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The Political Feasibility of a Global ECommerce Tax RIFAT AZAM* I. INTRODUCTION ............................................................................2 II. THE PROPOSED GLOBAL E-COMMERCE TAX ...............................7 A. E-commerce Taxation Challenges and Current Responses 7 B. The Details of the Global E-commerce Tax .......................11 C. The Normative Basis for the Global E-commerce Tax ......12 III. THEORIES OF INTERNATIONAL COOPERATION AND THE POLITICAL FEASIBILITY OF A GLOBAL E-COMMERCE TAX..13 A. State Sovereignty Concerns ................................................13 B. Realism and the Political Feasibility of a Global E-commerce Tax .............................................................14 1. The Theory ....................................................................14 2. State Interests and Their Achievement .........................17 C. Liberalism and the Political Feasibility of Global E-commerce Tax .............................................................19 1. The Theory ....................................................................19 2. State Values and Their Fulfillment ...............................21 D. Summary.............................................................................22 IV. THE GLOBAL INTEREST AND VALUE: FUNDING GLOBAL PUBLIC GOODS ................................................................................23 A. The Definition of Global Public Goods ..............................24 B. The Current Regime for the Provision of Global Public Goods ..............................................................................25 C. The Current Financing of Global Public Goods................29 D. New Trends and Sources of Global Public Goods Finance ...........................................................................31 * Radzyner School of Law, Interdisciplinary Center Herzliya. Please contact me at [email protected]. I would like to thank Professor Reuven AviYonah, Professor Diane Ring, Professor Aharon Barak, Professor David Gliksberg, Dr. Asif Efrat, and Dr. Daphné Richemond-Barak for their valuable comments and support.

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E. The Global E-commerce Tax as a Good New Source of Finance ...........................................................................35 F. Funding Global Public Goods as a Global Interest and Value That Enhances Political Feasibility .....................37 V. SUPPORTING EMPIRICAL CASE STUDIES ....................................39 A. Global Taxes Proposed Recently by the UN, G20, EU, and Politicians .......................................................................39 B. Growing Trends of Cooperation on Global Tax Issues......43 C. The Supranational Role of International Institutions on Global Economic Issues ..................................................46 VI. CONCLUSION ............................................................................55 I. INTRODUCTION In its strongest statement yet on progressive tax reform, the United Nations (“UN”) recently called on countries to introduce a global carbon tax and a financial transaction tax (“FTT”).1 The Global Internet Tax suggested by the European Telecommunication Network Operators Association (“ETNO”), which wants Apple, Google, and other Web companies to pay to deliver content, was proposed for debate at a UN agency called the International Telecommunication Union in December 2012.2 On May 23, 2012, the European Parliament adopted an opinion supporting the Commission’s proposal on FTT.3 In my recent article, Global Taxation of Cross Border ECommerce Income,4 I proposed a Global E-Commerce Tax (“GET”) on cross border e-commerce income that would be imposed by a new supranational institution, The Global Tax Fund, to 1. See UNITED NATIONS, WORLD ECONOMIC AND SOCIAL SURVEY 2012: IN SEARCH OF NEW DEVELOPMENT FINANCE 4 (2012), available at http://www.un.org/en/development/desa/policy/wess/index.shtml. 2. See Declan McCullagh & Larry Downes, U.N. Could Tax U.S.-Based Web Sites, Leaked Docs Show, CNET (June 7, 2012, 11:58 PM), http://news.cnet.com/8301-1009_3-57449375-83/u.n-could-tax-u.s.-based-websites-leaked-docs-show/. 3. See EUR. COMM’N, TAXATION & CUSTOMS UNION, Taxation of the Financial Sector, http://ec.europa.eu/taxation_customs/taxation/other_taxes/ financial_sector/index_en.htm (last updated Feb. 15, 2013). 4. Rifat Azam, Global Taxation of Cross Border E-Commerce Income, 31 VA. TAX. REV. 639 (2012).

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be established by countries through international treaty. According to my proposal, GET revenues should be spent to fund global public goods. I argued normatively that the proposed regime achieves legitimate, certain, efficient and fair taxation on cross border ecommerce income. In addition, it finances the very important and growing need of supplying global public goods. I concluded that the GET would be a desirable and plausible resolution of linked problems on both the income tax and the expenditure side of government functions. In this Article, I examine, analyze, and argue for the political feasibility of the GET. In my opinion, a GET that funds global public goods is indeed a project of formidable dimensions, but it is nonetheless a viable one. To make this argument, I open my analysis by addressing the nation state sovereignty obstacle. I claim that the normative scope of sovereignty has been transformed and even curtailed to meet the new world order of the twenty-first century. According to one of the contemporary conceptualizations, sovereignty means fair participation in making international rules through international institutions.5 In my opinion, the proposed regime meets this modern conceptualization of sovereignty. According to other new views of the role of sovereignty in the twenty-first century, global sovereignty is gradually gaining an increasingly pivotal role in the global era of an inter-linked world.6 A GET is part of this evolution of global sovereignty. In addition, I argue that e-commerce has already eroded the state’s ability to tax global e-commerce income, representing a greater infringement on state sovereignty than my proposal for the GET, which restores the state’s ability to tax global e-commerce income through international cooperation and global institutions. Furthermore, the nature of state sovereignty is actually the product and outgrowth of fiscal pressures, and the very same pressures are now changing the character of the nation state and the notion of state sovereignty through a natural process of economic and political evolution all over the 5. See ABRAM CHAYES & ANTONIA HANDLER CHAYES, THE NEW SOVEREIGNTY: COMPLIANCE WITH INTERNATIONAL REGULATORY AGREEMENTS 27 (1995); see also Anne-Marie Slaughter, Sovereignty and Power in a Networked World Order, 40 STAN. J. INT’L L. 283, 285–87 (2004). 6. Kanishka Jayasuriya, Globalization, Law, and the Transformation of Sovereignty: The Emergence of Global Regulatory Governance, 6 IND. J. GLOBAL LEGAL STUD. 425, 432–33 (1999).

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world. In my opinion, these arguments enable us to overcome the sovereignty obstacle to move forward with in-depth analysis of the interests, values, and reasons that affect the political feasibility of the GET. I also rely on theories of international cooperation7 to analyze the political feasibility of my proposed GET. For instance, the realist theory identifies power and interests as the primary factors affecting state behavior. States, realists argue, use power to achieve their interests in the international sphere through selfhelp—operating in an anarchical world bereft of normative values.8 Realist Robert Keohane—in his fascinating book, After Hegemony—asserts that states cooperate when cooperation serves their interests and maximizes their benefits in comparison to noncooperation.9 In this regard, international institutions play a vital role in ensuring the maximization of benefits. Based on this realist analysis of state behavior, I argue that states as egoistic actors have good reasons to cooperate intensively and to compromise their sovereignty by accepting the GET. By adopting the GET, governments gain a number of clear benefits, including the taxation of cross border e-commerce income that easily escapes taxation currently and increased neutrality between taxing e-commerce income and traditional income. Another theory of international cooperation, the liberal theory, places human liberty and welfare at the center of its concerns, asserting that these values drive governments to cooperate. Inter7. For a discussion of international cooperation, see generally LLOYD GRUBER, RULING THE WORLD: POWER POLITICS AND THE RISE OF SUPRANATIONAL INSTITUTIONS (2000); ROBERT KEOHANE, AFTER HEGEMONY (1984); Joseph Grieco, Anarchy and the Limits of Cooperation: A Realist Critique of the Newest Liberal Institutionalism, 42 INT’L ORG. 485, 490 (1988); Charles Lipson, International Cooperation in Economic and Security Affairs, 37 WORLD POL. 1 (1984); Kal Raustiala, The Architecture of International Cooperation: Transgovernmental Networks and the Future of International Law, 43 VA. J. INT’L L. 1, 3–5 (2002); R. Harrison Wagner, The Theory of Games and the Problem of International Cooperation, 70 AM. POL. SCI. REV. 330 (1983). 8. Tim Dunne & Brian C. Schmidt, Realism, in THE GLOBALIZATION OF WORLD POLITICS 162–64 (John Baylis & Steve Smith eds., 3d ed. 2005); MICHAEL JOSEPH SMITH, REALIST THOUGHT FROM WEBER TO KISSINGER 1–2 (1986); PAUL R. VIOTTI & MARK V. KAUPPI, INTERNATIONAL RELATIONS THEORY: REALISM, PLURALISM, GLOBALISM 32–34 (1st ed. 1987). 9. KEOHANE, supra note 7, at 6.


