The Dangers of Tax Cooperation: How the Common Reporting Standard Is Used

• In Event: IPE and Authoritarianism

Abstract

To what extent does international cooperation in taxation alter the landscape of domestic politics? Typically, political scientists focus either on the state’s material benefits from cooperation or on domestic political incentives that force leaders to tie their hands by joining international organizations. This contributes to the general idea that as international cooperation deepens, individual states sovereignty becomes more constrained. However, it is becoming clearer that leaders may leverage international organizations to shift domestic politics in their favor. This may especially be the case in the international taxation regime, where decisions made at the international level can profoundly affect a leader’s domestic political coalition. In this paper, I propose to examine the domestic political consequences of the Common Reporting Standard (CRS), a relatively new institution in international taxation. The CRS facilitates the sharing of financial information between states in order to stop international tax evasion, but not all countries that have joined have a strong incentive to completely shut down offshore finance. Countries like Saudi Arabia have no income taxation and generate more than enough revenue from natural resources; others, like Russia and China, have autocratic leaders that notoriously abuse the offshore financial system for their own gain. I propose to empirically examine how CRS members use the financial information they gain from cooperation. I hypothesize that such information will be used differently across regime type: democratic countries in the CRS do try to stop tax evasion and raise tax rates on their wealthiest citizens, whereas autocratic countries will make less effort to stop tax evasion and won’t raise taxes. Even further, autocracies may use the information to suppress economic elites that aren’t part of the ruling coalition. I intend to provide evidence for these hypotheses using quantitative analysis of tax rates and illicit financial flows worldwide, using recent advances in causal inference with panel data to construct counterfactual estimators, akin to a more traditional differences-in-differences design. If my hypotheses are confirmed, this suggests that states can use tax cooperation to enhance state power over political opponents; however, the means by which states use their power and the opponents themselves will vary. Deeper international cooperation to automatically share financial information may simultaneously undermine and strengthen state sovereignty. This suggests that scholars of international taxation should keep in mind the variation in why states choose to participate in the international tax regime and potentially be more stringent with member access into the regime.

Author

• Tyler Ditmore, UNC Chapel Hill