Yesterday at the colloquium, Allison Christians, having braved our no doubt fraught international border to the north, presented her work in progress, Human Rights at the Borders of Tax Sovereignty. Despite the title, it's less a “human rights” piece as such than an inquiry into how countries' rights to tax may properly be defined and limited.
In making this inquiry, she operates from the view, as I do, that we must ultimately be thinking in terms of people. States are often the actors, not only in the reality of international relations but also in terms of how writers in the field conceptualize law and justice. E.g, from a Hobbesian starting point one might think of a state's rightful powers being limited only by other states. She doesn't accept this (nor do I), since (a) when thinking in terms of one state we are not fans of totalitarian absolutism, (b) states' only good purpose is to act on behalf of some set of individuals, and (c) it is individuals' interests, wellbeing, and/or rights that ought to concern us.
In an article (Taxing Potential Community Members' Foreign Source Income) that I gather will be coming out shortly in the Tax Law Review, I noted what I called the “Monty Python tax principle.” It's derived from the bit in an old Monty Python skit in which a silly man in a bowler hat says: “To boost the British economy, I'd tax all foreigners living abroad.” This is exactly what a given country seemingly should want to do, as a matter of self-interest, if we posit both that it's feasible (think greatly expanded drone capabilities) and there will be no blowback from other countries. If benign policymakers in a given country as prioritizing their own people's (citizens? residents? domiciliaries? community members') wellbeing over that of people outside the charmed circle – a move that seems unavoidable, yet is hard to support ethically in a wholly satisfying way – then this both (a) enriches the favored group relative to outsiders who are assumed to matter less, and (b) avoids tax-discouraging domestic activity. Think of it as the idea that the U.S. ought to want to tax, say, dealings by people in Germany with each other and/or people in China, if only it could and if only the Germans and Chinese wouldn't respond by doing something we disliked.
In the article, I took it as given that of course we don't try to do this, presumably at least in part because we ARE concerned about how the Germans and Chinese would respond. It helped to set up what I considered the paradoxical character of how we tax, say, people living in Germany or China who might or might not potentially be viewed as Americans for purposes of applying the U.S. income tax (e.g., in the case where they are U.S. citizens but long-time expatriates with only very limited if any continuing U.S. ties). The paradox, or irony, or whatever you want to call it that I discerned goes as follows: To say you are a U.S. person, e.g., by reason of your citizenship, is to say: You are still one of us. We still care about you. But the direct practical consequence is that, if you're still one of us and thus we still care about you, we respond by imposing continuing U.S. tax burdens on you – whereas if we don't care about you we DON'T impose those burdens. Talk about tough love! This approach would be exactly backwards if we were actually thinking in terms of the Monty Python tax principle (i.e., if we preferred imposing disutility on those we don't care about), at least if no other strategic or other considerations were relevant here.
Anyway, a further line of thought that our article for yesterday's colloquium interested me in pursuing was that we in the U.S. would not only be displeased and disadvantaged if, say, the Germans and Chinese imposed taxes on Americans transacting with themselves or with Mexicans or Canadians; we would indeed likely think that it was outrageous and unfair. So despite the limited scope by reason of national boundaries (e.g., the U.S. government can properly be mainly concerned with Americans' welfare), there are also reciprocity types of norms that we bring to our thinking about how we and other countries alike should exercise our tax jurisdiction. Hence, not generally following the Monty Python tax principle (which is not to say it never influences one's behavior) is not just a matter of limited power or concern about retaliation, but also about subscribing (at least to a degree) to cooperative behavioral norms that one may view as properly limiting one's claims of taxing power.
That in turn brings us back to the paper by Allison Christians. At this early stage, it posits three alternative ways of thinking about how a given country's right to tax might be conceptualized and limited. One's view might be based on (a) sovereignty, (b) nexus, comprising residence and source principles, or (c) a notion of “membership” such as that recently explored in work on tax competition by Peter Dietsch, who is at McGill and writes about distributional justice, including in the international setting. I am generally sympathetic to the normative views the paper expresses, but I would tend to cast differently the relationship between these alternative approaches.
1) Sovereignty - The article describes this as the idea that a state's power to tax is absolute, unless perhaps it butts up against the claims of another state. I agree with the paper that this is not a normatively satisfying position, even in a one-state world. My own take is that rejecting this view commits one to believing that a given country's tax claims must be reasonable, in terms of some underlying, but as yet unspecified, set of metrics. In the one-state case, these might mainly relate to ideas about due process, limiting uncompensated takings, etcetera. In the case where a given state has limited membership and limited territory, they may relate to why we don't generally accept the Monty Python tax principle, and agree, for example, that the U.S. should not be taxing the people of Germany or China when they transact with themselves or each other.
In sum, therefore, the sovereignty view that she describes is not a proposed standard for deciding which claims of taxing authority that a government might make are reasonable – it's an alternative to requiring reasonableness of any kind.
