TAX, SOCIETY & CULTURE

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Cockfield: Big Data and Tax Haven Secrecy

Published Oct 14, 2015 - Follow author Allison Christians: - Permalink

Art Cockfield has posted a new paper on SSRN, Big Data and Tax Haven Secrecy, forthcoming Florida Tax Review. The article sets out research he did with the International Consortium of Investigative Journalists (ICIJ) and is of interest. Here is the abstract:

While there is now a significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering and the financing of global terrorism. To provide insight into this secret world of tax havens, this Article relies on the author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. The Article deploys a transaction cost perspective to assist in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in non-democratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.

Tagged as: evasion information scholarship tax policy

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Today at McGill Law: Martin O'Neill on Corporations, Tax, and Social Justice

Published Nov 10, 2014 - Follow author Allison Christians: - Permalink

Martin O'Neill, Senior Lecturer in Politics at the University of York, joins us as today's speaker in the Spiegel Sohmer Tax Policy Colloquium at McGill. He'll present a work in progress that he has entitled "Corporations, Conventionalism, Taxation and Social Justice." Here is an abstract:

A failure to take seriously the conventionality of corporations has led to an unimaginative view of corporate taxation as being structurally analogous to the taxation of individuals. There are, in fact, many disanalogies between the two: corporate profit should not be treated as analogous to individual income; low-profit corporations should not be treated advantageously by a tax system in the same way as it should treat low-income individuals; and, most significantly, corporations are not owed the same level of care and determinacy as individuals with regard to the tax rules that they face. Breaking the perceived link between individual taxation and corporate taxation makes room for a reassessment of the structure and purpose of corporate taxation. 
Taking a step back from issues focussed narrowly on taxation, as such, there is a general need to integrate normative issues regarding corporations into our understanding of the proper configuration of the basic structure of a democratic society. In our current non-ideal circumstances, the corporations we actually have are corrosive of the possibility of social justice. In part, this is because we’ve been blinded by a certain picture of corporations as ‘natural’ economic entities, and have been too timid and unimaginative in the ways in which we subject corporations to political regulation and constraint. A robust conventionalism would allow us to reverse the usual order of justification: from seeing corporations as placing constraints on government policy, to seeing corporations as conventional economic units that should be embedded in an institutional and regulatory structure that delivers social justice. 
This gestalt switch opens up wide vistas for public policy innovation. Thus, this is an area in which applied political philosophy has an important home. First, conceptually, it opens up policy spaces which are easy to ignore when one is in the grip of an earlier picture. Secondly, in order to make sense of theories of liberal egalitarian justice, we need a better idea of their institutional setting, and this means moving beyond (or at least supplementing) overly schematic debates about the relative significance of government agencies and individual behaviour. We also need to think about how the basic structure of society should be organized so as to marshal its most significant economic institutions in directions which are conducive to the pursuit of social justice within a democratic society.
The presentation will again take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm. As always, the colloquium is open to all: students, faculty and the general public are welcome.

Tagged as: colloquium corporate tax McGill philosophy scholarship tax policy

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This Fall at McGill: Colloquium on Tax Philosophy

Published Sep 12, 2014 - Follow author Allison Christians: - Permalink

I am pleased to announce that the annual McGill tax policy colloquium is now being generously supported by the law firm Spiegel Sohmer, Inc., under a grant established for the purpose of fostering an academic community in which learning and scholarship may flourish.

This fall, in its inaugural instalment, the Spiegel Sohmer Tax Policy Colloquium will return to tax policy fundamentals by critically examining the goals of taxation from a law and philosophy perspective.

The Colloquium will therefore be convened jointly by myself and Daniel Weinstock, who is the James McGill Professor in the Faculty of Law and Director of the McGill Institute for Health and Social Policy.  His research explores the governance of certain types of liberal democracies, and the effects of religious and cultural diversity from an ethical perspective on the political and ethical philosophy of public policy.

Each talk takes place in the Seminar Room, Institute for Health and Social Policy, 1130 Pine Ave, from 14:35 to 17:35.  These events are free and open to everyone. We welcome students, faculty and the general public to attend. Here is the line-up:

Monday, October 6: Wayne Norman, Mike and Ruth Mackowski Professor of Ethics, Kenan Institute for Ethics and Department of Philosophy, Duke University. His work focuses on business ethics and his published work includes numerous books and journal articles, as well as contributions to “Ethics for Adversaries: How to Play Fair When You’re Playing to Win.”

Monday, October 20: Joseph Heath, Professor in the Department of Philosophy and the School of Public Policy and Governance at the University of Toronto; Director of the University of Toronto Centre for Ethics. He has published work very widely including the recent book "Enlightenment 2.0: Restoring Sanity to Our Politics, Our Economy, and Our Lives."

Monday, October 27: Patrick Turmel, Professor in the Department of Philosophy, Laval University. His work focuses on ethics and political institutions, particularly cities. His publications include co-authorship of a book titled “La Juste Part: Repenser les Inégalités, la Richesse et la Fabrication des Grille-Pains.”

Monday, November 11: Martin O’Neill, Senior Lecturer in Moral and Political Philosophy, Department of Politics, University of York, U.K. His research examines global and intergenerational justice. Among his many publications, Professor O’Neill’s most recent book is “Property-Owning Democracy: Rawls and Beyond.”

