Havens in a Storm: The Struggle for Global Tax Regulation

Introduction

Introduction 1 Tax is an area where states are most in need of international cooperation but least able to achieve it. This situation reflects the tension between contemporary economic changes and traditional sovereign prerogatives in a particularly stark form. From the early 1990s, policy makers in the world’s richest and most powerful countries worried that changes in the international economy might severely undermine their ability to tax. Discussions about what could and should be done to address this new threat took place within several clubs of rich states: the Group of Seven nations (G7), the European Union (EU), and especially the Organisation for Economic Co-operation and Development (OECD), which was entrusted with formulating a response.The centerpiece of the strategy developed in 1996–98 was targeted at small states, labeled tax havens. These states were accused of fostering “harmful” tax competition at the global level by bidding for mobile investment with fiscal and regulatory concessions.The OECD sought to pressure tax havens to adopt a standard package of tax, financial, and banking regulations in order to tame this competitive dynamic and avert a “race to the bottom” in tax rates. The ensuing struggle between the two sides was above all a rhetorical contest. Both sides tried to garner the support of third parties, and the result of this contest hinged on concerns about losing face in the eyes of various transnational audiences. By 2002 the small state tax havens had prevailed, and the campaign to regulate international tax competition had failed. This book is devoted to explaining the nature and outcome of this struggle. Why is this particular issue, an attempt to impose global regulations on tax havens, important enough to warrant a book? In economic terms, the sums at stake are huge, amounting to hundreds of billions of dollars of tax revenue and trillions of dollars of investment. The effort to establish global tax standards also sheds light on the problem of implementing international regulation that creates losers as well as winners. If the policy outcome of interest is regulation, then the conceptual goals are to advance our understandings of the use of language for political ends, as well as how actors’ concerns about the way they are thought of by others affect their decisions and behavior. In international politics as in everyday life, actors spend a lot of effort and time talking to one another and worrying about what others think of them. These concerns are crucial for explaining the development and outcomes of the tax competition controversy, but also many other disputes in world politics. Since the 1980s one of the defining issues in the field of International Relations has been the significance of security fears versus utility gains in establishing cooperation between self-interested states in the international arena. Perhaps even more important has been the division between a rationalist approach, imported from economics , and a constructivist approach emphasizing culture, norms, and identity. Overlaying these concerns has been the more popular public discussion of globalization , especially in terms of what growing international economic flows and technological developments mean for the future of the state. The events to be examined are important for each of these controversies. If the transformative effect of economic globalization is to be seen anywhere, it should be in the area of international tax competition. For those scholars interested in solutions to international market failures and collective action problems, the initiative to establish global tax regulation is an important case of the limits of crafting and implementing regulatory solutions . Rather than the proposed regulations creating benefits all around, they threatened to create definite winners (the OECD and its member states) and losers (the tax havens).As such, the conflict is a study in power political economy.The centrality of conflict between state actors thus gives the tax competition controversy a strong affinity with realist concerns. The account of the initiative against harmful tax competition presented in this book aims both to address conceptual criticisms of constructivist explanations in general and to expand the coverage of this approach into international economics. Particular attention is given to several concepts associated with language use for political ends, such as rhetorical action, speech acts, and argument.The second major conceptual focus is on reputation in world politics, that is, on how actors are affected by the opinions others hold of them. These two concepts work together: the way an actor is perceived affects the impact of its...