2) Nexus - Here we have the traditional standards, which have been around in varying forms for close to a hundred years, since the work of League of Nations economists in the 1920s (but probably in fact for even longer). As they have crystallized today, let's call them the ideas of “residence” and “source.” Under the nexis view, a country can reasonably tax its residents on any of their worldwide income (yes, for the moment let's assume an income tax, although at some point the analysis may need to be more general). Or it can reasonably tax non-residents on income the source of which is domestic.
Let's abstract from the, in many ways arbitrary and unsatisfying, aspects of actual residence and source rules, as they have evolved in given countries' laws, in tax treaties, in the work of multilateral institutions (such as the OECD and the UN). Corporate residence, for example, is inherently a formalistic and unsatisfying idea, albeit hard to avoid once one has an entity-level corporate income tax. Likewise, source rules for particular types of income are inevitably formalistic and unsatisfying, e.g.., when (lacking better alternatives) we “source” passive income based on the place of residence of the issuer. And the source idea inherently can employ either origin-based or destination-based approaches. E.g., if I write a book and it's sold and read in India, this is U.S. source income if we focus on the act of production but Indian source income if we focus on the act of production. (An income tax is seemingly a production-based concept, but the existing U.S. income tax uses both types of approaches here and there – even leaving aside the currently prominent idea of replacing it with a “destination-based” tax.) But of course to say that we might think of the income from this as U.S. source or Indian source does not mean that we might also (without more facts) reasonably think of it as German source or Chinese source.
Okay, enough throat-clearing and back to the point I meant to make. Without in any way tieing oneself to existing residence and source doctrine, these are versions of two fundamental ideas on which an anti-Monty Pythonesque claim of “reasonable” tax jurisdiction might rest. First, you are one of our people or a member of our community. Second, while you aren't one of our people or a member of our community, you are doing something that relates to us sufficiently to make it reasonable that we might impose tax consequences on it (potentially meaning that you might have to participate in payment of the tax, and/or be expected to bear its economic incidence).
Thus, standards somewhat like “residence” and “source” appear to be fundamental once we have multiple states with distinct members and territories, even if current legal doctrine lacks any sort of fundamental or universal character. So I'd say, “nexus” as defined to mean generalized ideas akin to (a) residence and (b) source seems fundamental here – of course, also without any further implication that we are necessarily thinking in terms of the current legal meanings of the term nexus.
So we now have, I would say, at least some very guidance re. thinking about reasonableness here – reasonableness in terms of what? But of course this still leaves the vast majority of the hard work still to be done.
3) Membership - As I understand this set of concepts from the discussion in the paper, it comprises (a) an approach to thinking about what “residence” might reasonably mean, plus (b) a benefits-based approach to thinking about what “source” might reasonably mean.
On (a) or residence, I'm sympathetic. In defining “Americans” who might be treated as U.S. taxpayers for purposes of being taxable on non-U.S. source income, notions that the paper discusses of voluntariness, intentionality, ability to opt out, the importance of factors suggesting true affiliation (not limited to geographic presence within a given period), may be very helpful as we try to flesh out the contours of reasonableness. Christians, of course, has written eloquently about what she views as the grotesque over-reach of the U.S. tax system with respect to foreign non-resident U.S. citizens who may not even know that they are citizens or ever have valued or chosen a U.S. affiliation, e.g., by reason of having been born here without ever subsequently living here. (Indeed, her eloquence on this point is such that I am sometimes reminded of Hamlet speaking to his mother: “You go not till I set you up a glass / Where you may see the inmost part of you” – she is good at holding up the glass so that we can see what our system is doing to people whom we apparently don't care about.)
On (b) or source, I'm unsympathetic at least to treating benefit as an exclusive ground for viewing tax jurisdiction as reasonable. Take the case of an optimal tariff, applied to inbound sales that would otherwise be generating rents to the sellers, e.g., by reason of the monopoly power conveyed by intellectual property rights. This might include the case where, say, Apple is selling iPhones in India.
Do we really care about whether India has a “benefit” theory on hand for the existence of a consumer market that Apple can now exploit? I don't find a benefit analysis here particularly necessary or interesting. The optimal tariff that India might levy, even if we called it a source-based income tax, can be thought of as organizing the Indian consumers to exercise monopsony power that offsets Apple's monopoly power as a seller and thus creates a bilateral monopoly, under which India can extract some of the surplus, in lieu of Apple's owners getting it all. I see nothing wrong with this, especially once we think of the Indian government as rightly acting on behalf of its people's interests. And even if one has monopsony power being exercised in otherwise competitive market settings, one might think of negotiations between countries as being the best way to create Pareto improvements – as distinct from positing that a given country lacks “rights” with respect to influencing the terms of transactions that involve its own people.
It's probably fair to say that I find the topic of this paper interesting enough to add it to the list of topics for future papers that I probably won't ever write, but that, who knows, perhaps someday I would (especially if asked).