Monday, November 17: Peter Dietsch, Professor, Department of Philosophy, Université de Montréal. He works on questions of distributive justice with particular emphasis on the application of philosophical theories through social instruments including the tax system. His work is widely published, including a recent article titled “Tax Competition and Global Background Justice” in The Journal of Political Philosophy. He is also working on a book on tax competition entitled “Catching Capital”.

I am looking forward to hearing what these pre-eminent philosophers can tell us about the state of contemporary tax policy theory. Over the course of the semester it is my hope that we can develop a framework for thinking about tax policy that responds to the world in which we find ourselves today, with all of its promises and challenges for democracy, economy, and identity.

Tagged as: McGill philosophy scholarship tax policy

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It Isn't Just about Greece: Domestic Politics, Transparency and Fiscal Gimmickry in Europe

Published May 23, 2014 - Follow author Allison Christians: - Permalink

Here is an interesting article by James Alt, David Dreyer Lassen and Joachim Wehner that might help explain why it's hard for governments to contend with the problem of tax planning (or base erosion, or however one might like to categorize the issue): governments themselves are inclined toward playing around with numbers, too, or what the authors call engaging in gimmickry. It's also another compelling argument for more transparency in governance coupled with an example of why governments are ambivalent about meeting that goal. Abstract:

This article analyzes the political origins of differences in adherence to the fiscal framework of the European Union (EU). It shows how incentives to use fiscal policy for electoral purposes and limited budget transparency at the national level, combined with the need to respond to fiscal rules at the supranational level, interact to systematically undermine the Economic and Monetary Union through the employment of fiscal gimmicks or creative accounting. It also explains in detail how national accounts were manipulated to produce electoral cycles that were under the radar of the EU budget surveillance system, and concludes with new perspectives on the changes to (and challenges for) euro area fiscal rules.
And here are some observations from the paper:
We show that: (1) despite reporting rules and an elaborate monitoring mechanism (including Eurostat), political incentives resulting from the electoral cycle and the state of the economy systematically undermined compliance with SGP fiscal rules; (2) under such rules, the scale of gimmickry depends on the degree of fiscal transparency in the domestic budget process; (3) incentives for fiscal gimmickry grew with the adoption of these fiscal rules, and tampering with accounting related to subsidies was not the only way in which countries evaded the SGP and Eurostat supervision; and (4) contrary to a good deal of contemporary discussion, non-compliance with the SGP was not 'all about Greece'. Greece was indeed an extreme case, the least transparent of the countries we study. However, the patterns we identify appear whether or not we include Greece in the data.

Countries with higher fiscal transparency generally observed SGP requirements for fiscal reporting, but occasionally violated the deficit limits.

When larger deficits loomed in an economic downturn, low-transparency countries also systematically circumvented the reporting rules using creative accounting.

Our result – that despite common supranational rules and monitoring, domestic institutions (budget transparency), politics (elections) and economic cycles (recessions) explain much of the variation in outcomes – reinforces the argument that 'the source of fiscal discipline is at the domestic level'.

...asymmetric information in an economic union is not only of academic interest, but has serious, real-world consequences for sustaining co-operation among national governments.

...Why would governments choose to misrepresent the state of their public finances? Euro member countries generally face three audiences: domestic voters, bond markets and the EU itself. Conceptually, countries projecting deficits or debt levels that violate the SGP rules can – for a given level of budget transparency – do three things. Each involves a different trade-off. First, they can observe the fiscal rules and make real adjustments to tax and expenditure levels, which will placate bond markets and Eurostat, but will be costly if the resulting policies are unpopular with voters at the national level. Secondly, they can forego fiscal consolidation, break the rules outright, and post deficits and debts in excess of SGP thresholds. This also can come at a price. Greece's entry into the common currency was delayed due to too-high deficits and, after the introduction of the euro, the system had penalties that made it potentially costly for countries to violate the rules. Thirdly, countries can resort to gimmickry, leaving real outcomes (especially spending) unchanged.8 Voters are unharmed in the short run, and gimmicks fool bond markets and supranational authorities to the extent they are undetected. Here the trade-off is intertemporal: if undetected, gimmickry keeps governments on good terms with everyone in the present, but may entail considerable costs, if deficits and debts later accumulate, in the form of high bond yields and even political unrest. Strategic choice could involve more than one of these avenues for action.

...If countries face costly constraints – either politically, from voters, or economically, from supranational fiscal rules or markets – why would countries not simply reduce transparency in order to facilitate fiscal gimmickry? They could, but making governance structures less transparent is visible, carries substantial reputational costs and, in our context, is penalized by bond markets.

...how can we make gimmickry observable and quantified, when the point of misrepresenting fiscal quantities is to avoid detection? We next show how gimmickry can be inferred from traces left in the national accounts, even after Eurostat scrutiny.

...One measure of gimmickry that is reasonably well known to practitioners is the stock-flow adjustment (SFA). The SFA is a statistical residual, an accounting item defined to reconcile the difference between a change in a government's debt (the total face value of the 'debt-like' or 'fixed' claims held against it) and budget deficit (the excess of spending over revenue)

...shares and other equity' transactions become gimmicks when, for instance, payments to cover recurring losses by a state-owned company are treated as equity purchases instead of current transfers.

