Chapter 3: The tragic choices of tax policy in a globalized economy
Tax is considered one of the main vehicles for debating the sometimes conflicting normative considerations underlying our collective lives in the state. Tax decisions are known for affecting the size and distribution of the national welfare pie, but they are also highly significant for tax- payers’ identities and the types of communities we live in. Ordinarily, when we discuss normative questions of tax policy we envision a country ruled by a sovereign that is entrusted with exclusive legislative powers. The sovereign, we would like to believe, designs tax rules that are compatible with the underlying normative values shared by its constituents. Ideally, the sovereign would aim to maximize the welfare pie (efficiency) and justly (re)distribute it, while reinforcing citizens’ identity, supporting their communities and representing their democratically pronounced collective will. Globalization in general, and international taxation in particular, change this setting dramatically. Zooming out to the international level, we realize that the powerful sovereign we envisioned is but one of 200 or so sovereigns that compete with each other. They compete for investments, for residents and for tax revenues. Such set-changing requires rethinking of existing norms. The competition for residents and investments undermines the very basis for countries’ vision about tax policy. It renders tentative and conditional everything from efficiency to redistribution and even the very concepts of community, national identity and democratic participation. In classic tax policy discussions, tax is a compulsory tool to be used by the state to overcome collective action problems in financing public goods.
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