The empirical analysis of the previous sections will inform the normative analysis to follow. In lowering their tax rates to attract investments and capital, countries exert pressure on other countries to lower their tax rates in order not to lose capital and investments. Two points are worth mentioning. Internally, agents benefit unequally from it: corporations more than individuals and big corporations more than small ones. Globally, developing and poor countries are deprived of significant revenues. Although countries maintain their capacity to set the tax rates as they wish, they lose their ‘de facto fiscal self-determination’ (Dietsch and Rixen 2012). Without regulation, there are risks of this phenomenon being exacerbated and countries being dramatically deprived of their capacities to act upon justice internally. A state’s capacity to implement justice within its borders can thus be undermined. Whether this practice leads to a race to the bottom – all states entering competition and lowering their tax rates to a minimum – is debatable (Ronzoni 2009, Ronzoni 2014). What the data suggests is that the race to the bottom has been prevented in richer countries precisely because the tax burden shifted, exerting more pressure on immobile factors like labour and smaller companies. Even if the race did not end completely at the bottom, injustices have nonetheless been created (with regressive fiscal policy in rich countries and shrinking tax revenues in poorer countries as shown in the previous section). This has heavy consequences. Illicit
financial flows and tax competition infringe state sovereignty in forcing states to forego a welfare system, or at least in reducing significantly their chances to implement a welfare system. Undermining their internal capacity to act might lead states to lose the power to control their economies or to monitor external interference. Empirical evidence seems to point in this direction (TJN 2005, Avi-Yonah 2007, Dietsch and Rixen 2012, OECD 2014). If countries wish to prevent revenue losses, they have to adopt regressive fiscal measures.
In sum, if countries respond to tax competition by diminishing the burden on capital income relative to labour income, they would be undermining attempts to address income inequality through the tax system. In more affluent countries, this change in the ownership patterns of taxation is not always reflected in the overall level of tax revenues. Smaller companies tend to bear an always-heavier tax burden than bigger corporations and similarly labour tends to bear an always-heavier burden than capital. The internal injustice of these shifts in ownership patterns created by tax competition reflects the loss of governments’ capacity to act upon justice.
To pursue the ethical analysis, we may categorize the first two forms of tax competition as virtual tax competition, as opposed to the third form (FDI), which we may call real tax competition. Virtual tax competition is composed of the two first forms of tax competition mentioned above: for portfolio capital and for paper profits. “From a legal perspective, there is a difference between these two cases – the first is considered evasion and illegal whilst the second constitutes legal tax avoidance – but from an ethical perspective, there is no difference between the two.” (Dietsch and Rixen 2016: 14). I would rather say that there is no difference except the fact that FDIs stimulate other aspects of the economy (which in turn may raise other tax revenues).
This is only a brief summary of the phenomenon of tax competition, but it indicates we have reasons to believe tax competition raises a problem from the standpoint of justice. As mentioned, the task of this chapter is less to formulate original principles of justice to tackle this problem, than to show the normative elements that must be considered by any theory of global justice wishing to address it. The primary objective of this chapter is more to show how bottom-up non-ideal theory works than to
present a full-blown non-ideal theory to tackle tax competition. I want show how to do non-ideal theory, notably by examining the role of actual non-compliance, feasibility and path-dependence for this level of theorising. The presentation of the problem in this section should help us in observing in the following sections that the complexity of the problem of tax competition reveals normative elements that theories of justice must consider.
Now, one relevant question is why are governments entitled to tax the revenues produced within their national boundaries. Dietsch invokes in this context one crucial idea that is common in the international tax law literature: one has a duty to contribute to the public goods where one conducts one's economic activities, because individuals and firms are part of a system of cooperation (Dietsch 2016: 235). This system is only possible because public goods and infrastructure are provided by governments. Therefore, natural and legal persons should pay taxes in the countries where they benefit from infrastructures. This underlines that what is under scrutiny here is not how agents spend their money, but how they receive it (Dietsch 2015: 90). Profits are not created by the single hand of capital owners. I take the idea that governments are entitled to tax the revenues produced within their national boundaries to be considerably weighty from a normative standpoint.