...A government's electoral incentives are captured by years left in its term of office, ending in zero in the election year: there should be more gimmickry when fewer years are left

...Panel A clearly reveals an electoral cycle in gimmicks which is conditional on transparency. But increasing transparency reduces or eliminates the electoral cycle.
... Appendix 8 presents estimates with different measurements and coding of rules, transparency and other variables, varied samples and including a lagged dependent variable. Those tests qualitatively support our main results: the presence of an electoral cycle in gimmicks, more pressure from hard times and recourse to gimmicks exacerbated by rules – all of which are conditional on limited transparency.
Moreover, supranational fiscal rules that are intended to sustain co-operation instead exacerbate incentives for national governments to manipulate reported data rather than fix fiscal policy.

These are systematic tendencies, rather than the actions of any single country. Budget process transparency can reduce the incentives to manipulate, even those that would otherwise intensify in times of economic stress. Warnings that have been raised in policy and research papers since the early 1990s about the risks of moral hazard in economic policy making for countries in economic unions remain a concern.
 The following observation meshes with other work on the tendency of governments (such as here and here and here) to deficit-finance more generally:
In democracies, even advanced ones, politicians' incentives to employ gimmicks get stronger as elections approach.
And finally the punchline:
...The results show that Greece was not a special case; rather, it was the extreme case of a general, and comprehensible, pattern.
The appendices contain rich details and references.

Tagged as: economics scholarship tax policy

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Video & Audio Resources on Political Theory, Inequality, Finance, and Governance

Published Mar 13, 2014 - Follow author Allison Christians: - Permalink

Russell Haggar, a Sociology and of Government and Politics teacher in the UK, has put together a a visually alarming but very useful "Compendium of Video and Audio Materials for Advanced Level Government and Politics and Sociology Students and for the General Reader," with sections on Political Theory, Welfare and Inequality, Labor Politics, the Financial Crisis, and others. Here is but a sample of what you will find:

  • Stephanie Flanders’ three part series for the BBC: Masters of Money: John Maynard Keynes: Friedrich Hayek: Karl Marx 
  • Laurie Taylor : Thinking Allowed on Capitalism with Ha-Joon Chang and David Harvey
  • Who Owns the World? by Noam Chomsky
  • Why Equality Is better for everyone [Video on The Spirit Level from The Equalities Trust]
  • Gordon Brown and the Financial Crisis [Andrew Rawnsley for Channel 4]
  • RBS : Inside the Bank that ran out of money  
  • Meltdown: The Global Financial Collapse (four part series)
  • 3 Part BBC Series by Michael Cockerell on The Great Offices of State, with part 3 entitled The Secret Treasury
Many, many more resources at the link.

Tagged as: governance history inequality information institutions scholarship

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FATCA in Canada-constitutional challenge mounting

Published Feb 28, 2014 - Follow author Allison Christians: - Permalink

A group of Canadians has put together a campaign to explore the constitutional violations posed by FATCA in Canada. Some of these issues were raised by pre-eminent constitutional scholar Peter Hogg, in this letter to Finance. Others arise because of the adoption of the intergovernmental agreement (IGA), which bypasses data protection laws and lacks even the minor anti-discrimination clause seen in other IGAs.

I've been asked if these issues are serious. I think they are. The issue FATCA raises for me is not so much sovereignty--though I perfectly understand the instinct on that front--but rather it is the problem of serious mismatch between the goals targeted and what will be attained by FATCA when law on the books meets law in practice. The constitutional challenge is a signal that something is seriously awry with FATCA. As with most activism, this effort demonstrates that a not-small number of people are experiencing some not-small violation of fundamental principles, and in light of government failure to respond, are forming grassroots responses in an effort to achieve a remedy.

Let's have a look at why this might be so.

The goals of FATCA are clear and the law writes a clear narrative that is palatable to the public: we must stop tax evasion. Who would possibly speak out against that goal? I don't know too many people that would.

However, the law in practice is a completely different story, with a normative dimension unique to the United States. This dimension has, as far as I can see, been completely ignored by lawmakers both in America and internationally. It involves the attempt by the United States to impose taxation of persons based on their legal status instead of their actual inclusion in American society.

I know that this s difficult to understand conceptually. An example might help.

A was born in Illinois to a Swedish mother and an American father. The family moved to Sweden when A was 6 months old, and she spent her whole life in Sweden, working there, paying taxes there, using the schools and the health care system there, and getting married to a fellow Swede. A is a US national, and therefore subject to US taxation as if A had done all of those things in America. A has always been subject to US taxation, and FATCA doesn't change that in the slightest. But A never paid any attention to US law or politics, decisions of the US Supreme Court, or Congressional hearings. Why would she? She is a resident of Sweden paying high taxes and living her life. A has bank accounts at her neighbourhood bank, and tax-deferred savings account sponsored by her government.

In the eye of FATCA, A is an offshore tax evader.

Since she is an evader, she must be monitored to ensure she is caught and brought to justice, and further that she goes forward in full compliance with all US tax laws. Since she cannot be trusted to come forward, her bank must disclose her personal and financial information, and that of her spouse (guilty by association), to the IRS. Since the bank has no incentive to do that, it must be threatened with sanctions if it fails to do so. Since banks don't want to work under that threat, Sweden must be compelled to step in and facilitate the data transfer.