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national institutions are one central model of state cooperation that maximizes the welfare of its citizens.10 The modern trend of neoliberal institutionalism clearly emphasizes the importance of international regimes and systems of governance, especially in the era of globalization, as a means of overcoming anarchy and introducing order into the international field.11 As expected, I found strong support for a global e-commerce tax from the liberal perspective as a tool of governance and order in the global world.12 Additionally, an important pillar in my argument for the GET is the global interest and value of funding global public goods. I argue that funding global public goods serves governments as real politicians because they benefit from the supply of global public goods and because they have the potential to reduce direct spending and funding of global public goods. In my view, liberal politics could and would support the value of funding global public goods to handle serious global need and maximize welfare globally. In other words, the global taxation of e-commerce provides an answer to tax challenges. Spending revenues to fund global public goods addresses challenges to the GET’s political feasibility by providing good incentives for governments to participate in a global taxation scheme. In support of my theoretical and analytical arguments, I rely on a set of empirical case studies: first, recent proposals of the UN, the European Telecommunication Network Operators Association, the International Telecommunication Union (“ITU”), the G20 countries, and the European Union (“EU”) to impose global taxes; second, the growing trend towards cooperation on global tax issues, as exemplified by the struggle against harmful tax competition and the growing role of the Organization for Economic Cooperation and Development (“OECD”) in setting international tax

10. For a discussion of liberal theories, see generally Tim Dunne, Liberalism, in THE GLOBALIZATION OF WORLD POLITICS, supra note 8, at 186; Andrew Moravcsik, Taking Preferences Seriously: A Liberal Theory of International Politics, 51 INT’L ORG. 513 (1997). 11. See Steven L. Lamy, Contemporary Mainstream Approaches: NeoRealism and Neo-Liberalism, in THE GLOBALIZATION OF WORLD POLITICS, supra note 8, at 212–14. 12. Cf. DAVID HELD, DEMOCRACY AND THE GLOBAL ORDER: FROM THE MODERN STATE TO COSMOPOLITAN GOVERNANCE 267–68 (1995).

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policy and norms;13 third, the experience of existing international economic institutions such as the World Trade Organization (“WTO”) and the International Monetary Fund (“IMF”)14 and their supranational role; and fourth, the recent development of the Streamlined Sales and Use Tax Agreement in the United States, in which states agreed to harmonize their sales tax laws to cope with e-commerce tax issues.15 These cases bolster my argument for the political feasibility of a GET. Following this introduction, Part II briefly describes the GET and summarizes its normative basis. Part III addresses the state sovereignty obstacle, provides the theoretical framework for international cooperation, and analyzes the interests and values of the countries within this framework to evaluate the political feasibility of a GET. Part IV discusses the global interest and value of funding global public goods as one main argument in favor of the political feasibility of a GET. Part V presents the supporting empirical case studies, and Part VI provides brief closing remarks.

13. See generally Arthur J. Cockfield, The Rise of the OECD as Informal “World Tax Organization” Through National Responses to E-Commerce Tax Challenges, 8 YALE J.L. & TECH. 136 (2006) (discussing the OECD’s role in developing tax rules to confront e-commerce tax challenges); Diane Ring, Who Is Making International Tax Policy?: International Organizations as Power Players in a High Stakes World, 33 FORDHAM INT’L L. J. 649 (2010) (discussing the role of international organizations in tax policy). 14. See generally JOSEPH STIGLITZ, GLOBALIZATION: THE GREATEST HITS 3–22 (2002) (arguing those who vilify globalization fail to understand its benefits); Joseph Stiglitz, Globalization and the Logic of International Collective Action: Re-examining the Bretton Woods Institutions, in GOVERNING GLOBALIZATION: ISSUES AND INSTITUTIONS 240 (Deepak Nayyared ed., 2002) (arguing that IMF actions have not been effective in correcting global economic market failures); Joseph Stiglitz, Democratizing the International Monetary Fund and the World Bank: Governance and Accountability, 16 GOVERNANCE 111 (2003) (criticizing the structure of the IMF). 15. See Streamlined Sales and Use Tax Agreement, STREAMLINED SALES TAX GOVERNING BOARD, INC., http://www.streamlinedsalestax.org/index.php ?page=modules (last visited Feb. 20, 2013).


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II. THE PROPOSED GLOBAL E-COMMERCE TAX A. E-commerce Taxation Challenges and Current Responses E-commerce has several definitions,16 but for purposes of this Article, I define “e-commerce” as any commercial transaction conducted wholly or partly by using the Internet. The growth of ecommerce has been impressively expansive. In the EU, for instance, e-commerce constitutes around 8.8% of total retail sales.17 In the United States, e-commerce sales accounted for 5.2% of retail sales in 2012, estimated at $225.5 billion.18 And in China, the number of online shopping users reached approximately 161 million by December 2010,19 and the figure is projected to double by 2013.20 Worldwide, the global e-commerce turnover reached $680 billion in 2011 and is expected to grow up to $963 billion by 2013.21 One study estimated that by the year 2020, e-commerce will constitute approximately 27% of total retail sales (54% market penetration) in the United States and will exceed $1.6 trillion.22 E-commerce challenges23 the current international tax regime, which divides tax jurisdiction on cross border income be16. See RICHARD L. DOERNBERG ET AL., ELECTRONIC COMMERCE AND MULTIJURISDICTIONAL TAXATION 2, 9, 37 (2001). 17. See Online Retailing: Britain and Europe 2012, CENTRE FOR RETAIL RES., http://www.retailresearch.org/onlineretailing.php (last visited Feb. 20, 2013). 18. U.S. CENSUS BUREAU NEWS, QUARTERLY RETAIL E-COMMERCE SALES 1 (2012), available at http://www.census.gov/retail/mrts/www/data/ pdf/ec_current.pdf. 19. CHINA INTERNET NETWORK INFO. CTR., STATISTICAL REPORT ON INTERNET DEVELOPMENT IN CHINA 38–39 (2012), available at http://www1.cnnic.cn/IDR/ReportDownloads/201209/P02012090442038854449 7.pdf. 20. BOSTON CONSULTING GRP., THE WORLD’S NEXT E-COMMERCE SUPERPOWER: NAVIGATING CHINA’S UNIQUE ONLINE-SHOPPING ECOSYSTEM 6 (2011), available at http://www.bcg.com/documents/file91905.pdf. 21. BLUEMIND CORPORATE FIN. STRATEGY, E-COMMERCE MARKET 3, available at http://www.bluemind.nl/wp-content/uploads/2011/02/Report-ecommerce-market.pdf. 22. Grady Maguire, E-Commerce: A Statistical Market Analysis and Forecast of Emerging Trends, 1 CROSSINGS 41, 45 (2011), available at http://www.csustan.edu/honors/documents/journals/crossings/Maguire.pdf. 23. For comments on e-commerce taxation challenges, see generally DOERNBERG ET AL., supra note 16, at 37 (discussing how e-commerce can be

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tween the territorial source country and the personal resident country and sets methods to minimize double taxation through bilateral tax treaties based mainly on the OECD Model Tax Convention.24 The normative justifications for the current international tax regime and the sharing of the international tax pie are questionable because territorial concepts have become much less relevant in the age of e-commerce. Additionally, the technical rules governing international e-commerce face obstacles, as a wide range of tax planning strategies and tax avoidance techniques developed rapidly in the wake of e-commerce growth. All together, the lack of compatibility between the current international tax regime and the features of e-commerce presents tremendous problems in taxing global e-commerce income, resulting in serious under-taxation of cross border e-commerce income.25 implemented in business and security concerns); JINYAN LI, INTERNATIONAL TAXATION IN THE AGE OF ELECTRONIC COMMERCE: A COMPARATIVE STUDY (2003) (providing an in-depth analysis of e-commerce taxation challenges in Canada, China, Hong Kong, Japan, Singapore, and the United States); DALE PINTO, E-COMMERCE & SOURCE-BASED INCOME TAXATION (2003) (arguing that application of source-based taxation may prove problematic in some ecommerce transactions); BJÖRN WESTBERG, CROSS-BORDER TAXATION OF ECOMMERCE (2002) (discussing what arenas of e-commerce constitute a permanent establishment for taxation purposes); RICHARD A. WESTIN, INTERNATIONAL TAXATION OF ELECTRONIC COMMERCE (2000) (detailing the current problem presented by the taxation of e-commerce and how different entities are approaching the issue); Reuven S. Avi-Yonah, International Taxation of Electronic Commerce, 52 TAX L. REV. 507 (1997) (comparing different taxation systems’ treatment of e-commerce); Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, 12 VA. J.L. & TECH. 5 (2007) (discussing the links between e-commerce and cyberspace law); Charles E. McLure, Jr., Taxation of Electronic Commerce: Economic Objectives, Technological Constraints, and Tax Laws, 52 TAX L. REV. 269 (1997) (discussing how traditional notions of taxation may need to be altered to fit the e-commerce scheme). 24. See OECD Model Tax Convention on Income and on Capital—An Overview of Available Products, ORG. FOR ECON. CO-OPERATION & DEV., http://www.oecd.org/ctp/taxtreaties/oecdmtcavailableproducts.htm (last visited Feb. 20, 2013). 25. So far, I have not found a reliable empirical study that measures tax losses of cross-border e-commerce income at the international level. However, I have found studies that measure sales and use tax losses at the state level within the United States—including e-commerce. According to the Center for Busi-


