Networks, norms, and national tax policy.

• Published date: 01 January 2010
• Author: Christians, Allison
• Date: 01 January 2010

ABSTRACT

Increasing economic integration inevitably draws states to coordinate their tax policies, yet policymakers are eager to protect their autonomous "tax sovereignty." Cooperation and autonomy are balanced in transnational networks, especially the OECD, where state representatives, experts, and interest groups engage in continuous negotiation to develop nonbinding, or "soft" global tax policy norms. While the merits of these norms have prompted much scholarly analysis, little is understood about the nature and significance of using networks to develop tax policy norms in this manner. This Article demonstrates how and why states use the unique soft governance structure of the OECD to develop global tax policy norms and achieve national tax policy goals, and explores some of the implications of this particular means of balancing the competing goals of international cooperation and national autonomy in a politically, socially, and economically globalized world.

 I. INTRODUCTION
                 II. WHY TAX POLICY DEVELOPS IN NETWORKS
                 A. Collision of National Tax Bases
                 B. Early Networks: Interest Groups, Experts, and Officials
                 C. Resolution: To Remain Unresolved
                III. HOW THE OECD DEVELOPS TAX POLICY NORMS
                 A. How Networking Works: The OECD's Institutional
                 Structure
                 1. Diplomatic Network: The OECD Council
                 2. Expert Network: The CTPA
                 3. Public/Private Network: The CFA
                 B. The Norm-Building Process: How Much Can Be Observed
                 C. Evidence of Network-Driven Tax Policy Development in the
                 United States
                 IV. SOME IMPLICATIONS OF NETWORK-DRIVEN TAX POLICY
                 DEVELOPMENT
                 V. CONCLUSION
                

I. INTRODUCTION

Increasing economic integration inevitably draws states to coordinate their tax policies, as the recent global economic crisis reminds us. (1) Yet politicians, public sector officials, and tax academics and professionals have become accustomed to working with a view of the state as a "hermetically sealed sphere" (2) of "tax sovereignty"--virtually complete autonomy in tax law and policy-making. (3) In some areas of tax regulation, especially the WTO regime, states have traded complete autonomy for cooperation by forging agreement in a multilateral treaty and by using supranational institutions to police violations of agreed-upon legal precepts. (4) But states have not similarly created a binding multilateral regime to trade autonomy for cooperation in income tax matters. Instead, states have come to rely on "soft" methods for coordinating income taxation through network-based collaboration, modeling, peer pressure, and emulation to reconcile these competing goals. (5) The soft law approach involves political, social, and economic relationships among states and individuals that significantly impact the types of tax norms that arise and take root internationally.

Using transnational networks, the world's wealthiest states have built a unique institutional infrastructure through which they continuously renegotiate, and disseminate globally, a set of mutually agreeable income tax standards. (6) The main component of this infrastructure is the Organisation for Economic Cooperation and Development ("OECD"), whose membership comprises thirty industrialized countries, including the United States, Canada, Australia, and most of Western Europe. (7) The OECD facilitates tax policy development by hosting hundreds of meetings, conferences, and workshops for the purpose of producing nonbinding norms around which nations can converge. (8) The OECD describes itself as a "market leader in developing standards and guidelines," and policy norms it develops have worldwide impact. (9) A volume of scholarly analysis is accordingly devoted to the merits of tax policy norms produced by the OECD. Yet little is understood about the nature and implications of developing tax policy norms in this manner. (10)

This Article demonstrates how states use the unique soft governance structure of the OECD to develop global tax policy norms and achieve national tax policy goals, and explores some of the implications of this particular means of balancing the competing goals of international cooperation and national autonomy. Part II analyzes the emergence of network-based tax policy collaboration and argues that early decisions against multilateralism led to the soft global tax governance structure supported by the OECD today. Part III analyzes how the OECD network facilitates tax policy coordination, first by examining how the OECD "works" in terms of its institutional structure and processes, and second by showing how lawmakers in the United States use this soft governance structure as the intellectual foundation, the benchmark, and the impetus for national tax law reform. Part IV examines some of the implications of network- and norm-based tax governance and concludes that this approach presents serious challenges for monitoring the autonomy/cooperation tradeoff. Part V concludes.

