Cockfield on governance and the international tax regime

Art Cockfield has published his article, The Limits of the International Tax Regime as a Commitment Projector, which examines how governments use and abuse the pluralistic nature of the international tax law regime to achieve their goals. He presented this as a paper in draft form last year at McGill and it is highly recommended reading. Here is the abstract:

As explained by Ronald Coase, transaction costs are the costs associated with discerning a price on a given exchange. This article conceptualizes the international tax regime as a political and legal system striving to address transaction cost challenges, and claims it has an uneven record. On the one hand, the international tax regime lowers transaction costs and hence promotes global economic growth. It does this by facilitating credible government commitments to ensure that the same cross-border profits are not taxed twice by two countries. Multinational firms are thus protected against the risk that their cross-border activities will be unduly deterred by taxation, which encourages more global economic activities.On the other hand, governments are unable to offer credible commitments that they can effectively address other important international tax policy concerns. First, despite ongoing reform efforts governments are not able to offer reasonably reliable promises that they will inhibit aggressive international tax planning that dilutes revenues in countries like the United States. Second, the international tax regime affords governments opportunities to develop their own policy solutions (such as the 2010 U.S. anti-tax evasion initiative to create a global tax information reporting system through the Foreign Account Tax Compliance Act) and thus governments can renege on earlier promises to abide by traditional international tax norms.

The article includes a tremendously interesting section on "Breaking Commitments through Unilateralism," in which Prof. Cockfield discusses the US adoption of FATCA and how this legislation violated international tax norms as well as circumvented longstanding international commitments under existing treaties. Prof. Cockfield is optimistic that despite its faults, FATCA could help lead the world to global automatic information sharing. I am very much less optimistic because of the grave imbalance of resources and the high transaction costs he describes, and because I view the intergovernmental agreements that purport to commit the US to greater information exchange as aspirational at best.

In the conclusion, Cockfield sums up the current status quo of global tax governance:

The fact that the ITR [International Tax Regime] evolved as a largely noncooperative government game is understandable given the desire on behalf of governments to preserve political control over their tax systems. Nevertheless, by eschewing its traditional reliance on limited bilateral and multilateral cooperation, the recent U.S. initiative through FATCA to create a global tax reporting system to address tax evasion concerns — a system that operates in contravention of the formal and informal rules of the ITR — shows another limit of the ITR as a projector of reasonably reliable commitments. In a noncooperative game without any binding multilateral rules, governments may be tempted to break their promises to follow international tax norms in order to pursue their own domestic policy goals. 

...The analysis in this article has shown how, depending on how the context affects the ability of governments to exchange credible commitments, the ITR lowers or raises transaction costs. Thus, it disagrees with the tentative claim that, in the long run, international taxation will find its most transaction-cost-efficient governance structure. This conclusion is consistent with the view of North that, unconstrained by market forces, “the political market has been, and continues to be, one in which the actors have an imperfect understanding of the issues affecting them and equally in which the high costs of transacting prevent the achievement of efficient solutions.”