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Different proposals have been discussed in literature to cope with e-commerce taxation challenges, including adaptation of the existing international tax regime in accordance with adaptations in other fields of cyberspace law;26 levying a withholding tax on e-commerce income by the demand jurisdiction where the consumers of e-commerce reside;27 fixing a formula for e-commerce taxation;28 and taxing e-commerce income by the residence country only.29 At the positive law level,30 countries have been negotiating the issues of e-commerce taxation since 1997 through the OECD, which served as a global forum for discussing global tax issues.31 Several discussion papers and guidelines resulted from these negotiations, discussing various technical issues regarding ecommerce taxation32 and enacting two main changes to the comness and Economic Research at the University of Tennessee, uncollected taxes on e-commerce totaled $8.6 billion in 2010 and are projected to increase to $11.4 billion in 2012. Donald Bruce, William F. Fox & LeAnn Luna, State and Local Government Sales Tax Revenue Losses from Electronic Commerce 3–4 (Univ. of Tenn. Working Paper, 2009), available at http://cber.utk.edu/ecomm/ ecom0409.pdf. Another study by Jeffrey Eisenach and Robert Litan criticizes these figures and reaches different estimates. Using a different methodology, they estimate that uncollected sales taxes from state and local e-commerce sales were approximately $3.9 billion in 2008, and that it will increase to $4.7 Billion in 2012. JEFFREY EISENACH & ROBERT E. LITAN, UNCOLLECTED SALES TAXES ON ELECTRONIC COMMERCE: A REALITY CHECK 4 (2010), available at http://www.amplify-pa.info/wp-content/uploads/eisenach-litan-e-commercetaxes.pdf. These figures could give a clue on tax losses at the international level on cross border e-commerce. 26. See Azam, supra note 23, at 38–74. 27. See Avi-Yonah, supra note 23, at 537–41, 548–50. 28. See LI, supra note 23, at 590. 29. See U.S. DEP’T OF THE TREASURY, OFFICE OF TAX POLICY, SELECTED TAX POLICY IMPLICATIONS OF GLOBAL ELECTRONIC COMMERCE 21–23 (1996) available at http://www.treasury.gov/resource-center/tax-policy/Documents/ internet.pdf; John K. Sweet, Comment, Formulating International Tax Laws in the Age of Electronic Commerce: The Possible Ascendancy of Residence-Based Taxation in an Era of Eroding Traditional Income Tax Principles, 146 U. PA. L. REV. 1949, 1960–72 (1998). 30. For a good resource on positive law, see Annette Nellen, ECOMMERCE TAXATION LINKS, http://www.cob.sjsu.edu/nellen_a/e-links.html (last updated April 18, 2012). 31. See Cockfield, supra note 13, at 63. 32. See FORUM ON STRATEGIC MGMT. TO THE COMM. ON FISCAL AFFAIRS, ORG. FOR ECON. CO-OPERATION & DEV., TAX ADMINISTRATION

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mentary of the OECD Model Tax Convention. First, the commentary of Article Five—which defines “permanent establishment” as the source rule of business income in the words, “a fixed place of business through which the business of an enterprise is wholly or partly carried on”—was changed to define the circumstances under which a server could be considered a permanent establishment when it plays a central role in the production of the income. 33 Second, the commentary to Article Twelve was changed to include classifications of several e-commerce transactions in different categories of income.34 Unfortunately, these technical changes did not bring about a real change in the taxation of cross border ecommerce income. Thus, the need for a different solution is apparent and becomes increasingly important as e-commerce grows rapidly.

ASPECTS OF ELECTRONIC COMMERCE: RESPONDING TO THE CHALLENGES AND OPPORTUNITIES 4–8 (2001), available at http://www.oecd.org/dataoecd/ 46/44/1923272.pdf; OECD COMM. ON FISCAL AFFAIRS, CLARIFICATION ON THE APPLICATION OF THE PERMANENT ESTABLISHMENT DEFINITION IN ECOMMERCE: CHANGES TO THE COMMENTARY ON THE MODEL TAX CONVENTION ON ARTICLE 5, at 2–3 (2000) [hereinafter OECD COMM. ON FISCAL AFFAIRS, CLARIFICATION], available at http://www.oecd.org/dataoecd/46/32/1923380.pdf; TECHNICAL ADVISORY GRP. ON MONITORING THE APPLICATION OF EXISTING TREATY NORMS FOR THE TAXATION OF BUS. PROFITS, ORG. FOR ECON. COOPERATION & DEV., ATTRIBUTION OF PROFIT TO A PERMANENT ESTABLISHMENT INVOLVED IN ELECTRONIC COMMERCE TRANSACTIONS 5 (2001), available at http://www.oecd.org/dataoecd/46/25/1923312.pdf; TECHNICAL ADVISORY GRP. ON MONITORING THE APPLICATION OF EXISTING TREATY NORMS FOR THE TAXATION OF BUS. PROFITS, ORG. FOR ECON. CO-OPERATION & DEV., THE IMPACT OF THE COMMUNICATIONS REVOLUTION ON THE APPLICATION OF “PLACE OF EFFECTIVE MANAGEMENT” AS A TIE BREAKER RULE 3–9 (2001), available at http://www.oecd.org/dataoecd/46/27/1923328.pdf; TECHNICAL ADVISORY GRP. ON MONITORING THE APPLICATION OF EXISTING TREATY NORMS FOR THE TAXATION OF BUS. PROFITS, ORG. FOR ECON. CO-OPERATION & DEV., TAX TREATY CHARACTERISATION ISSUES ARISING FROM E-COMMERCE 3– 5 (2001) [hereinafter TECHNICAL ADVISORY GRP., TAX TREATY CHARACTERISATION], available at http://www.oecd.org/dataoecd/46/34/ 1923396.pdf. 33. OECD COMM. ON FISCAL AFFAIRS, CLARIFICATION, supra note 32, at 4–7. 34. TECHNICAL ADVISORY GRP., TAX TREATY CHARACTERISATION, supra note 32, at 17–32.


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B. The Details of the Global E-commerce Tax As described in my recent article, Global Taxation of Cross Border E-commerce Income, the Global E-commerce Tax is a 15% flat tax on net income from cross border e-commerce transaction without any distinction between the categories of income.35 The GET will be levied and run by the Global Tax Fund (“GTF”) as a supranational institution to be established by countries through treaty. According to my suggestion, litigation and legal enforcement measures in relation to the GET will be kept within respective nation states for reasons of efficiency and sovereignty. Based on the literature on rational design of international institutions,36 I presented a sketch design of the GTF to ensure its accountability, reliability, and transparency. According to my proposed design, the members of the GTF will be countries, with some limited participation of non-governmental organizations (“NGOs”). The scope of the GTF at this stage will be limited to the collection and spending of the GET. Administratively, the GTF will be a central organization that runs all aspects of the GET, excluding legal litigation and legal enforcement. A Board of Governors will make high-level policy and decisions, while an Executive Board manages the system on a daily basis—helped by administration and staff and supervised by a supervising board. In my opinion, the GTF should elect its key officials on a professional basis rather than a representative basis. In making decisions and voting procedures at the GTF, I proposed to use the weighted voting rule according to a quota system, which relies on the country’s share of the global e-commerce market taking into account both production and consumption of e-commerce. Finally, I suggested the inclusion of an escape clause in the design of the GTF as a measure to increase countries’ participation in the project. Fiscally, I proposed spending GET revenues to fund global public goods that are underprovided without global government or governance. This suggestion is a central pillar in my proposed tax 35. 36.

Azam, supra note 4, at 665. See generally THE RATIONAL DESIGN OF INTERNATIONAL INSTITUTIONS (Barbara Koremenos et al. eds., 2001) (discussing the rational and optimal design of international institutions); THE THEORY OF INSTITUTIONAL DESIGN (Robert E. Goodin ed., 1996) (discussing institutional design and underlying theories).

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regime, and it plays a critical role in making the GET politically feasible, as will be discussed in details in Part IV of this Article. C. The Normative Basis for the Global E-commerce Tax From a tax policy point of view, I contended in my recent article that the GET to fund global public goods is a “good tax” based on several arguments.37 The legitimacy argument contends that the GET is legitimate because global taxation on clearly global income seems to better reflect the consent of the governed and the affiliation of the online community. The certainty argument contends that the GET better handles e-commerce taxation challenges and ensures certain taxation on cross border e-commerce income. I further argued that the GET is efficient in two senses. First, it promotes economic efficiency because it simultaneously achieves both “capital export neutrality” and “capital import neutrality,”38 enabling neutral investments both worldwide and locally in the most efficient locations and by the most efficient investors. Second, it promotes administrative efficiency because it is intuitively more efficient to run one global e-commerce tax regime with one flat rate and without different categories of income than it is to run the existing international tax regime, which faces challenges in the era of global e-commerce. In addition, I made a fairness argument that the GET better advances international equity because it levies global tax on clearly global income and spends the tax revenues globally, instead of dividing the tax base or revenues among different countries without any clear, reasonable, or accepted formula of sharing. More than that, the GET advances interindividual equity because it reduces the existing gap between non e-commerce income, which is fully taxed, and e-commerce income, which could easily escape taxation altogether. Finally, I made a finance-based argument, asserting that the tax is justified because it provides resources to satisfy the serious global need for global public goods. Just as state taxation evolved to finance state public goods, the GET will evolve to finance global public goods.39

37. 38. 39.

See Azam, supra note 4, at 675, 684. Id. at 672. Id. at 685.


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III. THEORIES OF INTERNATIONAL COOPERATION AND THE POLITICAL FEASIBILITY OF A GLOBAL E-COMMERCE TAX It is not difficult to expect that the main argument against the GET will be that it is an unrealistic, idealistic, and optimistic tax that will fail to generate positive discussion, much less implementation. I wish to refute this typical argument. I think that a GET for funding global public goods is indeed a project of formidable dimensions, but it is nonetheless a viable one. A. State Sovereignty Concerns If we understand sovereignty in its traditional meaning as full and exclusive power of the state within its borders and are concerned with upholding this notion of sovereignty, then a GET is clearly not feasible. However, if we view sovereignty in light of modern developments, the discussion of the GET’s political feasibility could continue more deeply. For this purpose, I first address state sovereignty concerns to make it one consideration among others, rather than a total political ban to a GET. First, the meaning of sovereignty has changed in recent years to meet new developments in world politics.40 One perspective of sovereignty argues that the new sovereignty is fulfilled through participation in the decision-making process by international organizations.41 According to this view, the proposed GET balances sovereignty concerns appropriately, because the establishment of the model is totally negotiable and requires the consent of the states, and because the main decisions on the tax and the spending of revenues remain with the states themselves as members of the GTF—an international institution. Another view transforms sovereignty to mean “global sovereignty.”42 Importantly, the GET does not infringe upon this meaning of sovereignty. To the contrary, it strengthens sovereignty in its global sense. Second, the proposed tax aims to stop the erosion of the tax base and accordingly serves sovereignty. In my view, in compari40. David Held, Law of States, Law of Peoples: Three Models of Sovereignty, 8 LEGAL THEORY 1, 2 (2002); Paul Berman, The Globalization of Jurisdiction, 151 U. PA. L. REV. 311, 365 (2002); Jayasuriya, supra note 6, at 431. 41. CHAYES & CHAYES, supra note 5, at 27; see also Slaughter, supra note 5, at 285–87. 42. Jayasuriya, supra note 6, at 431–33.