As I have said often, this is an extraterritorial jurisdictional claim that requires the help of other countries. Getting help is not a choice, it is a necessity. One country simply cannot assert its jurisdiction over people who live in another country, without that other country's help. American scholars know this, and they say America should ask for the help it needs. The problem that we have seen FATCA reveal is that this help necessarily involves America's needs trumping domestic laws that apply to targeted persons in the country of their residence.

I do not think America should be demanding help from other countries in taxing the residents of those countries. America needs to learn to tax its own residents, like every other country must do. If the world's biggest economy cannot figure out how to make its own people pay for their own public goods, it is difficult to see why other countries should be enlisted to help it along.

This is why the mismatch between the law on the books and the law in practice is so troubling in the case of FATCA. Looking past the use of legal status instead of residence as a jurisdictional claim, a regime that requires financial institutions to report nonresident accounts to these account holder's home countries is absolutely necessary to protect the income tax base from widespread tax evasion facilitated by foreign bank secrecy laws.  Of that there is simply no doubt. To the extent FATCA can do that, it is to be applauded and most of all extended globally because this is a global issue. I explain and advance this argument here

Most countries cannot act alone in instituting this necessary regulatory structure, since foreign financial institutions would simply shun a given market rather than comply. This is the potentially positive side of what makes the United States different from most, maybe all, other countries. This also explains why the OECD is very very quickly trying to ride the coattails of FATCA (before it is too late and the US changes its mind about being part of a global data exchange system, as it has before), by gearing up to create a global FATCA, or call it a GATCA

GATCA is FATCA minus two key aspects: the normatively unjustifiable legal-status based tax, and most of the economic sanctions. The UK has done something similar with those same parameters with respect to a selected list of countries. (The OECD's GATCA is also fully reciprocal, but that deficiency in FATCA is another issue). These differences make a GATCA supportable exactly where FATCA is not (both systems have other major flaws but we can leave those aside for the big picture here).

FATCA's enforcement of legal-status based taxation renders it normatively unjustifiable. It violates the residence principle, which Reuven Avi-Yonah has gone so far as to call an international customary law. It is also of course completely unworkable on a global scale: imagine if other countries decided to learn from the US example and started smoking out their own disapora to enforce their own FATCA regimes. It is unimaginable that if the OECD countries got together and seriously debated status-based taxation, they would agree on a global standard to enforce it for all countries. The common reporting standard GATCA they have devised, which is so obviously based fundamentally on the residence principle, shows that the OECD recognizes that enforcing status-based taxation is not and should not be a goal of any project to counter tax evasion.

Yet no conversation is being had about the outlier, whose demands will make enforcement of GATCA more extensive and more expensive for every other country.

Residence based taxation is not perfect by any means but it is the least worst alternative if governments want to continue to use personal income taxes in a world in which individuals are to be allowed the freedom to move. FATCA deserves to fail to the extent it ignores this reality. A constitutional challenge will at minimum open a desperately needed political conversation about why this is so.

Tagged as: Canada citizenship FATCA international law Tax law tax policy

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Monday at McGill: Diane Ring on Sovereign Harmony, Domestic Discord

Published Nov 24, 2013 - Follow author Allison Christians: - Permalink

The 4th Annual Tax Policy Colloquium at McGill Law concludes Monday with a presentation by Professor Diane Ring of Boston College on her paper, Sovereign Harmony, Domestic Discord: Democracy and the Gap Between International Tax Cooperation and Domestic Politics (draft not yet available). Professor Ring explores how to understand the interplay between domestic tax politics and the need for nations to speak with one voice on the international stage. She argues that the more fractured internal politics, the less hope there seems to be for the kind of international cooperation that would make the tax system more coherent both nationally and internationally. Here is the Abstract:

The challenges of the international tax system have become ubiquitous. Newspapers recount the tax exploits of multinational corporations that are household names and announce the jail sentences of the latest Swiss bankers and U.S. taxpayers to fall in the ongoing attack on tax evasion. The twin pressures on effective income taxation captured by these stories are those of tax evasion (typically engaged in by individual taxpayers) and tax avoidance (typically characterized by the planning and structuring undertaken by multinational corporations). In both cases cooperation between and among states plays a pivotal policy and enforcement role. That is not to say that cooperation (in its various iterations) is a universal or achieved objective. Rather, the question of whether states can identify a shared goal and move cooperatively toward that goal is an important focus of international tax policy discussions. With respect to the problem of tax evasion there have been some notable steps of cooperation through information sharing measures (including Tax Information Exchange Agreements) as well as domestic changes designed to increase transparency. Less agreement and coordination has been evident for the problem of tax avoidance. The current context in which these questions are being explored communally is the Organization for Economic Cooperation and Development (OECD) project on “Base Erosion and Profit Shifting” (the “BEPS” project). 
But regardless of the degree of current cooperation, agreement, and coordination achieved on these international tax issues, the focus on the status of state-to-state relations can obscure another critical factor in the international tax system: domestic politics. Even if and when states reach a shared understanding of a dimension of the evasion or avoidance problems, a resulting agreement by states is not the end game. Although states must act and negotiate as monoliths in their state-to-state interactions, there remains the ever-present constraint of democracy at home and the possibility that a deal struck on the global stage is undone in the domestic sphere. This dynamic between international relations and domestic “politics” is neither new nor limited to taxation. But the serious attention to and heightened expectations from cooperation among nations regarding major issues of international tax policy requires that comparable attention be directed at the domestic side of cooperation. 
The task of this paper is to explore how domestic politics can impact the heart of the international tax system – agreements among states on important issues of tax policy design and practice. Through a better understanding of the intersection of domestic politics with international debates and agreements, we can consider how and under what circumstances states might diminish the likelihood that domestic discord will ultimately undermine sovereign harmony (i.e. international agreement). Part I outlines three recent examples of international agreement or cooperation that risked rejection or at least significant undermining on the domestic front. Part II reviews the literature regarding international cooperation to develop a framework for approaching the case studies on domestic politics in international tax. Part III draws upon the theoretical work reviewed in Part II to develop a framework for understanding the intersection of international tax and domestic politics. In light of the increasing role that global cooperation and coordination plays in the development of successful international tax policy and practice, the Conclusion considers further research that could illuminate the domestic side of international agreements.
The McGill Tax Policy Colloquium features distinguished visiting academics and offers a forum for students, professors, and local practitioners to discuss issues of tax policy and theory, along with related issues of economics and social justice. Professor Ring's talk will commence at 2:30 pm tomorrow; members of the public are warmly welcomed.

Location: McGill Faculty of Law, 3644 Peel Street, New Chancellor Day Hall, Room 203.

Date and Time: Monday, 25 November, 14:30–16:30.

Tagged as: McGill scholarship tax policy

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Rhetoric as Intellectual Anaesthetic in Tax Politics: Guest post by Marco Garofalo

Published Nov 10, 2013 - Follow author Marco G.: - Permalink

Advocates of tax policy reform use common rhetorical themes to link their preferred policies to desired descriptors. The most common of these are fairness, efficiency, simplification, and competitiveness. Most of the time these terms are used without definition or explanation and they are used indiscriminately to support policy proposals across the political spectrum. This can have a tremendously destructive impact on public discourse over time, as people use these words to mean virtually anything, and then begin to believe these words have no meaning at all.

In his 1946 essay, Politics and the English language, on using "language as an instrument for expressing and not for concealing or preventing thought," George Orwell warned that using rhetoric in this sloppy manner ultimately destroys our ability to engage in critical thinking:

[A]n effect can become a cause, reinforcing the original cause and producing the same effect in an intensified form, and so on indefinitely. A man may take to drink because he feels himself to be a failure, and then fail all the more completely because he drinks. It is rather the same thing that is happening to the English language. It becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts.
 Orwell argued that political actors use language to deceive their audiences. He writes:
The words democracy, socialism, freedom, patriotic, realistic, justice have each of them several different meanings which cannot be reconciled with one another. In the case of a word like democracy, not only is there no agreed definition, but the attempt to make one is resisted from all sides. It is almost universally felt that when we call a country democratic we are praising it: consequently the defenders of every kind of regime claim that it is a democracy, and fear that they might have to stop using that word if it were tied down to any one meaning. 
Political actors can easily exploit the different meanings of words by using them in vague and imprecise ways. The audience then assumes the word to mean what they think the word means, rather than whatever meaning might have been intended by the speaker. The popular use of the term "a fair tax regime" serves as a ready example. Each person projects their own, everyday understanding of fair onto this word, giving the phrase any number of meanings, probably few of which would survive scrutiny under close examination. Consequently, a political actor announcing a new tax policy can deceive her audience by calling it “a step towards a fair tax regime” without in any way attempting to define what such a regime might require to fulfill principles of fairness.

In a paper presented last month at McGill, Professor Lynne Latulippe presented the use and misuse of the term "competitiveness" in contemporary tax policy. This term, usually bundled with efficiency, frames contemporary tax policy discussions and often hides the fact that generous benefits are intended to be granted to certain political constituents thereunder.

On Monday, Professor Shirley Tillotson from Dalhousie University will add to this discussion by presenting her text, “The moral worlds of fair taxation: a perspective from 20th century Canadian history” at the McGill Tax Policy Colloquium. In an echo of Orwell's warnings, Professor Tillotson presents a striking example of the use and misuse of rhetoric in furthering political goals by examining the use of "patriotism" in the development of Canadian taxation. Patriotism served as a ‘moral exhortation’ in the interwar period, as Professor Tilloston puts it, to do one’s part for the national purse.

Professor Tillotson employs as a telling example a noted failure of the federal tax authority to enforce compliance with the tax law on judges in Quebec, on the grounds that exposing judges as tax dodgers would undermine “absolute confidence” in the system just as the government badly needed cash to address the fiscal crisis of the 1930s. The rhetoric ran thus: if people do not have confidence that the judiciary is acting patriotically, then why would they aspire to patriotism? By sweeping non-compliance under the rug and linking taxation with war, the authorities were able to convince people in the 1920s through to the 1940s that paying taxes is patriotic.

