The Competence of Nations and International Tax Law

"How is the cooperation of these vast numbers of people in countries all over the world, which is necessary for even a modest standard of living, to be brought about?" (1) INTRODUCTION This article proposes a conceptual foundation for the field of international tax law. The Article refers to this foundation as the institutional competence of nations in global economic development. A nation's institutional competence may be defined as its discretion to make decisions in pursuit of our collective goal of global economic development, discretion that is subject to a number of standards and limitations. The Article analyzes the institutional competence of nations in global economic development from the perspective of institutional economics, simple game theory, and the literature on social norms. The Article expresses the institutional competence of nations through standards and limitations that reduce the abuse of sovereign discretion and address international collective action problems in the pursuit of global economic development. These standards and limitations allocate prescriptive jurisdiction among nations over the global income tax base. The foundation proposed by the Article would coordinate international taxation with the international regulation of trade. The Article also addresses the proper place of capital export neutrality in the hierarchy of values for economic development, the choice between territorial and worldwide tax systems, the evaluation of tax havens and appropriate responses, the use of anti-deferral regimes, and the possible need for a multilateral tax treaty. On this institutional foundation, the role of the state is both essential and subordinate: sovereignty becomes an instrumental value and national law-making is seen in terms of a conceptual subsidiarity, to use the European term, or a consequentialist federalism in the realm of global economic development. Moreover, non-state actors facilitate sovereign competition and the benefits that such a constraint on the abuse of sovereign discretion brings to the world's people. The Article begins with an analogy. Consider the manager of a complex organization. In order to obtain the best results, the manager must delegate decision-making authority to others. Furthermore, the delegation of decision-making authority must be accompanied by a grant of autonomy to the subordinate decision-makers, if the manager hopes to receive the full benefit of delegating decision-making authority. Unfortunately, subordinate decision-makers can abuse their discretion. Subordinates might depart from the organization's goal and pursue their own objectives, possibly exploiting individuals under their control along the way. Furthermore, subordinates might attempt to shift their costs onto the budgets of other decision-makers on the same plane of authority. To minimize the abuse of discretion, the manager must create standards and limitations within which subordinate decision-makers are to exercise their autonomy. The delegation of decision-making authority to multiple subordinates also creates collective action problems for those subordinates. Hence, the manager of the complex organization must encourage the development of social norms that coordinate collective action within the organization. We can summarize the task of the manager of a complex organization. The manager must set the organization's overall goal. The manager must delegate decision-making authority and autonomy to subordinates within the organization. And, finally, the manager must create a decisional environment for those subordinates. The decisional environment consists of standards and limitations to minimize the abuse of delegated discretion and of social norms to coordinate the subordinates' collective action. We can draw an analogy from the complex organization to the community of nations. Of course, we have no actual manager for the community of nations. …