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son to the current tax regime in which individual nation states cannot tax cross border e-commerce income, the proposed model—in which nation states agree to cooperate within a global tax fund that enables full taxation of cross border e-commerce income and the spending of revenues gained in the service of a common interest— actually strengthens sovereignty rather than weakens it. Given a world in which largely irrevocable changes in the global economy have destroyed the ability of states to prosper under autarchy and in which states must achieve social objectives to be legitimate, international institutions now provide the primary means for states to prosper and achieve social objectives. Consequently, they also provide the primary means by which states may reassert or express their sovereignty. Institutions actively aid states in this reassertion of sovereignty. This is a fundamentally transformational argument: it rests on the claim that both the international system and state-society relations were transformed by events of the twentieth century. As a result, the nature of sovereignty itself is transformed.43 Third, public finance concerns have transformed political order in recent years.44 The advent of global e-commerce brought new economic pressures in its wake, destroyed the ability of the state to tax e-commerce, and depleted its funds available for public spending—all of which stimulate political change. In sum, sovereignty matters, but interests and values matter, too—an argument to which I turn in the following section. B. Realism and the Political Feasibility of a Global E-commerce Tax 1. The Theory Political realism assumes that states are perpetually engaged in an international struggle for survival. States use power to achieve their interests in the international field through self-help in 43. Kal Raustiala, Rethinking the Sovereignty Debate in International Economic Law, 6 J. INT’L ECON. L. 841, 860 (2003). 44. See Roland Paris, The Globalization of Taxation? Electronic Commerce and the Transformation of the State, 47 INT’L STUD. Q. 153–55 (2003); Gunther G. Schultze & Heinrich W. Ursprung, Globalization of the Economy and the Nation State, 22 WORLD ECON. 295, 297–99 (1999).


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an anarchical world that lacks normative values.45 Neo-realism attributes this state of war in the international system to the structure of the system itself, rather than to its inherent nature. 46 The theory posits that state power includes not only military power, but also other sources of power, such as economic and political power.47 Upon these assumptions of realism, the classical realist argument adopted a mercantilist tradition that did not recognize the potential for international cooperation.48 In the words of Joseph Grieco: For realists, international anarchy fosters competition and conflict among states and inhibits their willingness to cooperate even when they share common interests. Realist theory also argues that international institutions are unable to mitigate anarchy’s constraining effects on inter-state cooperation. Realism, then, presents a pessimistic analysis of the prospects for international cooperation and of the capabilities of international institutions.49 However, international cooperation does exist, and institutions such as the International Monetary Fund and the World Bank have indeed evolved, seemingly in defiance of the realists’ pessimistic prognosis. Enlisting the Hegemonic Stability Theory, the realists argue that these institutions emerged as institutions to serve the interests of the United States as a hegemonic power after

45. See SMITH, supra note 8, at 24–27; VIOTTI & KAUPPI, supra note 8, at 32–34; Dunne & Shmidt, supra note 8, at 84–99; Anne-Marie Slaughter, Liberal International Relations Theory and International Economic Law, 10 AM. U. J. INT’L L. & POL’Y 717, 721–24 (1995). 46. See Lamy, supra note 11, at 114–29; see generally KENNETH WALTZ, THEORY OF INTERNATIONAL POLITICS (1979) (creating neo-realism, which the author refers to as structural realism). 47. See Lamy, supra note 11, at 114–29; see generally WALTZ, supra note 46 (creating neo-realism, which the author refers to as structural realism). 48. See JAN KLABBERS, AN INTRODUCTION TO INTERNATIONAL INSTITUTIONAL LAW 29–30 (2002). 49. Grieco, supra note 7, at 485.

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World War II.50 But a different and more convincing reasoning was later furnished by Robert Keohane in his fascinating book, After Hegmony.51 Keohane argues that states cooperate when cooperation serves their interests and maximizes their benefits in comparison to non-cooperation.52 In this context, international institutions play a vital role in assuring maximization of the benefits. As the author stated: [C]ooperation can under some conditions develop on the basis of complementary interests, and that institutions, broadly defined, affect the patterns of cooperation that emerge. ... Even egoistic actors may agree to accept obligations that preclude making calculations about advantage in particular situations, if they believe that doing so will have better consequences in the long run than failure to accept any rules or acceptance of any other politically feasible set of rules.53

50. See Robert Keohane, The Theory of Hegemonic Stability and Changes in International Economic Regimes, in CHANGE IN THE INTERNATIONAL SYSTEM 131, 131–32, 143–47 (Ole R. Holsti et al. eds., 1980); Stephan Haggard & Beth A. Simmons, Theories of International Regimes, 41 INT’L ORG. 491, 500–04 (1987). 51. KEOHANE, supra note 7. 52. Id. at 243–47. For examples of the game theory analysis of international cooperation, see generally Robert Jervis, Realism, Game Theory, and Cooperation, 40 WORLD POL. 317 (1988); Amir Licht, Games Commissions Play: 2x2 Games of International Securities Regulation, 24 YALE J. INT’L L. 61 (1999); Richard E. Quandt, On the Use of Game Models in Theories of International Relations, 14 WORLD POL. 69 (1961); Duncan Snidal, The Game Theory of International Politics, in COOPERATION UNDER ANARCHY 25 (Kenneth A. Oye ed., 1986); Glenn H. Snyder, “Prisoner’s Dilemma” and “Chicken” Models in International Politics, 15 INT’L STUD. Q. 66 (1971); James K. Sebenius, Challenging Conventional Explanations of International Cooperation: Negotiation Analysis and the Case of Epistemic Communities, 46 INT’L ORG. 323 (1992); R. Harrison Wagner, supra note 7. 53. KEOHANE, supra note 7, at 9, 13.


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2. State Interests and Their Achievement In response to the realist perspective, my argument is that states, as egoistic actors, have good reasons to cooperate deeply and intensively, and even to compromise their sovereignty by accepting the GET as a model that advances state interests. In the current state of affairs, states face the classic “Prisoner’s Dilemma,” in which their optimal interest is to tax e-commerce income; however, states decline to do it because if one state taxes while the neighboring state does not, the e-commerce will naturally migrate to the neighboring state, and the first state will lose more than it would have lost by de-facto non-taxation. The outcome of this dilemma is non-taxation of cross border e-commerce income. I am aware of the counter-argument—that a similar dilemma exists in the case of tax shelters and tax competition in general, but it did not lead to global tax. While true, the dilemma in the case of ecommerce is much more severe for several reasons. First, the mobility of e-commerce business is much higher than in traditional businesses. Second, the global and virtual features of e-commerce business make it very difficult for any one state to tax e-commerce income. Third, any taxation by one country has spillover effects on the other countries. Taken all together, the severity of the dilemma in the case of e-commerce taxation provides better reasons for increased international cooperation. The cooperative strategy is much more beneficial to nation states than the current state of affairs. By cooperating, governments are not forced to disclaim tax by the Prisoner’s Dilemma. Rather, by adopting the GET, these governments improve the possibility of imposing taxes on cross border e-commerce income and gain significant benefits. These benefits include the taxation of cross border e-commerce income that was not actually taxed before, more neutrality between e-commerce income and traditional income, and benefits from funding global public goods (as will be discussed in Part IV). In view of the interests and stakes of the world’s leading countries, the imposition of a GET would likely be opposed by the United States as a result of the influence of its e-commerce corporations, which dominate the global e-commerce market. These American corporations pay taxes to the United States government on their cross border e-commerce income, typically employing tax planning strategies and subsidiaries in low tax jurisdictions to re-

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duce their tax liability.54 The global e-commerce tax might increase their tax burden, and they could lobby the United States government and politicians to oppose the tax. Their greater concern might be the tax’s negative effect on their business growth. To counter these arguments, it is notable that these corporations must spend significant resources on tax planning to reduce their tax liability. Additionally, they are still exposed to tax risk because source countries tax these corporations for their cross border sales to customers within their territories. This tax exposure is very high, and averting this risk through the payment of global ecommerce tax may be a wiser strategy. Therefore, it is not clear that American e-commerce corporations would necessarily urge their government to oppose the GET. Further, other stakeholders inside the United States might push their government to accept the GET. Global infrastructure corporations could benefit from increased spending on global public goods and support the model. Environmental groups have a clear interest in increasing the global public goods supply and would likely lobby the American government. Human rights organizations are also an important stakeholder that arguably would support the GET to fund global public goods. In sum, the situation in the United States is complex, and it is difficult to anticipate the American position. But, we can at least say that it is by no means clear that the United States would strongly oppose the model. The picture seems clearer in Europe. European ecommerce corporations sell mainly to Europeans and have less global reach than American e-commerce corporations. In addition, Europeans consume cross border e-commerce from global corporations more than Americans. Accordingly, Europe has a greater interest in accepting the GET. Moreover, the Europeans—both countries and individual citizens—care greatly about global justice and global public goods, with powerful activists that would urge governments to join an international treaty. Support can also be expected from developing countries, as they would gain a share of the international tax pie on cross border e-commerce income and would also benefit from joining the GTF and spending the tax revenues to fund global public goods. 54. See Edward D. Kleinbard, Stateless Income, 11 FLA. TAX REV. 699, 701–03 (2011).


