The rise and fall of governance's legitimacy: the case of international direct taxation
Radaelli, Claudio M.
Kraemer, Ulrike S.
University of Exeter
This paper covers the long-term development of governance in international and EU direct taxation. It makes three claims. Firstly, informal governance is ‘old’ governance as far as direct taxation is concerned. Evidence for this claim comes from the emergence of an epistemic community within the League of Nations before World War Two and the soft mechanisms used to diffuse principles of income taxation in the first part of the last century. Principles, rules, and instruments were then somewhat institutionalised by the OECD in the context of the model treaty convention and guidelines for transfer pricing between the 1960s and the 1980s. The OECD approach – based on informal governance - was quite successful both in terms of diffusion and in terms of legitimacy. During these years, the European Commission tried to promote formal governance of direct tax policy, with ambitious plans for directives, but the achievement was limited. In the 1990s, the OECD launched more ambitious and multilateral plans aimed at cracking down harmful tax practices in member states and in non-OECD jurisdictions. At the EU level, the fight against harmful tax competition provided the opportunity to ‘discover’ informal governance with the code of conduct on business taxation. The code, however, was nested in a tax package containing a directive on savings – a classic example of formal governance. This leads to the second claim. Overall there is no linear pattern of informal governance. The OECD-promoted international tax order is more formal than in the past, but in the EU there is more interest in informal governance than in the past. The third claim is about legitimacy. The legitimacy of international tax governance has declined over the last 100 years or so. There are several reasons for that, most importantly the scope of governance and the range of actors involved therein. The wider the scope and the range of actors targeted by informal governance, the larger the loss in legitimacy. This seems to lead to the paradoxical conclusion that legitimacy has been higher under conditions of close, technocratic governance networks – a point hard to reconcile with democratic theory. The final part of the paper makes some steps towards reconciliation by looking at the issue of ‘legitimacy for whom’ and at politicisation as resource for developing the notion of public interest in international taxation.
Paper prepared for the exploratory workshop on 'Soft Law, New Policy Instruments, and Modes of Governance in the EU', University of Exeter, 28 January 2005