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Taxes and Sovereignty: A Complicated Relationship

This post provides a general idea of the historical roots of the relationship between taxes and sovereignty, to show the importance - but also the limits - of the current debate on the new international tax agreement pushed by the US administration, and how much the current proposal is “pro-federalism”.

From Jesus’ answer to “no taxation without representation”

Taxes had profound political implications. One famous example is Jesus’ answer on the matter of paying taxes to Rome or, more substantially, to the Roman Emperor. He said: “Render unto Caesar the things that are Caesar's and unto God the things that are God's”. This sentence was used in the following centuries to define the relationship between state and church in Western countries.

In the Middle Ages debates over taxes became a power struggle between the kings and the aristocracies. King John I of England tried to impose harsh fiscal policies to finance his unsuccessful wars in France, but he found large opposition from his barons who obliged him to sign the Magna Carta in 1215. King Philip IV “the Fair” of France had a long struggle to reduce the power of the nobles and collect taxes, especially from the Catholic Church. The debt situation of the French treasury was at a certain point in such bad shape that he had to suppress the order of the Knights Templar in order to expropriate their possessions. He even had to execute the Master of the Templars who had at the time the same protection of sovereign princes. This created a “dangerous” precedent for the European aristocracy even before the executions of Mary Stuart, Queen of Scots, and King Charles I of England.

Indeed, coming to the revolutions’ age, what did the American Revolution, the English Revolution, and the French Revolution have in common? Taxes and sovereignty! Who has the authority to collect taxes and make fiscal laws? Who has the right to demand them and who has to pay them? All these questions are part of the debates during those times.

There is no rose without spines

Coming to the 20th century and the modern system of nation-states, the issue was not anymore who had the authority to tax inside the different countries, but how to regulate taxation for entities operating in different jurisdictions. The main idea at the time was to avoid the situation of double taxation and give more space to multinational companies to operate more freely in the world. Developing and emergent companies started to reduce the amount of corporate taxes in order to attract investments. This situation had positive impacts on enterprises and some states that, thanks to foreign direct investments, were able to acquire know-how for their subsequent development.

However, thanks to a lack of sufficiently strong multilateral tax agreements and to the ability to exploit loopholes derived from different bilateral treaties, the phenomenon is known as tax avoidance began to erode part of the fiscal capacities of the states. The OECD affirms that corporations are able to avoid paying taxes for a total amount between $100 and $240 billion US dollars per year.

The G7 agreement of last June, and the current debates inside the G20 and the OECD, are trying to fix some of the issues related to tax avoidance in a more multilateral framework than in the past.

Some comments are quite enthusiastic, some others less so. Moreover, the debate is still ongoing, and “the devil is in the details”. [2] However, it is possible to say at least that it is a first step in trying to reduce the fiscal advantages of the big corporations and re-increase the fiscal capacities of the states.

The return of the “stabilizer”: a new beginning?

One thing is quite clear: without the new US administration, nothing could happen. In this sense, the post-Trump (at the moment?) world shows the return of the USA as a “stabilizer” of the world system. The concept of “hegemonic stability” as described by Kindleberger implies that a hegemon country (or a group of countries) with sufficient power has to ensure respect for the minimum of rules of the game in absence of a world government. [3] After the decline of the British Empire, the USA assumed this role, which grew even more after the fall of the USSR.

However, this kind of system poses democratic problems and issues concerning the fiscal sovereignty of the states that is, as we saw above, one of the most important manifestations of sovereignty.

We can see how this action from the US administration is important for the domestic fiscal plans of President Biden. The White House itself explained this. In any case, he needs an agreement at the G20 level at least, to be able to obtain the approval of the US Senate [4] on the agreement itself and his fiscal plans. To sum up, this international agreement is functional to the current US administration. Someone could argue, “who cares if we can obtain a good treaty?” Well, this way of thinking implies that a) if the US Senate will not approve the international agreement, the international treaty is dead; b) if the US administration will decide in the future that the tax agreement is not any more convenient, the agreement is dead as well.

Furthermore, we have to consider that every national government and parliament will have to approve national laws as coherently as possible to the spirit of the agreement and implement them without putting exemptions and loopholes.

Moreover, taking into account that in the current system there is no authority over the nation-states (at least formally), pushing states opposing this reform against their will poses a democratic and a sovereignty problem. The basic concept of democratic sovereignty at the nation-state level implies that only the people in a specific territory and the government elected there have the power to impose taxes and determine their rules. If a country or a group of countries imposes in whatever way a rule to an independent state, this is an attack on the sovereignty of that state. In this sense, the finance minister of Bermuda and the Hungarian government are quite right. Indeed, it is a matter of sovereignty!

Finally, considering that there is no clear control and enforcement mechanism at the moment, everything will depend on the willingness of states to respect the agreement and the power relations among them. Taking into account all those considerations, we can say that this agreement is “historical” if everything proceeds without problems in the next months and for however long the agreement lasts.

In this sense, I quite disagree with who is writing that this could be a first step towards the world federation. I would say that this is mostly the current system desperately trying to save itself. ∎

[1] Of course, there are different interpretations of the sentence but here I referred to the most known one. [2] Definition of the tax base and other technicalities, which sectors are included in the agreement and which are not, and more other issues. For more info: you can check here and here (in Italian) as well as here and here (in English). [3] See Charles Kindleberger (1973) The World in Depression, 1929-39. Berkeley: University of California Press as well as Charles Kindleberger (1986) International Public Goods without International Government, The American Economic Review Vol. 76, No. 1, pp. 1-13.

[4] Remember that the US Senate is the only branch of the US Congress to have the power to vote on international agreements and to pass a two-thirds majority is needed. Currently, the Democratic party has half of the senators.


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