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C. Liberalism and the Political Feasibility of Global E-commerce Tax 1. The Theory The liberal political theory places great importance on human liberty and sees the role of states as the promoters of this liberty. Indeed, welfare is one of the foundations for the promotion of human liberty, and liberalists posit that states ought to work toward the maximization of welfare.55 In their interaction in the international system, according to liberal theory, states are governed and motivated by values and international public law, despite the existing anarchy in the international system. Liberalists recognize the existence of anarchy in the international arena but view it negatively and attempt to find solutions to its existence. These solutions include liberal internationalism, which argues that international law is the way to handle anarchy;56 liberal institutionalism, which argues that international regimes and institutions are the means of overcoming anarchy;57 and liberal idealism, which argues for the establishment of global government to abolish anarchy altogether.58 Modern liberalism reformulated liberalism as a theory rather than an ideology. The core assumptions of this reformulated liberalism are as follows:59 “the fundamental actors in internation55. Cf. Howard F. Chang, A Liberal Theory of Social Welfare: Fairness, Utility, and the Pareto Principle, 110 YALE L.J. 173, 177–78 (2000). 56. See DAVID LONG, TOWARDS A NEW LIBERAL INTERNATIONALISM: THE INTERNATIONAL THEORY OF J.A. HOBSON 54 (1996); Anne-Marie Burley, Law Among Liberal States: Liberal Internationalism and the Act of State Doctrine, 92 COLUM. L. REV. 1907, 1909–10 (1992); Stanley Hoffman, The Crisis of Liberal Internationalism, 98 FOREIGN POL’Y 159, 164–67 (1995); Anthony McGrew, Liberal Internationalism: Between Realism and Cosmopolitanism, in GOVERNING GLOBALIZATION: POWER, AUTHORITY AND GLOBAL GOVERNANCE 267, 267–68 (David Held & Anthony McGrew eds., 2002). 57. See Robert Keohane & Lisa Martin, The Promise of Institutionalist Theory, 20 INT’L SECURITY, Summer 1995, at 3, 9, 46–51. 58. See Andrias Osiander, Rereading Early Twentieth Century IR Theory: Idealism Revisited, 42 INT’L STUD. Q. 409, 425 (1998); Brent J. Steele, LiberalIdealism: A Constructivist Critique, 9 INT’L STUD. REV. 23–52 (2007). 59. Andrew Moravcsik, Taking Preferences Seriously: A Liberal Theory of International Politics, 51 INT’L ORG. 513, 516–17 (1997).

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al politics are individuals and private groups, who are on the average rational and risk-averse and who organize . . . collective action to promote different[] interests under constraints imposed by material scarcity, conflicting values, and [various] societal influence[s]”; “[s]tates represent . . . some subset of domestic society, on the basis of whose interests state officials . . . prefer[,] and [states] act purposively in world politics”;60 and “[t]he configuration of interdependent state preferences determines state behavior.”61 Neo-liberal internationalism emphasizes the importance of international law in containing and restraining anarchy and in establishing a normative order in the international field. It also places importance on international regimes and institutions, especially in the era of globalization, as a tool for countering anarchy and for creating orderly institutions in the international field. Institutions serve as “the mediator and the means for achieving cooperation among actors in the system.”62 As advocates of democracy and fairness in international relations, neo-liberals view institutions as the best tool for confronting the challenges of globalization.63 As David Held expressed: [A] political basis exists upon which to build a more systematic democratic future. This future has to be conceived in cosmopolitan terms—a new institutional complex with global scope, given shape and form by reference to a basic democratic law, which takes on the character of government to the extent and only to the extent, that it promulgates, implements and enforces this law. But however its institutions are precisely envisaged, it is a future built upon the recognition that democracy within a single community and democratic relations among communities are deeply interconnected, and that new

60. 61. 62. 63.

Id. at 518. Id. at 520. Lamy, supra note 11, at 213. See HELD, supra note 12, at 237–38.


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organizational and legal mechanisms must be established if democracy is to survive and prosper.64 2. State Values and Their Fulfillment Under the current system, countries are faced with significant e-commerce taxation challenges and with the loss of ecommerce tax revenues. It is well settled that no one country can independently tax cross border e-commerce income efficiently and fairly, and international cooperation is needed to tax global ecommerce income to gain tax revenues. The GET model requires a high level of cooperation between nations because a lesser commitment to cooperation would not suffice for the purpose of taxing global e-commerce income. Given that the GET model includes spending tax revenues to fund global public goods, the liberal theory would support it as a model that advances human liberty and welfare on a global basis, rather than for one particular county. The GET will serve the interests of all participating countries and will benefit humanity as a whole, with no change in the relative power between countries. Thus, liberalists can be expected to support the model.65 Individuals, private groups, and various domestic actors would likely urge their liberal governments to commit to this fair and efficient system of 64. Id.; see also ROBERT O. KEOHANE & JOSEPH S. NYE, POWER AND INTERDEPENDENCE 35 (1st ed., Little, Brown, & Co. 1977); Amitai Etzioni, On the Need for More Transnational Capacity, 56 FLA. L. REV. 921, 921 (2004); Robert O. Keohane, Governance in a Partially Globalized World, 95 AM. POL. SCI. REV. 1, 5 (2001); Jessica T. Mathews, Power Shift, 76 FOREIGN AFF. 50, 61–63 (1997). 65. I find support for my argument that the GET is positively feasible not only in the current state of world politics, but also in the writing of other scholars and institutions that have proposed to establish an international tax organization. See VITO TANZI, TAXATION IN AN INTEGRATING WORLD 140 (1995); Frances Horner, Do We Need an International Tax Organization?, 24 TAX NOTES INT’L 179 (2001); Robin Woellner & Lee Burns, International Information Flows—The Tax Implications, 6 AUSTRALIAN TAX F. 143, 200 (1989). Importantly, my proposed GET is limited to imposing a tax upon global ecommerce income, rather than imposing a general international tax. However, in its limited scope, the GET I propose has full and unique authority on taxing global e-commerce income and spending the tax revenues to fund global public goods.

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global taxation on global e-commerce income for the funding of global public goods. Among these groups, we could count environmentalists, human rights activists, global justice movements, and corporations from different industries including the ecommerce industry. Commentators and activists who support distributive justice at the international level and the use of tax policy to advance development and human values would clearly support the GET. This tax regime gives partial benefit to developing countries that contribute customers to the e-commerce market by giving them an indirect share of the tax pie. It also transfers some wealth from developing countries—where e-commerce corporations reside and currently pay taxes—to developing countries and the world as one unit. This regime contributes to the advancement of the economies of developing countries and enhances their development. It also advances several other human values that will be welcomed from a liberal point of view. D. Summary In sum, the world has changed dramatically in the era of globalization and e-commerce. Countries must accept these fundamental changes to retain their relevance in taxing global income and their ability to fund global public goods. On the subject of the rise of e-commerce in the age of globalization, Roland Paris aptly wrote: The rise of electronic commerce, I have argued, will likely spur the movement toward the globalization of taxation––a development that would represent a historic shift in the balance of political authority between territorial states and the international state. Apart from national defense, no activity is more central to the idea of the modern state than that of taxation. Scholars from the 16th century onward have treated taxation as a special prerogative and occupation of the state. Jean Bodin, who is widely regarded as the first theorist of the modern state, described taxation as one of the “unique attributes of sovereign power.” In the words of sociologist Fritz Karl Mann, “taxation is the inseparable twin of the modern state.” Devolution of de facto authority


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over taxation from the exclusive domain of the territorial state to a transnational tax regime would be an important substantive and symbolic development in the gradual internationalization of the state. Political opposition to the globalization of taxation is, as we have noted, certainly possible. In the end, however, changes in the technology, mobility, and scope of global commerce will likely leave states with little choice but to increase the coordination and harmonization of their respective tax policies. The nonterritorial character of electronic commerce poses a particular challenge to existing systems of taxation and to the minimalist international tax regime whose principal features were established at the end of World War I—a challenge that will soon have to be addressed. Splendid isolation is rapidly becoming an untenable stance for states in the realm of taxation. And to the extent that de facto taxing authority migrates upward from the state to a new global tax arrangement, the emerging international state will have gained an important additional function. Schumpeter’s thesis—that material conditions, including changes in technology and economics, influence the evolution of political forms—seems even more relevant today than it was in 1918.66 IV. THE GLOBAL INTEREST AND VALUE: FUNDING GLOBAL PUBLIC GOODS As the previous sections reveal, the use of the global ecommerce tax revenues to fund global public goods plays a critical role in my argument for the political feasibility of the GET. I have touched on this point throughout this Article in different contexts, and this section aims to deepen the discussion and strengthen the argument that countries have a global interest in financing global public goods, which could lead them to adopt the GET. 66.

