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Florida Tax Review

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.

This paper does not seek to establish whether and when tax competition is good or bad. That is a distinct question reflecting assessments of government action, the market, externalities, and behavioral predictions. Instead, this paper assumes that some subset of countries will contend that certain tax competition is undesirable. From that baseline, the paper considers the question of how sovereignty shapes arguments over the merits of tax competition and how sovereignty influences the design of responses to tax competition. Part I provides a basic overview of sovereignty concepts, in particular their relevance to a nation-state desirous of control over tax policy. Part II defines tax competition, identifies the different kinds of states involved, reviews the emergence of the OECD project to limit harmful tax competition, and traces the EU experience with tax competition. Part III explores the normative grounds for challenging tax competition and the role of sovereignty in shaping and limiting these challenges. Finally, Part IV, working from the practical and theoretical baselines established in Part III, considers how an appreciation of sovereignty claims can facilitate the design of plausible cooperation strategies for states trying to limit tax competition.

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