Democracy, Sovereignty and Tax Competition: The Role of Tax Sovereignty in Shaping Tax Cooperation

Abstract

Virtually all efforts to confront and curb tax competition effectively require some measure of cooperation among nation-states. Regardless of the precise amount and type of competition deemed acceptable, the cooperation question arises. Only for those who would advocate a complete acceptance of all forms of “tax competition” would cooperation seem irrelevant, although even for those pro-competition advocates, some joint advocacy on the part of the “competing” nations has formed an important part of their efforts to maintain competitive practices. Assuming we envision a world in which there is some notable commitment by a number of nations to tackle the problem of “harmful” tax competition, what will their solution look like? The prospect of tax cooperation inevitably raises questions regarding the plausibility of such cooperation, the scope and best context for such cooperation and the normative principles upon which it rests. Yet attempting to resolve these broad questions can be daunting.This paper contends that sovereignty shapes both the problem of tax competition and the solution of cooperation. Understanding the functional and normative goals underlying nation-states’ claims for tax sovereignty can enable us to assess, predict and influence prospects for tax cooperation. As I have argued elsewhere, claims of tax sovereignty are proffered in a variety of situations, by a variety of actors, with a variety of motives, but there are nonetheless several core goals that are at risk when a nation-state makes the decision to surrender some measure of its tax power. An understanding of these goals and principles helps highlight unresolved issues in tax competition conversations, fruitful avenues for cooperation efforts, and the connections among inter-nation equity (which presumes sovereignty), interindividual equity, and competition.