Paris, supra note 44, at 177.

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A. The Definition of Global Public Goods Classical economic literature defines public goods as goods that satisfy two economic criteria.67 First, they are non-rival, in the sense that consumption by one consumer does not reduce the goods available for consumption by other consumers.68 Second, they are non-excludable in the sense that it is impossible to exclude a free-rider from consuming goods without payment.69 The UN Development Program builds on this economic definition as a basis but adds two dimensions to the definition. It distinguishes between potential and de facto public goods. De facto public goods are those that meet the economic criteria but also satisfy a political criterion—namely the need for a political decision to consider the goods as public and supply them in that capacity. It also adapts the definition to the global scene, defining global public goods as public goods with benefits that extend to all countries, people, and generations.70 We could distinguish between different types of public goods according to the level of their rival and exclusive features. Pure public good is totally non-rival and non-excludable, while impure public good is partly rival, partly excludable, or both.71 We 67. For an overview of literature on public goods, see NICOLA ACOCELLA, THE FOUNDATIONS OF ECONOMIC POLICY: VALUES AND TECHNIQUES 106–11 (1998); RICHARD CORNES & TODD SANDLER, THE THEORY OF EXTERNALITIES, PUBLIC GOODS, AND CLUB GOODS 113–31 (1st ed. 1986); JOHN CULLIS & PHILIP JONES, PUBLIC FINANCE AND PUBLIC CHOICE 45– 48 (2d ed. 1998); RICHARD A. MUSGRAVE & PEGGY B. MUSGRAVE, PUBLIC FINANCE IN THEORY AND PRACTICE 49–53 (2d ed. 1976); BERNARD SALANIÉ, THE MICROECONOMICS OF MARKET FAILURES 69–78 (2000); PAUL A. SAMUELSON & WILLIAM D. NORDHAUS, MICROECONOMICS 32 (15th ed. 1995); JOSEPH E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR 128–36 (3d ed. 2000); see also John G. Head & Carl S. Shoup, Public Goods, Private Goods, and Ambiguous Goods, 79 ECON. J. 567, 568–69 (1969) (explaining that goods can be classified as public or private). 68. See ACOCELLA, supra note 67, at 106–07. 69. See id. 70. See PROVIDING GLOBAL PUBLIC GOODS: MANAGING GLOBALIZATION 78–80 (Inge Kaul et al. eds., Oxford Univ. Press 2003); see also Jean Coussy, The Adventures of a Concept: Is Neo-Classical Theory Suitable for Defining Global Public Goods?, 12 REV. INT’L POL. ECON. 177, 182 (2005). 71. STIGLITZ, supra note 67, at 128, 135.


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can also distinguish between different types of global public goods according to the global reach feature. Global natural commons— such as the atmosphere or the high seas—are typically rival and nonexclusive.72 Global man-made commons—such as global networks, international regimes, norms and knowledge—are often non-rival and difficult to exclude.73 And, global policy outcomes or conditions—such as global peace, financial stability, and environmental sustainability—have indivisible benefits that form the core of interdependencies among countries and people, tending to be non-excludable and de facto inclusive and public. B. The Current Regime for the Provision of Global Public Goods According to the traditional theory of public goods, these goods could and should be provided by the state because private entities cannot receive payment for providing non-excludable goods and, therefore, will decline to sell them.74 The free-rider problem inherent in public goods precludes the possibility of market forces generating the provision of public goods, thus necessitating their provision by a public authority.75 At the global level, the provision of global public goods faces additional difficulties. In the global scenario, there is no one nation state capable of providing all public goods. Thus, the freerider problem at the global level is actually a free riding of states. No one country is willing to pay for a global public good that benefits other countries that do not pay for it, thus causing provision problems.76 Pedro Conceição differentiates between two main

72. Cf. CULLIS & JONES, supra note 67, at 47–48. 73. See STIGLITZ, supra note 67, at 130–31. 74. The classical example of a pure public good is the outdoor circus. No market could supply this good for payment, and the public authority supplies and finances it through taxes. P ROVIDING GLOBAL PUBLIC GOODS, supra note 70, at 113. 75. See Paul A. Samuelson, Diagrammatic Exposition of a Theory of Public Expenditure, 37 REV. ECON. & STAT. 350, 356 (1955); Paul A. Samuelson, The Pure Theory of Public Expenditure, 36 REV. ECON. & STAT. 387, 389 (1954); J. E. Stiglitz & P. Dasgupta, Differential Taxation, Public Goods, and Economic Efficiency, 38 REV. ECON. STUD. 151, 157–59 (1971). 76. See Agnar Sandmo, International Aspects of Public Goods Provision, in PROVIDING GLOBAL PUBLIC GOODS, supra note 70, at 112, 124.

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provision problems, underuse and under-provision.77 An underused global public good exists where certain players, countries, or people are unable to consume it, either in full or in part. Underuse usually results from limited accessibility or the nature of the good that limits its consumption. An underprovided good, on the other hand, either does not exist or is not fully or adequately provided. Under-provision is usually related to the following phenomena: undersupply, in which the good is not provided or is provided partially; mal-provision, in the sense that the global public good is provided in a distorted way that generates biases against groups of countries; and overuse, in which excessive use of global public good causes its under-provision.78 For example, the overuse of the atmosphere causes pollution, which results in the underprovision of the public good of climate stability.79 In terms of these criteria, it is clear that global public goods are underprovided. This under-provision status was examined in several studies that analyze the provision profiles of several global public goods, providing a clearer picture of the provision gap of each global public good and the cost of corrective actions to reduce the gap.80 Conceição summarized some of these studies and presented them as interesting appendices to his work.81 In the present context, the findings concerning International Financial Stability provide helpful background. International financial stability is under-provided,82 considering the number of financial crises since the 1970s and the recent global financial crisis. “Between 1975 and 1998 there were 158 currency crises, 54 banking crises, and 32 twin (currency and banking crises[,]” including the East Asian Financial Crisis (1997 to 1998), the Russian Federation’s 1998 debt crisis, and Brazil’s 1999 currency crisis.83 The cost of financial crises in the years 77. See Pedro Conceição, Assessing the Provision Status of Global Public Goods, in PROVIDING GLOBAL PUBLIC GOODS, supra note 70, at 152, 154. 78. See id. at 154–56. 79. See id. at 156. 80. See id. 81. See id. at 152, 162. 82. See INT’L MONETARY FUND, GLOBAL FINANCIAL STABILITY REPORT, DURABLE FINANCIAL STABILITY: GETTING THERE FROM HERE 1 (2011), available at http://www.imf.org/external/pubs/ft/gfsr/2011/01/pdf/text.pdf. 83. Conceição, supra note 77, at 163.


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from 1975 to 1998 totaled 8.2 trillion dollars, including a 15.1% drop in Indonesia GDP per capita, 6.7% in the Republic of Korea, 9.2% in Malaysia, and 10.3% in Thailand, and a 30% plunge of Russian Federation GDP.84 However, the recent global financial crisis in 200785 and the Euro financial crisis in 2010 represent the painful and unfinished saga of under-provision of international financial stability. The 2007 global financial crisis caused a decline of 8% (16 trillion U.S. dollars) in global financial assets.86 The damage was extensive, with financial assets declining in nearly every country and the world’s equities depreciating by almost 50% ($28 trillion in real terms).87 The 2008 stock market crash was the most severe since the Great Depression. Similarly, the European crisis from 2008 to 2010 resulted in a severe decline in GDP in 2009, and the GDP of 27 countries fell at an average rate of 4.3%.88 In 2009, Ireland’s GDP fell by 7.6%, Lithuania’s by 14.7%, and Finland’s by 8.2%.89 The cost of corrective actions for better provision of international financial stability is significant. Countries have adopted various measures to close the gap and provide international financial stability. For instance, the IMF was established after World War II to promote international monetary cooperation and ex84. See id. at 163. 85. For a discussion on the global financial crisis, see generally Daron Acemoglu, The Crisis of 2008: Structural Lessons for and from Economics, 28 CEPR POL’Y INSIGHT 1 (2009), available at http://www.cepr.org/pubs/ PolicyInsights/PolicyInsight28.pdf; F. Gerard Adams, The World Financial Crisis: New Economy, Globalisation and Old-Fashioned Philosophy, 10 WORLD ECON. 45 (2009); Alan Greenspan, The Crisis, BROOKINGS PAPERS ECON. ACTIVITY 201 (2010); Friedrich Schneider & Gebhard Kirchgässner, Commentary, Financial and World Economic Crisis: What Did Economists Contribute? 140 PUBLIC CHOICE 319 (2009); David Colander et al., The Financial Crisis and the Systemic Failure of Academic Economics (Univ. of Copenhagen Dep’t of Econ., Discussion Paper No. 09-03, 2009). 86. CHARLES ROXBURGH ET AL., MCKINSEY GLOBAL INST., GLOBAL CAPITAL MARKETS: ENTERING A NEW ERA 8 (2009), available at http://www.eclac.org/noticias/paginas/3/35143/Global-capital-markets.pdf. 87. Id. at 10. 88. Id. at 9–10. 89. EUR. COMM’N, EUROSTAT YEARBOOK 2011, at 47 (2011), available at http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CD-11-001/EN/KSCD-11-001-EN.PDF.

