The Political Economy of ‘Tax Spillover’: A New Multilateral Framework

Abstract

Tax spillovers are the effects one country's tax rules and practices have on other countries. They have been assessed in aggregate terms by the IMF using econometric models, and were found to have a ‘significant and sizable’ impact in reducing corporate tax bases and rates in ‘developing countries. However, a widely accepted form of country level spillover analysis remains elusive, despite demands from non‐governmental organisations (NGOs) and international organisations (IOs). We present the first framework for conducting comprehensive national level spillover analyses using a qualitative evaluation framework in three steps. First we identify the importance of the normative underpinnings of multilateral evaluation frameworks. We make the case for an international moral harm convention that discourages states from doing harm to other states through their tax policies. Second we illustrate some of the difficulties in conducting country level spillover analyses using econometric methods, while advancing a broader conception of spillover, based on the defensive purpose of corporation tax. Third we present a new framework for conducting spillover analysis, that assesses relationships between four direct taxes and a number of administrative and institutional features of tax systems. Finally, we present initial pilot qualitative assessments for the UK and Denmark, involving scores, risk dashboards and visualisations.

Creating a race to the top in global tax governance: the political case for tax spillover assessments

“…The IMF's work also acknowledged methodological difficulties, with accurate country-level estimates being especially problematic using econometric equations (IMF, 2014: 15). In an effort to provide a foundation for assessing tax spillovers on a country-by-country basis we created a new spillover assessment tool kit (Baker and Murphy, 2019). Our framework moved beyond the IMF's work in five ways.…”

“…Any intellectual project with the aspiration of re-engineering global governance to prioritise alternative values and norms also needs to give serious consideration to the sets of conditions that make change plausible and achievable. In this contribution, we move beyond our recent work, which outlined the soft-law dynamics of a new spillover evaluation framework (Baker and Murphy, 2019), to establish more fully the political case for spillover assessments. We use literature on NGO benchmarking of revolutionary and reformist types to suggest that hybrid modes of working are often essential to increase political appeal and traction (Broome and Quirk, 2015a;Seabrooke and Wigan, 2015).…”

Modern Monetary Theory and the Changing Role of Tax in Society

“…Applying a spillover assessment tool kit in a full UK assessment, revealed that both capital gains and corporation tax provisions encouraged the shifting of income out of the income tax base (Baker and Murphy, 2019b: 5). At the same time, a whole range of exemptions, allowances and reliefs were found to provide favour to income earned from wealth rather than from work, further incentivising the under reporting of income (Baker and Murphy, 2019b: 4).…”

“…Applying a spillover assessment tool kit in a full UK assessment, revealed that both capital gains and corporation tax provisions encouraged the shifting of income out of the income tax base (Baker and Murphy, 2019b: 5). At the same time, a whole range of exemptions, allowances and reliefs were found to provide favour to income earned from wealth rather than from work, further incentivising the under reporting of income (Baker and Murphy, 2019b: 4). A recommendation emerging from that assessment was that all allowances and reliefs offered in the UK should be systematically evaluated to determine: their cost; their economic effectiveness; the benefits arising from continuing to offer them; and any impact of their withdrawal.…”

“…From a macroeconomic perspective, that is not only questionable but can also spill over to undermine other parts of the same tax system, while producing an expansion in wealth inequality. An MMT framing when harnessed with a direct application of spillover analysis to the UK demonstrates that this is a double ill from both a macroeconomic and social policy perspective (Baker and Murphy, 2019a, 2019b).…”