Do Left Governments Tax More? How States Tax Global Capital with Tax Treaties

• In Event: Poster Session: International Political Economy 2 & APCG (African Politics)
  In Poster Session: Poster Session: International Political Economy 2

Abstract

Investment and migration flows generate bilateral payments and overseas corporate and personal income that could be taxed by both the resident and source states. To facilitate capital and labor flows, countries have negotiated over 4000 bilateral taxation treaties (BTTs), which are designed to eliminate double taxation by specifying the amount taxable by the source state and requiring the resident state to offer exemptions or credits. Two features of the content of BTTs make BTTs particularly important for attracting foreign investment: First, BTT provisions vary greatly over income and payments generated from investment, not those generated from labor migration alone. Second, nearly all BTTs grant the same level of source state taxing rights to the two contracting states, but net importers of investment (mostly developing countries) are the source of more income and payments than investment exporters. Hence, developing countries have signed BTTs with developed countries with low taxing rights to attract investment, leading to concerns about fiscal loss. Yet we lack scientific evidence on when governments give up taxing rights.
In this paper, I develop the first comprehensive dataset on the source state taxing rights granted by BTTs. I then examine the roles of government ideology in forming BTTs and in determining source taxing rights. Debates on whether globalization prevents left governments from levying high taxes ignore international tax laws, while international taxation scholars have overlooked domestic politics. I argue that compared to right-leaning governments, left-leaning governments do not sign more or fewer BTTs but negotiate lower source taxing rights to attract foreign investment. Results of regression analysis are largely consistent with my hypothesis and reveal intriguing patterns of heterogeneity across countries of different regime types and development levels.

Author

• Jerry Min, Harvard University