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change rate stability, which partially contributed to international financial stability.90 In 1999, G7 finance ministers and central bank governors took a more important measure in founding the Financial Stability Forum, which was replaced in 2009 by the Financial Stability Board (“FSB”) with substantial changes in response to the global financial crisis.91 The FSB is an international institution aimed specifically at improving e-international financial stability.92 The FSB was “established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies.”93 Members of the FSB have agreed to limit their sovereignty by cooperating to improve international financial stability.94 They gave a limited mandate to the FSB to improve the provision of international financial stability as a global public good.95 Similarly, at the EU level, following the European finan90. What We Do, INT’L MONETARY FUND, http://www.imf.org/ external/about/whatwedo.htm (last visited Feb. 27, 2013). 91. History, FIN. STABILITY BOARD, http://www.financialstability board.org/about/history.htm (last visited Feb. 27, 2013). 92. Id. 93. Overview, FIN. STABILITY BOARD, http://www.financialstability board.org/about/overview.htm. 94. See Mandate, FIN. STABILITY BOARD, http://www.financialstability board.org/about/mandate.htm (last visited Feb. 27, 2013) (“[M]embers of the FSB commit to pursue the maintenance of financial stability, maintain the openness and transparency of the financial sector, implement international financial standards (including the 12 key International Standards and Codes), and agree to undergo periodic peer reviews, using among other evidence IMF/World Bank public Financial Sector Assessment Program reports.”); see also Key Standards for Sound Financial Systems, FIN. STABILITY BOARD, http://www.fsforum.org/cos/key_standards.htm (last visited Feb. 27, 2013) (providing a list of standards to produce “sound financial systems”); Overview, supra note 93. 95. See Mandate, supra note 94. The mandate of the FSB is to: [A]ssess vulnerabilities affecting the financial system and identify and oversee action needed to address them[;] promote co-ordination and information exchange among authorities responsible for financial stability[;] monitor and advise on market developments and their implications for regulatory policy[;] advise on and monitor best practice in meeting regulatory standards[;] undertake joint strategic reviews of the policy de-


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cial crisis of 2010, the European Financial Stability Facility (“EFSF”) was founded (by a decision from May 9, 2010) to preserve financial stability in Europe by providing financial assistance to European states in economic difficulty.96 C. The Current Financing of Global Public Goods At the national level, taxes are the main tool for purposes of allocating and providing resources for national public goods. The nation state coerces its residents or citizens to pay the taxes to fund public goods. In fact, one of the main reasons to establish a nation state is to supply public goods funded by taxes. Taxation also plays a role in distribution, which promotes fairness and social justice. However, at the global level, there is no world government to coerce countries to pay taxes, and the resources needed for all global public goods are enormous. Usually, countries have no incentive to finance global public goods and have a variety of conflicting interests with respect to the spectrum of global public goods.97 Nevertheless, as things stand, national finance is the principal tool for allocating resources for global public goods. But this happens at the national level rather than at an international level.98 Almost every country spends locally in creating and providing global public goods, among them the control of communicable velopment work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps[;] set guidelines for and support the establishment of supervisory colleges[;] manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms[; and] collaborate with the IMF to conduct Early Warning Exercises. Id. 96. About EFSF, EUR. FIN. STABILITY FACILITY, http://www.efsf.europa.eu/about/index.htm (last visited Feb. 27, 2013). The header of its homepage states: “Our mandate is to safeguard financial stability in the Euro Zone by raising funds in capital markets to finance loans for euro area Member States.” Id. 97. See Scott Barrett, Creating Incentives for Cooperation: Strategic Choices, in PROVIDING GLOBAL PUBLIC GOODS, supra note 70, at 308, 308. 98. See Inge Kaul & Katell Le Goulven, Financing Global Public Goods: A New Frontier of Public Finance, in PROVIDING GLOBAL PUBLIC GOODS, at 329, 329.

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diseases, the promotion of human rights, and the enhancement of financial stability.99 Despite the difficulty of estimating precise sums, “a rough estimate suggests a worldwide figure of about $6 trillion” spent nationally in providing global public goods, while international spending on global public goods ranges from $7.5 billion to $24 billion.100 “Thus the ratio of international to national public spending ranges between 1:400 and 1:200.”101 National spending occurs when the country’s benefit is higher than its cost, and the costs are less than continuing inaction.102 For example, countries finance research and development to acquire knowledge, which will not only benefit the country and its citizens, but will also benefit the global world as a global public good.103 In this case, local finance does not negatively affect global finance incentives.104 However, in certain other cases, it does. For example, national spending to reduce the damage from climate change through local efforts and preventative measures (building sea walls, changing the varieties of seeds planted, et cetera) dulls the incentive to provide global public goods.105 This outcome is inefficient and especially harmful to developing countries.106 International financing of global public goods is limited and is mainly an option for industrialized countries.107 The semiglobal tax levied today takes the form of obligatory contributions to international organizations, such as the UN, the IMF, and the World Bank, calculated as a proportion of their national incomes. It also bears note that international financing of global public goods is often disguised as aid. Almost 30% of development assistance is spent on purposes related to global public goods.108 Both national and international contributions to financing global public goods are unable to garner sufficient resources to

99. 100. 101. 102. 103. 104. 105. 106. 107. 108.

See id. Id. at 340. Id. See id. at 332–34. See Barrett, supra note 97, at 311. See id. See id. at 313. See id. at 311. See id. at 309–11. Kaul & Le Goulven, supra note 98, at 329.


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meet the world’s needs.109 To state it bluntly, Global Public Finance is the most urgent and critical need of the twenty-first century. It is also clear that: financing global public goods requires more than just money, and certainly more than just increased public mobilization and spending at the international level. It also requires ensuring through financial and nonfinancial ways that all concerned actors, public and private, allocate adequate resources to global public goods that promise a high social return . . . .110 D. New Trends and Sources of Global Public Goods Finance In response to the shortage of financing for global public goods and the growing need for these goods, an interesting and innovative discussion about new sources to finance global public goods has swiftly developed. The following seven proposals for new finance to achieve the Millennium Development Goals, which require a $50 billion a year, were discussed in depth in the book, New Sources of Development: first, global environmental taxes (carbon taxes); second, currency transactions tax (Tobin taxes); third, creation of new special drawing rights; fourth, international finance facility; fifth, increased private donations for development; sixth, global lottery or global premium bond; seventh, increased remittances from emigrants.111 In this section, I will summarize these proposals, and in following sections, I will add my proposed global e-commerce tax as a viable additional source for funding global public goods and enhancing the feasibility of the GET. One proposal, global environmental taxes, describes a tax on goods that generates environmental externalities, such as the carbon tax, which is levied according to the level of carbon emissions.112 It is argued that this taxation achieves a double dividend

109. Id. at 331. 110. Id. at 335. 111. NEW SOURCES OF DEVELOPMENT FINANCE 1–2, 5 (A. B. Atkinson ed., 2005). 112. Id. at 5.

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because it reduces pollution and collects revenues.113 Several estimations were given for the expected revenues. For example, Anthony Clunies Ross of the International Labour Office estimated that a uniform tax rate of $21 per metric ton of carbon would yield $130 billion annually.114 Another study by the OECD estimated that revenues from a carbon tax would amount to $750 billion per year.115 From a revenue point of view, even the lower estimate, would collect 1.2 to 2.5 times the sum derived from official development assistance as it currently stands.116 As to the political prospects of the tax, it is viewed as “bleak” according to common critiques of economists.117 A more optimistic projection was made for carbon taxes when the revenue was proposed to be used for a specific purpose, such as economic development with a redistributive dimension in favor of poor, developing countries.118 Another proposal, the Currency Transactions Tax (“CTT”), is a tax levied on currency transactions. First proposed by James Tobin,119 the tax is widely known as the Tobin Tax. Originally, it was intended as a fiscal tool to enhance the efficacy of national macroeconomic policy and the stability of an international mone113. See SHI-LING HSU, THE CASE FOR A CARBON TAX: GETTING PAST OUR HANG UPS TO EFFECTIVE CLIMATE POLICY 6 (2011); THE OXFORD COMPANION TO GLOBAL CHANGE 98–101 (David J. Cuff & Andrew S. Goudie eds., 2009); R. SHACKLETON ET AL., THE EFFICIENCY VALUE OF CARBON TAX REVENUES 2–6 (1993); David Pearce, The Role of Carbon Taxes in Adjusting to Global Warming, 101 ECON. J. 938, 940–42 (1991). 114. Anthony Clunies Ross, Resources for Social Development 22 (World Comm’n on the Soc. Dimensions of Globalization, Int’l Labour Office, Working Paper No. 21, 2004). 115. Richard N. Cooper, Toward a Real Global Warming Treaty, 77 FOREIGN AFF. 66, 77 (1998). 116. Id. 117. See e.g., James M. Poterba, Global Warming Policy: A Public Finance Perspective, 7(4) J. ECON. PERSP. 47, 48 (1993) (“The paper begins by explaining that while efficiency considerations create a presumption for using coordinated international policies to alter greenhouse gas emissions, the prospects for such actions are bleak.”). 118. See Agnar Sandmo, Environmental Taxation and Revenue for Development, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 33, 45. 119. See JAMES TOBIN, THE NEW ECONOMICS ONE DECADE OLDER 87–92 (1974); James Tobin, A Proposal for International Monetary Reform, 4 E. ECON. J. 153, 153–54 (1978).