These days, we tend not to use the term patriotism to convince the public to comply with tax law. Instead, Professor Tillotson argues, discourse in the late 1950s and early 1960s revolved around different questions: which features are of the tax system are fair, economic, or moral? Deductible mortgage interest payments, child care expense deductions, expense account deductions are examples of policies that were in play. All of these succeeded or failed because they were fair or unfair; economic or uneconomic; or moral or immoral.

Free-riders in action.
The idea of the free-rider is the common denominator in tax reform politics, throughout the time period examined by Professor Tillotson and extending to contemporary tax discourse. Free-riders always have been, and always will be, the object of fiery hate. Words like patriotism and fairness may have elastic definitions, but free-rider is clear: someone who does not pay their fair share. And for some reason, people get really get riled up over other people not paying their fair share.

But a definition of free-rider depends on one’s definition of fairness. Multinationals like GE, Starbucks, Google, or Apple were easily painted as free-riders after media reports that they apparently pay very little taxes anywhere. Many people think that the fair share for these multinationals should be higher. Yet each company points to the other ways in which each contributes to social goals, and each lobbies vigorously for ever more tax reductions by arguing that these reductions would help them contribute even more to society or by falling back on a rhetoric of competitiveness.

Consequently, we will continue to "lob moral molotovs" at each other until we come to some definition of fairness. Maybe, as Orwell suggests, we do not want to find a definition for fairness, because then we will be tied to that definition. Self-interested parties want to continue hijacking this word, and others like it, to their own advantage. A consensus on fairness would put an end to that.

Reading Orwell alerts us to how important it is to pay close attention to the words used in tax policy discourse, and parse through any tax talk that is mired in political spin.  Orwell warned that the "invasion of one's mind by ready-made phrases … can only be prevented if one is constantly on guard against them, and every such phrase anaesthetizes a portion of one's brain.” As Professor Tillotson puts it: “[w]e should be able to do better”.

Tagged as: scholarship tax policy

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OECD public meeting on tax-base erosion project: US MNCs hope to 'participate'