II. WHY TAX POLICY DEVELOPS IN NETWORKS

Legal scholarship has only recently begun to recognize the characteristics of international income tax governance as a unique institutional infrastructure, but the history of this infrastructure dates back over almost a century. We may effectively trace a path from today's network-based, soft tax governance structure back to the efforts of a few tax policymakers in the early twentieth century who convened in the world's first transnational networks to resolve issues arising from the widespread adoption of modern income taxation. The structures these individuals created to navigate their shared concerns endures in the soft governance structure that develops global tax policy norms today. This part explores the historical issues that led policymakers to seek transnational cooperation, the factors that led them to use transnational networks as the optimal means of cultivating such cooperation, and the ultimate irresolution that resulted from their approach.

A. Collision of National Tax Bases

Like trade taxation, income taxation requires significant transnational cooperation, principally because nations tend to define income in ways that virtually guarantee overlap with other national definitions. (11) The United States was one of the first nations to adopt a tax regime that calculated liability based on income derived by its residents from all sources, whether domestic or foreign. (12) The nation quickly confronted the concern that U.S. residents earning profits abroad might also be taxed by foreign governments, resulting in double taxation. This would especially affect American exporters at a time when exported goods were the primary force driving the U.S. economy. In response, the U.S. Congress adopted legislation allowing for a deduction from income for foreign taxes paid. (13)

However, as tax rates rose and international commercial activity increased exponentially over the course of World War I, the tax deduction came to be seen as inadequate. (14) Apparently on the advice of a single tax expert, (15) Congress responded by allowing taxpayers to have a dollar-for-dollar credit, rather than a mere deduction, for taxes paid to foreign jurisdictions. (16) The United States was the first country to provide this kind of comprehensive foreign tax credit. (17) Under the new rule, although the United States nominally imposed taxation on its residents regardless of where the income was earned, the credit reduced or eliminated U.S. taxes to the extent foreign taxes were paid. Since the United States would only impose tax to the extent another country did not, the new rule made it profitable for other nations to impose creditable taxes on income earned by U.S. investors in their jurisdictions. (18) The U.S. regime was therefore seen as "making a present of the revenue to other countries." (19)

In stark contrast to the generosity of the U.S. foreign tax credit, most other countries did not unilaterally address the problem of overlapping income taxation at this time. (20) For example, Britain imposed worldwide taxation, but provided only a partial foreign tax credit against income derived within its empire. (21) As a result, Britain collected taxation on both its own investors who earned income abroad and, aided by the U.S. foreign credit, American investors who earned income in Britain.

The United States and Britain thus fundamentally conflicted over the issue of which country should cede its right to tax. The United States sought an international regime in which the country where income was earned (the source, or host country) had the primary right of taxation. Conversely, Britain sought an international regime in which primary tax rights would fall to the country that provided the investment capital (the residence, or home country). The two positions could not be reconciled with a compromise: rather, one view or the other must necessarily prevail. Moreover, as more countries adopted similar tax systems, the problem was becoming sufficiently prevalent that unilateral and bilateral solutions would be futile. With a growing number of nations aligning along the polarized U.S. and British positions, the desire to craft a mutually agreeable solution prompted the emergence of the first transnational tax networks. These early networks featured first interest groups, then experts, and finally government officials as countries navigated a workable approach to coordinating tax policy across national borders.

B. Early Networks: Interest Groups, Experts, and Officials

The newly formed International Chamber of Commerce ("ICC"), a non-governmental interest group of business executives, was the first institution to create a transnational space for debating tax policy. (22) The ICC brought together "responsible business leaders" from the United States, Britain, and several other countries to collaborate on common issues of interest, including possible solutions to the problem of double taxation. (23) The identities of the particular individuals who worked in the ICC seem to...