The Discrepancy between Ideal and Real World International Tax Rules

Only available on StudyMode
  • Topic: Tax, Taxation, Tax haven
  • Pages : 29 (9877 words )
  • Download(s) : 120
  • Published : March 16, 2013
Open Document
Text Preview
WU International Taxation Research Paper Series
No. 2012 - 10

The discrepancy between “ideal” and “real world” international tax rules. What drives politicians when making the rules?

Julia Braun

Editors: Eva Eberhartinger, Michael Lang, Martin Zagler (Vienna University of Economics and Business), Erich Kirchler (University of Vienna) and Rupert Sausgruber (University of Innsbruck)

Electronic copy available at:

The Discrepancy between „ideal“ and „real world“ international tax rules. What drives politicians when making the rules?*

Julia Braun‡

October 25, 2012

The current international tax system diverges greatly from a theoretically “optimal” tax system. One reason for this discrepancy may be that politicians strive for other objectives rather than making tax rules that comply with the theoretical concepts of optimal taxation. In this article, I overview the approaches used in the economic and legal literature to explain the motivations of the people making international tax policy and contrast them with observations from the “real world”. This article illustrates that the making of international tax policy is affected by many different factors: domestic pressure groups and the structure of the international tax system, along with selfinterested politicians and bureaucrats. Considering the complexity of the conditions under which international tax policy is made, it is not astonishing that international tax law deviates from the principles characterizing ideal taxation. Keywords: international tax policy, optimal taxation, global efficiency, national welfare, Public Choice Theory, Game Theory

JEL Classification: F50, F53, H21, H25, H87, K34

-----------------------------------------------* I would like to thank Eva Eberhartinger, Daniel Shaviro, Martin Zagler, and the participants of the doctoral seminar of International Tax Policy at the WU Vienna University of Economics and Business for their helpful comments. All remaining errors and inaccuracies are, of course, my own. Financial support from the Austrian Science Fund (FWF grant no. W 1235G16) is gratefully acknowledged. ‡

DIBT Doctoral Program in International Business Taxation at WU Vienna University of Economics and Business,


Electronic copy available at:

1. Introduction
International tax rules are frequently criticized as violating the principles of efficiency, equity, and simplicity. This observation raises the question as to where the divergence between ideal and “real-world” tax rules originates. The hypothesis of this article is that this discrepancy is inter alia caused by the fact that the politicians making international tax rules actually do not seek to create “ideal” rules in the light of tax theory but rather have other objectives in mind. It is quite evident that “it cannot simply be assumed that actors pursue the goals of equity and efficiency per se” (Rixen, 2008: 83). But what goals do politicians strive for? This article overviews the approaches used in the economic and legal literature to explain the motivations behind those people who make international tax policy, contrasting them with some “real world” observations. The purpose is to show that the motivations of those involved in international tax policy contribute to the inefficiency, inequity, and complexity of the international tax system. The article proceeds as follows. After having explicated the characteristics of international tax policy (Section 2), I will elucidate in more detail the theoretical principles that international tax rules should comply with (Section 3). Subsequently, alternative explanations of the objectives of international tax policy will be presented and analyzed with regard to their relevance in explaining international tax rules as we see them in the real world (Section 4). Specifically, I will examine the propositions that fundamental...
tracking img