Global Taxation: A Search for Generalizable Precedents
Myron J. Frankman
Taxation has always been the prerogative of "sovereign" governments even when their jurisdictions hardly resembled anything approaching integrated markets. To varying extents, it was expenditures by governments, financed by taxes, that contributed in part to the progressive integration of national markets. Today, in contrast, we have the opposite situation: a highly integrated world market with barely the semblance of an authority (democratic or otherwise) that can be regarded as sovereign. What we do have, instead, are international bodies relying principally on woefully inadequate voluntary contributions. The annual budget of the United Nations in 1994 amounted to five-one thousandths of one percent of estimated world GDP. If one compares the UN's resources to world population, we find the 1994 budget was equivalent to twenty three US cents per capita. Unless one subscribes to the default setting of UN inefficiency that has been established through relentless assault by many within the US, one might be inclined to marvel at how much has been accomplished with so little resources.
Those who see the plight of the national welfare state as related in part to the growth of what Robert Gilpin calls the "non-welfare international capitalist world", regard the maintenance of a tolerable global and local social order to require the urgent establishment of global taxation (subject to democratic control). There is no lack of ideas on the topic of global taxation: a rich literature on proposals for taxes to finance global governance which date back at least to the work of James Lorimer in 1884, has recently been surveyed [Frankman 1996]. The 1995 Report of the Commission on Global Governance identified as potential global revenue sources foreign exchange transactions (Tobin Tax), profits of multinational corporations and use of common global resources (including flight lanes, sea-lanes, ocean fishing areas, geostationary orbit and the electromagnetic spectrum) [217-21; see also Mendez 1992].
The impediment to the establishment of global taxation is not a technical one, but rather a political one. Mere technical questions are, in the immortal words of Stephen Leacock, "simplicity itself". The challenge is to change political perceptions which have been influenced and limited by carefully nurtured and often long-standing systems of myths and rationalizations. The hold that the concept of the nation "right or wrong" has over people's minds has been extensively commented on. Building support for a migration of sovereign authority to a global level will not be easy, but it is of critical importance.
The perception of the appropriateness of shifting taxation to a higher level jurisdiction is likely to be more a question of shifting prejudices than of evidence associated directly with the logic of scale change. We have seen functioning tax systems spread territorially over the Roman Empire and limited in our time to a sovereign micro-state such as St. Kitts and Nevis, a United Nations member with a 1993 population of 42,000 people and an area of 260 square kilometers. Neither in its time would likely have qualified as an optimum policy area. (1) The one functioned by force of arms, the latter by force of the myths associated with the Wesptphalia state system, which regards states as black boxes having de jure equality and often, by analytical sleight of hand, de facto equality as well.
In the current moment, state action and the extension of taxation are not particularly fashionable. Many, following the urging of the free market economists, have lost sight of the formerly common-place notion that taxation is the price which we pay for civilization. National governments are devolving responsibilities to lower level units which neither have nor are given the means to finance these activities. The question which Lord Kaldor raised over 30 years ago about when the developing countries will learn how to tax , can now be rephrased to question when the world as a whole will relearn to tax. (2)
In this paper, I shall examine precedents that might be built upon to eventually substitute taxation and revenue sources at the global level for voluntarism. In this connection, I shall be considering three experiences of shifting fiscal relations between existing governments and newly-formed higher level jurisdictions. The experience of newly-formed states, federal states, joint authorities and supranational bodies, like the European Union, generally required acquiescence in the transfer of either fiscal authority and/or revenues to a higher level.
The question at hand in this paper is the migration of revenue raising authority to higher levels. The relative revenue needs at different levels are subject to reconsideration as our perceptions of needs alter and as capabilities at different levels develop or wither. Central to fiscal capability is a revenue base of "own resources": these provide a jurisdiction the ability to plan in a relatively reliable manner its revenues and expenditures. When competition arises between jurisdictions either at the same or different levels, migration of activities can erode the tax base requiring either an increase of rates (causing more migration), an expansion of the tax bases or a petition for transfers as compensation.
Formula funding may or may not provide adequate resources for an institution. It has not been adequate for either the United Nations or the International Monetary Fund and the World Bank, but for different reasons. As is well known in the case of the UN, no powers are available to assure payment. Payment arrears by the USSR and the US have hobbled the institution at different points in its history. In contrast, the IMF has provisions to suspend the rights and privileges of any member in arrears on its payments. The problem confronting the IMF and the World Bank centers on the link between quota expansion and the veto on special issues (such as revision of Articles of Agreement). While the US has faithfully paid its quota contribution to the Fund, its resistance to quota increases which threaten the perpetuation of the US veto has limited the ability of the IMF to act as envisioned and has converted the Fund from its original function as a credit union of sorts.