Published Oct 27, 2013 - Follow author Allison Christians: - Permalink

Reuters reports that the OECD will have a "public meeting" in Paris on Nov 12-13, at which "companies will get to voice their concerns about the OECD's 'base erosion and profit shifting,' or BEPS, project":
The United States Council for International Business (USCIB), representing about 300 U.S. multinationals, has asked to participate at the hearing, said Carol Doran Klein, USCIB's tax counsel, on Monday.
And here comes a parade of lobbying that will be designed to protect all that is favorable to their clients in the status quo. These are the moments when I really appreciate the amount of transparency we have in US politics thanks to organizations like Open Secrets, the Sunlight Foundation and Muckrock:
A number of U.S. companies, including E. I. du Pont de Nemours and Co, (DD.N) and Starbucks Corp (SBUX.O), have raised questions about the BEPS project with members of Congress and the Obama administration, according to corporate lobbying disclosures filed earlier this year.
Remember "raising questions' is like "raising concerns": it doesn't mean the speaker has either a question or a concern; instead it means the speaker has an agenda. The Reuter's story continues:
Under existing international standards, the fees charged [on an inter-company basis] are supposed to be set using an "arm's length" approach, meaning one that replicates market-level values. In practice, fees are often skewed so that profits can be shifted into the low-tax country where the assets are located and out of higher tax countries. 
These practices are legal, but tax fairness activists and some less-developed countries are complaining about them.
Interesting subtext there. The story doesn't give any more detail about the public meeting but here is what the OECD says:
On 12-13 November a consultation, open to the public and press, will be held at the OECD in Paris. If you wish to attend, please contact TPConference@oecd.org.
Is not public and press redundant? No matter: the point is, this is part of the public consultation portion of the BEPS program.Here is a draft agenda in pdf, and it is fascinating in lineup of both topics and speakers--namely, only two are named right now and one of them has been a long time and trusted voice of business interests against corporate tax transparency, and purveyor of norm framing exercises at the OECD, namely, GE's Will Morris; the other is Michelle Levac, noted as one of the 50 biggest influences in tax by International Tax Review, owing to her role in leading Working Party 6 on transfer pricing. These two get bookend treatment, opening and closing the consultation. All the other speakers are TBD, so this is where the USCIB seeks to gain a foothold. Here is the outline so far:
Programme  Public Consultation on Transfer Pricing Matters  12-13 November 2013  OECD Conference Centre  2 Rue André Pascal, Paris 16th, France  Tuesday 12 November  08:30-09:30 Registration   09:30-09:50 Opening remarks and Ground Rules    Speakers:
Michelle LEVAC, Chair of Working Party No. 6
William MORRIS, BIAC   09:50-11:15 I:  Implementing country-by-country reporting  The BEPS Action Plan directs the OECD to develop and implement a system of country-by-country reporting to tax authorities of high level MNE group financial information.  A large number of questions arise in connection with implementing such a system.  These include:  (i) what information should be reported; (ii) at what time should that information be reported; (iii) to whom should such information be reported; and (iv) how should such information be shared among relevant governments, taking into consideration concerns regarding non-cooperative governments, incomplete treaty information exchange obligations, and the need to protect confidential taxpayer information.
Speakers: to be announced
1.  Information to be reported
2.  Information to be reported
3. Mechanisms for reporting / to whom to report / information sharing   11:15-11:45 Refreshment Break      11:45-13:15 II:  White Paper on Transfer Pricing Documentation  The BEPS Action Plan calls for the OECD to develop rules on transfer pricing documentation.  To initiate that process, the OECD published a White Paper on transfer pricing documentation on 30 July 2013.  The White Paper raises a number of issues on which business has provided comments.  These include: (i) the implementation of a standardised two tier documentation system; (ii) the use and content of a global master file; (iii) mechanisms for limiting early reporting to information useful in risk assessment with subsequent opportunity for governments to obtain detailed information necessary for audit; (iv) the development of materiality standards; (v) implementing consistent documentation formats across countries; and (vi) mechanisms for minimising unnecessary compliance burdens.    Speakers: to be announced  1.  Two tier approach
2.  Contents of global master file
3. Establishing materiality standards  4. Mechanisms for simplifying compliance (1)
5. Mechanisms for simplifying compliance (2).   13:15-14:30 Lunch break      14:30-16:00 III:  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Definitional Issues And Comparability Factors  On 30 July 2013 the OECD published a Revised Discussion Draft on Intangibles.  In the RDD, the definitional section was changed in some respects.  In addition, a new section of the RDD addresses comparability factors including location savings, features of local markets, assembled workforce, and corporate synergies.   Discussion in the afternoon session will be devoted to definitional issues and to the new section on comparability factors.
Speakers: to be announced
1. RDD changes to the definition of intangibles
2. Usefulness of the term “marketing intangibles”
3. Treatment of goodwill and on-going concern value / Examples 16 and 18   16:00-16:30 Refreshment Break      16:30-18:00 IV:  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Definitional Issues And Comparability Factors  (Continued)    Speakers: to be announced
4.Treatment of location savings and local market features
5. Treatment of Assembled Workforce
6. Treatment of group synergies
7. The financing and guarantee examples / Examples 1 and 2     Wednesday 13 November     09:30-11:00 V.  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Section B Of The RDD Section B of the June 2012 Discussion Draft attracted numerous written comments and was the subject of much discussion at the last business consultation. It has been substantially redrafted.  The approach in the RDD is more transactional in nature, while still emphasising the primary importance of functions performed, assets used and risks assumed.  The morning discussion will focus on the changes to Section B and the related examples     Speakers: to be announced
1. The general approach of new section B.
2. Examples 1 – 3
3. The treatment of outsourcing arrangements
4. The treatment of important functions   11:00-11:30  Refreshment Break      11:30-13:15 VI:  REVISED DISCUSSION DRAFT ON TRANSFER PRICING ASPECTS OF INTANGIBLES – SECTION B    Speakers: to be announced
5. Examples 11 – 14 and footnote 5 on page 63.
6. Treatment of funding for intangible development
7. Guidance on the use of corporate trade names   13:15-14:30 Lunch      14:30-15:15 VII: Other Discussion Draft Topics    Speakers: to be announced
1. Treatment of valuation techniques
2. Guidance on transfer pricing methods
3. Options realistically available / Example 24   15:15-16:00 VIII: Transfer Pricing Aspects Of The Beps Action Plan
The BEPS Action Plan published in July will guide much of the OECD transfer pricing work in the next two years.  The Action Plan contains four substantive transfer pricing areas of work in Actions 4, 8, 9, and 10.   This discussion will provide business an early opportunity to comment on the transfer pricing aspects of the Action Plan and the approach that Working Party No. 6 should take to fulfilling its mandate under the Action Plan.    Speakers: to be announced
1. How should the BEPS Project approach the question of hard to value intangibles / particularly transfers of partially developed intangibles?
2. How should the BEPS Project approach questions of risk allocations that may give rise to separation of income from relevant economic activity?
3. What role should there be for approaches outside the arm's length principle in addressing BEPS issues?        16:00-16:30 Refreshment Break      16:30-17:30 IX:  TRANSFER PRICING ASPECTS OF THE BEPS ACTION PLAN (CONTINUED)    Speakers: to be announced
4. How should the BEPS project approach the topic of recharacterisation of transactions?
5. What should the BEPS project consider in connection with global value chains and profit split approaches?
6.  What should the BEPS work on financial transactions address?    CONCLUDING REMARKS   17:30-18:00 Speakers:
Michelle LEVAC, Chair of Working Party No. 6
William MORRIS, BIAC   18:00 ADJOURN
Perhaps there will be additional public consultation meetings, I do not know. As Lynne LaTulippe taught my tax policy class recently, the consultation process is an often overlooked and in general understudied aspect of norm diffusion and lawmaking. This is one of the many times I wish that I was geographically situated to attend these things. I will be very interested to see how the speaker lineup evolves and would be very grateful to hear about the discussion from anyone who attends.


