The Political Economy of International Taxation

Abstract

International tax avoidance costs governments 300 billion USD every year. And the international community has failed to address this issue for decades. This dissertation shows how the problem has spiraled out of control. It comprises three related papers that investigate different aspects of the political economy of international taxation, with a central focus on the reasons for the persistence of international tax avoidance. The dissertation argues that national governments face a range of constraints, including political, institutional, and economic factors, posed by the existing international tax regime and globally mobile capital, which renders them unable and unwilling to fully address the problem of international tax avoidance. Indeed, the policy choices that governments have made in response to such constraints have actually deepened and perpetuated an international tax system that facilitates tax avoidance. In the first paper (chapter 1), "Treaty Shopping, Race to the Bottom, and Treaty Cascades," I examine the impact of bilateral tax treaties and treaty shopping on state policy autonomy. This paper argues that treaty shopping, where investors route international payments through third countries for lower withholding tax rates, drives the expansion of bilateral tax treaties, creating a vicious cycle of treaty cascades and a race to the bottom in withholding tax rates. To test the argument, the paper introduces two original datasets: (1) the universe of bilateral tax treaties, and (2) a manually coded dataset on worldwide statutory withholding tax rates over four decades. Analysis of the data supports the argument of the paper. The work highlights the crucial need for coordinated international efforts to address treaty shopping and prevent further erosion of state tax bases. The second paper (chapter 2), "Flexibility in International Institutional Design: The Case of the OECD MLI," examines the consequences of uncoordinated multilateral efforts to address treaty shopping, focusing on the most recent attempt in terms of the OECD Multilateral Instrument (MLI). The paper shows that while the MLI has achieved broad participation in signing and ratification, its flexibility measures have resulted in narrow applicability and shallow modifications to existing tax treaties. The paper argues that the choice of reservations and treaty exclusions by governments, based on their self-interest calculations, can limit the actual coverage of the MLI and ultimately undermine its effectiveness in addressing treaty shopping. The study emphasizes the need for concerted international cooperation to address international tax avoidance and to balance flexibility and effectiveness in the design of multilateral conventions. The third paper (chapter 3), "Domestic Institution and Multinational Profit-Shifting," provides an exploratory analysis that examines the relationship between regime type and profit-shifting. The paper argues that conventional measures of tax burden might be biased when multinational corporations are increasingly shifting profits across borders. The findings suggest that political constraints faced by democratic governments, which impede their ability to provide tax incentives or lower tax rates to the extent that some non-democratic regimes can, lead them to tolerate a higher level of profit-shifting by multinational corporations as a means of attracting foreign investment. This paper highlights the need for further research on the interplay between domestic institutions and multinational profit-shifting. Taken as a whole, the dissertation sheds light on the intricate and complex nature of international tax avoidance and its persistent nature. Through the lens of international political economy, it highlights the multifaceted challenges faced by national governments in addressing this issue. The findings demonstrate the need for greater international cooperation and coordination, and a better understanding of the political and institutional constraints that impede effective actions against tax avoidance. Yet it also shows just why such cooperation is so difficult to achieve. This research contributes to the broader discourse on state autonomy, economic globalization, and global governance.