From the Articles of Confederation to the Constitution
In the early years of American independence, the Confederation Congress had no power to tax, but rather resorted to imposing requisitions on the states. (3) As the states only contributed one-quarter of the levied sums between 1783 and 1789 -- providing but a fraction of the amount required to meet the interest due on the central government's debt -- the United States began its existence with a debt crisis. Repeated requests from the Congress in 1781, 1783 and 1785 to be allowed to impose a uniform five percent tariff on imports failed for lack of unanimous consent by the states [Hacker 1970, 44-46]. As Samuel Eliot Morison relates, "Congress was given all the powers connected with war and peace, except the important one of taxation to support a war" [1965, 279]. The only taxing power the federal government had was to charge postage. The clearly apparent limits on the abilities of the US central authority led the British to ask whether John Adams, America's first ambassador to London, represented one nation or thirteen [Heilbroner & Singer 1984, 72].
Morison relates that John Adams, Thomas Jefferson and James Wilson had tried, without success, to suggest a federal constitution for the British Empire. With the coming of American independence, all the old problems of distribution of sovereign powers were transferred to the states [1965, 227]. The difficulties that arose during the years of the Articles of Confederation shifted the balance of opinion in favor of the migration of functions to the central government. Morison refers to the Constitution of 1787 as having set up a "sovereign union of sovereign states" [1965, 311], but the sovereignty of the states under the Constitution was markedly redefined from what it had been under the Articles of Confederation. Gone were the separate import duties that the states had so jealously maintained; gone as well was their ability to coin money and issue bills of credit [Hacker 1970, 54]. The central authority now had at its disposition its "own resources", previously denied it: the right to collect taxes, duties and excises.
19th Century German Unification
There were said to have been over 1,800 customs frontiers in Germany in 1790, levied by over three hundred rulers, "virtually unchecked by any central authority" [Henderson 1939, 20]. The creation of a central authority in the form of a German Confederation in 1815 consisting of thirty-nine sovereign states, when viewed from one perspective, changed matters little, as its legislature "had scarcely any executive authority over the constituent states" [Milward & Saul 1973, 371]. Relationships between states and localities changed considerably, however. The initial migration of fiscal authority went from the localities to the individual states and has been judged to have acted as a stimulant to early German industrialization [D.E. Scremmer 1989, 483].
An early substantial revenue migration in terms of the geographic area involved was the elimination of internal tariffs and the creation of a unified external tariff realized by Prussia in 1816-1817. Saul and Milward describe this transformation in terms of scale shift:
The previous local Prussian tariffs had acknowledged the reality of commercial life in a state where each town was a separate local market and the countryside around it was subjected to its commercial domination. The new tariff presupposed the dissolution of these many local markets into one national market [Milward & Saul, 373].
Others were quick to see the merits of the Prussian example. As early as 1819, some 22 years before the publication of his National System of Political Economy, Friedrich List was advocating that the German Confederation follow the Prussian example and create a general tariff for all of Germany [Henderson 1939, 26]. Early in the expansion of the Prussian Zollverein to neighboring territories, an important revenue sharing arrangement was incorporated: revenue was to be divided on the basis of the population of each of the states rather than the value or volume of trade crossing its borders [Milward and Saul 1973, 374].
Jurisdictional jealousy works against the ceding of sovereignty to a higher power. Sovereign rights are devolved to subnational level much more readily than they are allowed to move upward. This is well illustrated in the case of the European Union, whose budget grew very modestly from 0.80 percent of the Community's GNP in 1980 to 1.09 in 1988 and is projected to rise to 1.27 percent by 1999, in contrast to an estimate in the 1977 MacDougall Report that no less 5-7 percent would be required for a Community with a monetary union [Pinder 1995, 184-85]. The Union's "own resources" are still limited to a share of revenues collected by member states on imports (including agricultural products) and from the VAT, as well as a small GNP-related levy on members [Shackleton 1990, 3]. This was at the heart of a late 1980's budgetary crisis as the decline in revenues associated with a reduction in proceeds from duties and agricultural levies was not fully offset by a growth of VAT revenues [Shackleton 1990, 10-11]. That which is labeled somewhat inappropriately as "own resources" remains a share of national taxes earmarked for surrender to the EU. To date the European countries have not experienced a case where any of its members have withheld the surrender of the earmarked share, but it is as much a possibility with earmarked revenues as it is with a membership quota. Europe's first true community tax -- that levied by the European Coal and Steel Community since its creation in 1952 on coal and steel production within the area -- is still the only such tax [Shackleton 1990, 2].