Tagged as: BEPS CBCR conference corporate tax lobbying OECD tax policy transfer pricing transparency

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The Shutdown and a Tea Party Tax Paradigm Shift: Guest Post by Marco Garofalo

Published Oct 14, 2013 - Follow author Allison Christians: - Permalink

One of the many benefits of hosting a tax policy colloquium is that the students become deeply engaged in grappling with tax policy principles through contemporary scholarship, and they apply these ideas to the world in which they find themselves. After our recent presentations by Reuven Avi-Yonah on the shifting pressures of globalization on the tax base, by Clifton Fleming on the politics of tax expenditure analysis, and by Lyne LaTulippe on the topic of tax competition, in which she introduced us to work by the political scientist Mark Blyth, one of my students came back with the following analysis of tax politics in the US, and he agreed to share it here.

Government Shutdown and a Tea Party-Induced Tax Policy Paradigm Shift in the United States

A paradigm shift in tax policy may be unfolding in the United States, as the Tea Party positions itself differently than either the Democrats or the Republicans when it comes to important aspects of tax policy processes and practices.  In a recent article, "Paradigms and Paradox: The Politics of Economic Ideas in Two Moments of Crisis," Mark Blyth investigated why we did not see a paradigm shift in economic policy after the financial crisis of 2008. He argues that paradigm shifts are usually:

  1. triggered by failures in the current paradigm; 
  2. accompanied by a new paradigm that is waiting in the wings to replace the current one; and 
  3. driven by a change in who can speak authoritatively on the subject.
He concluded that “it is politics, not economics, and it is authority, not facts, that matter for both paradigm maintenance and change.” Consequently, he argues that we did not see a paradigm shift after the financial crisis for a few reasons. First, even though there was a failure of the current paradigm, there was no challenger waiting to replace it. To illustrate his point, Blyth suggests that it was inconceivable that the Washington Consensus would be replaced by the Beijing Consensus, “so complete was its initial victory.” Second, the sudden policy failure did not result in a change of who speaks authoritatively on the subject, as protagonists did not change (individuals in the US Treasury, the ECB, and the IMF all retained their authority) and thus their solutions did not either. Blyth calls this ‘disciplinary incentive’; in other words, “too many careers and institutions are at stake!” Thus the financial crisis did not spur a paradigm shift.

But consider the Tea Party and its crusade. Since 2009, the Tea Party has been an unavoidable presence in US politics. While the Tea Party story has many permutations, causes, and manifestations, only the current government shutdown is important for the purposes of the current discussion. The current shutdown is not about Republicans versus Democrats; it is about the Tea Party versus Republicans. The Patient Protection and Affordable Care Act passed in Congress, was upheld by the Supreme Court of the United States, and its funding was not seriously contested by the Republican Party. This is an artificial crisis, a main architect of which appears to be Jim DeMint, former US Senator and current President of the Heritage Foundation.  If non-Tea Party GOP members do not want to play along, the implicit threat, according to Joshua Green of Bloomberg Businessweek, is that the Tea Party will turn on them, such as by launching “attack ads calling [Republican Senator Mitch] McConnell a ‘turncoat’ who ‘surrendered to Barack Obama’ in the healthcare fight."  So far, the Tea Party is pulling off this political coup: the government is shut down and positions are becoming entrenched.

Now consider this political impasse as a paradigm shift. First, we have a failure in the current paradigm (even though it is artificial). Joshua Green argues that “What’s causing the malfunction is a battle within the GOP.”  Second, we have a paradigm waiting in the wings to replace the current one. In fact, the Tea Party is not so much waiting to replace the Republicans as forcing that to happen. Third, the loci of authority in the Republican Party are shifting, either to Tea Party members or to the remaining GOP members who agree to change their tune. Hence we may see a paradigm shift, in which the Tea Party becomes the dominant faction in the Republican Party, resulting in a recalibration of the Democrat-Republican relationship.

Such a paradigm shift would have serious implications for tax policy. At least two would arise immediately, in the areas of tax expenditure analysis and tax consultations. First, tax expenditure analysis may begin to play a greater role. While the Republicans and Democrats function largely by dressing government spending as tax credits and deductions, the Tea Party is having none of that. The prime example would be the current crisis. The current government shutdown is itself a tax issue: the Patient Protection and Affordable Care Act, SCOTUS cogently reminds us, is a piece of tax policy. If the Tea Party does become the dominant Republican faction, then tax expenditure analysis may take center stage as a tool to sniff out government spending in all of its forms.

Second, the structure and content of tax consultations could change. Professor LaTulippe argues that international tax policy is beholden to a discourse of competitiveness (draft forthcoming). While part of the competitiveness discourse is about low rates, which the Tea Party presumably likes, part of the discourse is about tax expenditures, which the Tea Party would not like. Currently, tax consultations perpetuate this discourse by giving short time frames for the private sector to contribute to proposed tax reforms, with the result that a certain class of participants (accountants and lawyers) is greatly advantaged in giving feedback and achieving client-favored tax policy results. With the Tea Party paradigm, that policy loop could be disrupted, as this recent article suggests.

A paradigm shift in US politics is not certain. Any number of things could happen, including the Republican Party standing up to and beating the Tea Party. If that were to happen, then tax policy commentators should be concerned about the issues described above. Maybe once the dust settles we will meet the new boss, same as the old boss. But the current government shutdown (and impending sovereign debt default deadline) exhibits signs of a paradigm shift.  Something fundamental does seem to be changing on the small government side of political discourse. As such, we should stay tuned to the implications for tax policy.

Tagged as: political malfunction politics scholarship tax policy u.s.

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