, ending poverty, and decarbonizing our economies, as @JosephEStiglitz @gabriel_zucman and I write here @ForeignAffairs.

Obviously, multinational corporations like this outcome. Indeed, if governments let them get away with this, companies could seem to get anything they want.

But, as we show in our paper, they can’t always get what they want, when they want. Indeed, they wanted some things for a really long time. Like,100 years long. Like since the corporate income tax was introduced long. And they begged and pleaded for it. But they didn’t get it. The thing? The power to force two or more states to not tax them on the same income. States would do anything for them, but they wouldn’t do that. Rather, they insisted on retaining the sovereign power to set rates, enter into tax treaties with only the countries they wanted to, and settle disputes about multinational taxpayers in domestic courts. This can and did result in so-called “double taxation.” And as recently as the 1980s, states were saying anything less would constitute An Unacceptable Surrender of Fiscal Sovereignty, thus the title of the article. (cambridge.org/core/journals/…)

Our paper’s central contribution is to show how ideas and power — in this case neoliberal-ism and multinational capital — operate under constraints rendered by history. The tax settlement of the 1920s was an amalgam of capital-friendly substance and state-friendly process. It proved incredibly sticky, even in the face of obvious dysfunction. It was bad for states, as @thomas_rixen and others have written, because the clinging to sovereignty to set rates, perversely created an opening for “low to no tax” tax havens. (palgrave.com/gp/book/978023…) And it wasn’t ideal for capital, because of the double taxation.

The article goes through capital’s multiple failed attempts over a century to go through the front door and demand cession of tax sovereignty.

In the end, capital was successful, and states have just recently agreed to double taxation authority to private arbitrators, a process that gives MNCs much more agency. But, in a bizarre feat of timing, the capital win comes at a moment of left and right populist anger over MNCs

Deploying historical institutionalist theory, we explain how a corporate long-game burrowed within government, and leveraged the chaos government created to paint arbitration as not a handout to business but a solution for government.

And the solution is “judicialized,” where judge-like actors will make the relevant substantive decisions in quiet and long after governments make the process decision (which few have the capacity to track in itself). Thus the timing puzzle.

Complexity, quiet politics, submerged processes… this is capital’s love language, as @PepperCulpepper @SuzanneMettler1 and others have written. (press.uchicago.edu/ucp/books/book…)

Read the article and appendix for the full argument. It’s ungated, so everyone can give a read. We learned a lot through this project from @florence_dafe @henryfarrell @OFioretos @NikKalyanpur @thomas_rixen @GabrielSilesB @kateweaverUT and many others. (cambridge.org/core/journals/…)

As it happens, and this is rarely the case for long-brewing academic papers like ours, this article is highly relevant for the news of the week. Last month, the Biden administration called for a 21 percent country-by-country global minimum tax as part of the American Jobs Plan. (washingtonpost.com/politics/2021/…) This would remove incentives for companies to stash profits in low-tax tax havens, because the US would collect the difference between low rates and 21 percent. Indeed, it’s a lot like what pro-taxation forces have argued for from the 1920s to today. This idea — dubbed Pillar Two by the OECD — has gotten support from other G7 countries, including Italy… (ft.com/content/847c5f…)

Canada (ft.com/content/9f2b2b…)

France and Germany… (news.bloombergtax.com/daily-tax-repo…)

And Japan. (news.bloombergtax.com/daily-tax-repo…)

Yet, over the weekend, the UK government announced that it would be withholding support for the plan until the US agreed to so-called “Pillar One” rules, which would impose taxes on digital companies like Facebook. (ft.com/content/a24928…)

Pillar One is not necessarily an awful idea. Digital companies have been getting away with the tax equivalent of murder.

And the US has signaled openness to the idea (ft.com/content/c2a680…)

The only problem, as @alexcobham writes here, is that the digital plan is relatively trivial in terms of the revenue it will pull in. He suggests the posture is a delay tactic by the Johnson administration to protect the UK’s own tax havens.

Moreover, of relevance for our article, Pillar One adds still further complexity to tax rules… a boondoggle for tax lawyers, and you guessed it, tax arbitrators. This is in contrast to the global minimum tax, which lessens company discretion. (papers.ssrn.com/sol3/papers.cf…) If you’re looking for how arbitration can go from

- an incremental idea that MNCs convinced states to layer on top of a century old regime #BecauseNoBiggie

- to an international common law of tax

This direction of travel is how you get there.

(Adapted from this thread.)

I write about democracy, political economy, and trade. Fellow at the Roosevelt Institute and Roosevelt Forward.

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