A major shift in the rules governing a united Europe came with the passage in 1986 of the Single European Act which moved the European Council from a rule of unanimity to one of majority rule on most issues. Unanimity continues to be required on fiscal policy [Tsoukalis 1993, 63], the one issue that Jean Monnet and Robert Schuman considered critical at the dawn of a united Europe. Strict limits on the fiscal resources available to the EU continue to prevail. One compromise in exchange for the surrender of the unanimity-veto allows countries "under special circumstances, to continue applying national provisions after the adoption of new EC rules" [Tsoukalis 1993, 62]. Differential policies and opting-out were not to be the rule in fiscal matters, however. The unified market was to be pursued, but restraints on fiscal offsets to the effects of market operations were not to be loosened. Nonetheless, the European Council has been exploring EU-based revenue sources including profits from the European Central Bank, corporate taxes and an energy and carbon tax [Pinder 1995, 184]. Growing expenditures arising from newly assumed central responsibilities for development of Trans-European Networks of transportation, telecommunications and energy may well finally tip the balance of opinion in favor of community level revenue sources.
The sovereign pretensions of the individual states receive strong reinforcement from the conviction of mainstream economics today that markets can be counted on to provide appropriate incentives as long as monetary stability is assured. Implicit in this is the adequacy of a national government's "own resources" combined, where necessary, with access to credit markets. Conventional analysis assumes away a changed external environment. European nations, in this view, need only manage periodic external shocks and are not confronting fundamental changed circumstances associated with globalization. Bureau and Champsaur, for example, offer a cautionary view regarding expanded central fiscal activities: "it is not clear why an evolution toward some kind of fiscal federalism of the type in existing federations would be advisable" [1992, 91]. They associate "robust jurisprudence" with the consistent agreement of European governments "upon an interpretation that limits severely the scope of externalities open to centralized fiscal correction" . For their part, von Hagen and Eichengreen oppose the Maastricht restrictions on excessive national fiscal deficits as being likely to cause national officials to ask for support from the EU, in turn, "leading to the transfer to Brussels of power to tax and expanding transfers to member states." The next step in their logical sequence is increased pressure for bailouts, a reduction of Brussels' capacity to resist, followed by excessive borrowing by the EU, ultimately undermining European monetary stability [von Hagen & Eichengreen 1996, 137].
In our review of a select group of examples, a couple of generalizable precedents emerge, which relate more to will than to specific revenue-raising design. The stronger the support for jurisdictional level shift, the better the chances for success in terms of ceding either revenue sources or firmly earmarked revenues. The ceding of important revenue sources is likely to require the highest degree of agreement for jurisdictional shift of functions. In today's context where functions are being reassigned to lower levels with great enthusiasm, there is nonetheless a reluctance to cede revenue-raising sources. Function and revenue shift to the supra-national and global levels is still barely on the agenda. The grip of the Westphalian system's centrality of the nation state, still impedes the financing of sub and (especially) supra-national governing authorities.
A key obstacle to the successful level shift of sovereign prerogatives is the granting of a veto to one or more members of a union. Protection must exist for minority rights, but to incorporate veto rights into a union's constitution is to convert its original lofty purposes to mere rhetoric. This is to be seen in case after case: in the American Articles of Confederation, in the United Nations, in the Europe Union and in the International Monetary Fund, to cite but a few examples. If there is a perception that external threat is significant enough, a crisis is deep enough, or purpose important enough, the veto provisions may be abridged, opening the may to upward jurisdictional migration of claims to fiscal sources.
We do not lack for ideas on the financing of global governance; rather we lack a compelling collective consciousness of the need both for such a jurisdictional shift and for that shift to be associated with democratic control. Veblen's "common man" has still not come to recognize that his/her interests are served well neither by national governments beholden to vested interests, (4) nor by adding a layer of government that is beholden to a planetary hegemon, rather than to the people.
The author is Associate Professor, Department of Economics, McGill University, 855 Sherbrooke St. W., Montreal, QC, Canada H3A 2T7. E-Mail: email@example.com.
1.The notion of an optimum currency area [McKinnon 1984] has been extendedby Marina von Neumann Whitman [cited in Kindleberger 1978, 1] and Kindleberger [1986, 5] to an optimum economic area. M. Panic subsequently spoke of the world as an optimum policy area [1988, 317-30]. Regardless of the phrase used, all four authors regard the world as the optimum area.
2.The answer to Kaldor's question is no different today from that which he gave then: "the advocacy of fiscal reform is not some magic potion that is capable of altering the balance of political power by stealth. . . . In a successfully functioning democracy the balance of political power is itself a reflection of a continuous social compromise between the conflicting interests of particular groups and classes, which shift automatically in response to varying pressures" [1963, 419].
3.". . . all expenses of the federal government were to be assessed 'in proportion to the value of all land within each state;' but the taxes to pay these requisitions had to be laid by the states." [Morison 1965, 280].
4.Veblen, in one of his more optimistic passages, expressed confidence in the common man as an instrument of change when perceptions change: "whenever and so far as the timeworn rules no longer fit the new material circumstances they presently fail to carry conviction as they once did. . . . it is through the altered personal equation of those elements of the population which are most directly exposed to the changing circumstances that the wear and tear of institutions may be expected to take effect" [1919, 182-83].
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