From double tax avoidance to tax competition: Explaining the institutional trajectory of international tax governance

This article presents a history of international tax governance and offers a rationalist reconstruction of its trajectory. As an unintended consequence of its institutional setup, the tax regime, which originally only dealt with double tax avoidance, produces harmful tax competition. Despite this negative effect there are only incremental and partial changes of the regime, which are insufficient to curb tax competition. I argue that this development can be explained by considering the properties - and the sequence in which they come up - of the collective action problems inherent in double tax avoidance and tax competition. First, in double tax avoidance, a coordination game with a distributive conflict, governments did not want to endanger the solution they had institutionalized long before tax competition became virulent. Second, governments are unable to resolve the emergent asymmetric prisoner's dilemma of tax competition due to conflicts of interest among big and small country governments and successful lobbying of corporate capital. As a result, the institutional trajectory is characterized by the simultaneous occurrence of stability in the core principles and indirect and incremental changes of the rules in the form of rule stretching and layering.