The Right and the Good Taking Rights, Value Creation, and the Rhetoric of International Taxation

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David Elkins


A prominent theme in the discourse of international taxation is that taxing rights should follow wealth production. Examples of current attempts to implement such a proposition include the OECD’s BEPS project and the frequently heard calls to adopt some form of international formulary apportionment. In considering the validity of this proposition, the Article will rely on the familiar dichotomy in moral philosophy between the right and the good. In the context of international taxation, the right involves a host country’s deontological claim to receive a portion of the income produced within its borders. The good involves the claim that host countries need revenue from multinational enterprises (MNEs) to fund public goods. Although the literature often conflates these two claims, they are distinct and require separate analysis.

Within the realm of the right, we must make a further distinction between two different types of right-based claims. On the one hand, a host country may assert that MNEs who choose to operate in its territory take upon themselves an implicit contractual obligation to pay tax as delineated in the host country’s laws. When the host country imposes an income tax, MNEs are in effect contractually obligated to pay the host country a percentage of the income generated by their economic activity in the host country. Alternatively, the host country may assert a neo-Lockean claim to a commensurate share of the wealth that its social capital—in the broadest possible sense of the term—helped to create.

Regarding the contractual claim, I argue that the terms of the contract are in almost all cases delineated by the host country’s tax legislation. In effect the host country offers a standard-form contract to foreign entities, which then signify their assent by investing or otherwise operating in the host country’s territory. Consequently, if the terms of the agreement are difficult to enforce, the most obvious response would be to adopt terms that are more easily enforceable. I posit that the reason host countries do not do so is because a stricter tax regime would make it difficult to compete for international investments against countries whose tax systems are easier to manipulate. In other words, the so-called “loopholes” are actually part and parcel of the implicit contractual arrangement between the host country and the MNE.


The neo-Lockean argument is that creation of wealth within a country’s borders is effectively a joint project involving the exploitation of the MNE’s resources along with the social capital—in the broadest sense of the term—of the host country. Under neo-Lockean theory, the host country is entitled to a share of the income commensurate with its contribution to the production of that wealth, and income tax is the means by which it asserts that right. Profit shifting by MNEs understates the wealth actually created within the host country’s territory and prevents the host country from claiming its fair share of that income. I contend that this argument too does not succeed. First, from the mere fact that an MNE derives wealth from its operations in the territory of a certain country, it does not necessarily follow that the host country’s social capital contributes in any meaningful way to the production of that wealth. Second, even when there is reliance upon the social capital of the host country, the MNE will in most cases pay for its exploitation of the host country’s social capital via factor prices (particularly salaries and rent). Third, to the extent that the positive contribution of its social capital is not reflected in factor prices, the host country should be able effectively to impose tax on foreign entities. Its desire for more MNE tax revenue than it is capable of collecting in a competitive atmosphere constitutes at least prima facia evidence that it wants more than its actual contribution to the creation of wealth.

Moving from the right to the good, it is often asserted that budgetary exigencies of host countries require that they collect taxes from MNEs and that without such revenue their ability to supply essential public good would be seriously curtailed. However, this utilitarian claim does nothing to support the proposition that taxing rights should follow the production of wealth. In allocating taxing rights under the umbrella of the good, it is needs and the capacity to meet those needs that should dictate taxing power. To which of any number countries the international tax regime should grant the power to tax a particular MNE’s income in the name of the good would be a function of the extent to which granting the taxing power to any particular country would promote total human happiness. The location of wealth production is irrelevant from this perspective.

The Article concludes by considering why the principle that taxing rights should follow value creation has gained such prominence in the discourse on international taxation. I speculate that what actually motivates countries is a parochial concept of the good in which the welfare of their constituents takes precedence over the welfare of others. However, as it is difficult to seek international cooperation to implement such a principle, they instead attempt to justify their position in terms of an objective principle, even if that principle ultimately lacks a normative justification.

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