Bilateral treaties and heuristics for a sane tax regime.
The United States is party to a number of international tax treaties adapted to prevent double taxation of the same income. At first pass, it seems reasonable that we offset a citizen’s income tax liability by taxes paid to foreign governments. Conceptually, however, these arrangements don’t make all that much sense.
Proponents of the income tax offer myriad justifications that are used to assert the government’s right over some portion of private economic creation (these justifications come in the form of “rich people use public institutions and must therefore pay” or “the rich can afford to pay for the poor” or so forth); and tax treaties come about because two government’s assert their right over the same thing.
But these treaties are just a lazy way to collect a portion of justified revenues in a reasonable way. If some set of countries have a global tax regime where rich countries set higher tax rates than poor countries, the poor countries are deprived of tax revenue to which they are entitled that would have derived from poor country tax residents that earn some income in a rich country. Despite this incongruity, most people would agree that tax treaties make a lot of sense given domestic tax laws.
Therefore, a sane tax regime might be one where tax treaties make no sense. (For example, it would make no sense to offset the land tax liability I incur by owning a Manhattan penthouse by similar taxes owed on properties in south Bombay.)
Nor is the answer “end global taxation”. Within an income-tax oriented system, a global tax might be necessary in some fashion. For one, because income is a ethereal accounting notion, capital structure choices might result in present value differences between tax liabilities assessed on economically-identical transactions. More concretely, a corporation – or individual with complicated finances – can’t divide income earned by territory in a sensible way. Consider Apple, which designs high-end technology in Cupertino, but produces them cheaply in China from where the final goods are exported.
So if we didn’t have a global tax system a lot of income that was earned in the United States would never be taxed. Capital gains taxes are one way of getting around that in part, but this assumes the contrary as it would imply that the owner of Apple is paying taxes on China income. In practice it’s even more complicated since Apple isn’t owned only by Americans.
This is not to mention the fact that the above scenario assumes, contrary to most of reality, that capital income is taxed on a mark-to-market basis rather than as gains are realized. Though this might make economic sense, it would just create a big incentive for US-domiciled corporations to be owned by foreigners who can afford to hold their appreciating stock.
Perhaps we should have a tax regime where bilateral treaties like the ones discussed above are nonsensical. Carbon, land, and congestion taxes come to mind.