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tary system.120 But later on, it came to be seen as a revenue-raising tax that had the potential to become an important source for financing global public goods.121 As to the potential revenue from CTTs, several studies have given varying estimations. In 1996, Jeffrey Frankel’s study estimated that a CTT at the rate of 0.1% would yield $166 billion on the conditions of the foreign exchange market of 1995.122 But Tobin himself gave a lower estimation of $1,500 billion that might decrease to $50 billion if it took into account the fact that the tax could reduce the volume of the foreign exchange market.123 In 1996, David Felix and Ranjit Sau estimated revenues at around $148 billion if the tax rate were to be set at 0.1%, or revenues of $90 billion with a tax rate of 0.05%.124 According to Machiko Nissanke, “CTT at 2 basis points applied to wholesale transactions would generate annual revenue of about US$30–35 billion, while CTT at 1 basis point would produce US$17–19 billion.”125 Nissanke added to his revenue estimation a pessimistic perspective as to the political feasibility of the tax. He concluded that “[t]he CTT may be regarded more as a new additional source for development finance, rather than as a possible substitute for (or alternative to) official development assistance.”126 The Special Drawing Rights (“SDR”) proposal presents another effort to finance the Millennium Development Goals. In their basic form, they are described as promissory notes issued by the IMF to member states on the basis of a quota that is related to their relative strength in the world economy. Members that receive these notes may either hold them or ex-

120. See Machiko Nissanke, Revenue Potential of the Tobin Tax for Development Finance: A Critical Appraisal, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 58, 59. 121. Id. 122. Jeffrey Frankel, How Well Do Markets Works: Might a Tobin Tax Help?, in THE TOBIN TAX 41, 42 (Mahbub ul Haq et al. eds., 1996). 123. Id. at 60. 124. David Felix & Ranjit Sau, On the Revenue Potential and Phasing in of the Tobin Tax, in THE TOBIN TAX, supra note 122, at 223, 239–40. 125. See Nissanke, supra note 120, at 82–83. 126. Id. at 85–86.

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change a part of them over time for hard currency, through the Fund itself and through central banks.127 The original purpose behind the creation of SDRs was to increase international liquidity.128 So far, only two rounds of SDRs creation have occurred to raise a cumulative total of $21.4 billion.129 Additionally, the International Finance Facility (“IFF”) is a proposal that would collect annual commitments donations from donor countries in addition to revenues from the issuance of bonds in financial markets.130 These revenues, it is claimed by its proponents, would double the current ODA of $50 billion and could be used for development in developing countries to meet the Millennium Development Goals.131 Private donations could also be a source for funding global public goods. However, the data shows that private donations are usually made for national organizations rather than international ones.132 Along these same lines, a global lottery has been proposed as a source for funding development since the 1970s and has been discussed seriously in recent years.133 As to the revenue potential of global lottery, it was estimated in the year 2001 at the sum of $6.2 billion, based on the assumption that global lottery would take 10% of the 2001 global lottery gross profits.134 Finally, remittances by migrants could contribute substantially to development in recipient developing countries and constitutes a potential

127. Ernest Aryeetey, A Development-Focused Allocation of the Special Drawing Rights, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 90, 92. 128. Id. at 90. 129. Id. at 93–94. 130. See George Mavrotas, The International Finance Facility Proposal, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 110, 112. 131. See id. at 110. 132. See John Micklewright & Anna Wright, Private Donations for International Development, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 132, 133. 133. See Tony Addison & Abdur R. Chowdhury, A Global Lottery and a Global Premium Bond, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 156, 157. 134. Id. at 165. This compares to the $59.5 billion ODA and the $38.3 billion aid grants in 2001. Id.


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source of revenues that could prove beneficial by facilitating competition in this market.135 E. The Global E-commerce Tax as a Good New Source of Finance As articulated in my recent article in the Virginia Tax Review, the global e-commerce tax is a good and viable new source for financing global public goods.136 The following is an excerpt from that article, which explains the benefits of adopting the GET: First of all, this tax introduces new money into the overall pool of resources. More importantly, the GET revenues derive from an activity that should be taxed, just as any other income, but which currently escapes taxation as result of technical difficulties related to the structure and nature of the Internet and political obstacles related to international cooperation. Therefore, under these circumstances, the GET revenues are not coming from the budget or tax revenues of any particular country. The GET revenues originate in the e-commerce industry, which is currently a tax-free industry. In addition, the tax base is a genuinely global activity, which exploits global public resources such as the global communication network. It is only “natural” that revenues of a tax on this base be allocated for the funding of global public goods. This finance allocation is justified from an equity perspective. It should be seen as a payment for using global public goods. This would also resolve the unsolved problem of distributing the GET pie between the countries, because no one country would receive the revenues, but the global world as a whole would receive the benefit of the genuinely global commerce. To some extent, this resource for 135. See Andrés Solimano, Remittances by Emigrants: Issues and Evidence, in NEW SOURCES OF DEVELOPMENT FINANCE, supra note 111, at 177, 177. 136. See Azam, supra note 4, at 644.

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funding global public goods involves a dimension of distributive justice, because the e-commerce industry is currently located in developed countries. Therefore, using the tax revenues to fund global public goods might reduce the inter-nation gaps and advance a policy of inter-nation distributive justice. This policy would also benefit developed countries since the e-commerce industry would be enlarged as a result of funding global public goods in the developing world. In sum, this finance tool is good because it would produce more than just a double dividend and could advance welfare in the developing world, the developed world, and globally. Furthermore, this financial tool is good because it is not just another, albeit new, way of providing aid assistance. It is manifestly not a system predicted on assistance, but rather one which is based on a general and genuine concern for global public goods finance instead of being limited to development which has thus far been the central and almost exclusive preoccupation of existing literature and finance resources. The fact that this finance tool is governed by a global institution which allocates the resources on global bases would streamline the use of the finance resources. As to the revenue potential of the GET, it looks promising despite the difficulties of measuring and estimating, which are the result of the limited global data on the market. Based on the existing data on ecommerce, the B2C e-commerce market in 2011 is anticipated as reaching the sum of about $700 billion, and taking into account 15% as the share of cross-border e-commerce approximately, it appears there will reach a cross border e-commerce market of about $100 billion. If a net profit rate of 20% and a tax of 15% is used, there should be $3 billion in tax revenues. This might sound like a small figure in global terms. But if B2B e-commerce is taken into account, and more importantly, the future


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and the long-run are factored in, this sum will be much higher in the foreseeable future. Therefore, the potential of the future revenues is the issue here rather than the expected current revenues.137 F. Funding Global Public Goods as a Global Interest and Value That Enhances Political Feasibility Funding global public goods is a global interest for all countries. The need for funding these global public goods is important and urgent, as this section explains in detail. Each country needs and benefits from these goods, but it cannot supply or finance them individually as a result of the free-rider problem.138 Global funding solves the free-rider problem for all participating countries, allowing each to benefit. In configuring a GET, it is important to remain mindful that countries care not only about their potential for benefit, but also about their benefit relative to other countries. Countries benefit differently from different global public goods, presenting a conflict of interest that obstructs political agreement. However, there is an adequate supply of global public goods that benefit countries similarly such that this conflict of interest should not prevent cooperation. In addition, the GTF could spend revenues to fund varied global public goods to make sure that, in total, countries benefit similarly. The design of the GTF is structured to ensure accountability of the GTF and fairness in the spending of the GET revenues to gain political consensus. In addition to countries’ interest as beneficiaries of global public goods, the proposed funding regime could also serve the interest of each country in reducing its national spending and/or its international contributions for funding global public goods. Add to that the fact that financing and supplying global public goods advances the economy in each country and increases welfare. If we take, for example, spending on global communication infrastructure, it is clear that this global investment will yield improved pro137. Id. at 682–84 (footnotes omitted). 138. See PROVIDING GLOBAL PUBLIC GOODS, supra note 70, at 605 (defining a free rider as “someone who enjoys the benefits of a good without paying for it” and noting that “[b]ecause it is difficult to keep people from using pure public goods, those who benefit from them have an incentive to avoid paying for them”).

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duction in each country—increasing the size of the economy, reducing the costs of production, and maximizing welfare. This is a clear interest for all countries. The GTF will ensure that the relative interests of countries are balanced and maintained. This measure will also give countries incentive to compromise their sovereignty and accept the GET.139 Moving from interests to values, I posit that countries could share a common global value of supplying and financing global public goods—or at least the most necessary ones. This represents a common source of value for nations, as well as a source for gaining wide consensus. In my understanding, conflicts of interests could be minimized to ensure wide support of the value of funding global public goods. Advancing this value could make the world a better place for all without granting any relative advantage to one country. Therefore, to fulfill this value, countries could and should accept a GET to fund global public goods. It is important to emphasize that using the GET to fund global public goods does not infringe on countries’ relative status to each other—a factor that is critical in developing international cooperation. Compared to other spending regimes, such as formula regimes, this spending regime better allocates tax jurisdiction on cross-border e-commerce income and maintains countries’ relative positions of power. A clearly global income is taxed globally, and revenues are spent globally to benefit all countries similarly in the short and long term. For these reasons, I argue that using the GET revenues to fund global public goods enhances the political feasibility of the GET. This form of spending solves the yet unresolved problem of how countries can share in the tax pie on cross border e-commerce income. It also serves the interests of all participating countries that will benefit from global public goods by reducing individual spending on these goods and increasing the size of the global economy. Finally, it advances global common values of supplying and funding global public goods and making the world a better place.

139. See Kaul & Le Goulven, supra note 98, at 344–45 (describing how state actors are incentivized to participate in the funding of global public goods when other actors make “complementary contributions”).


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V. SUPPORTING EMPIRICAL CASE STUDIES In previous sections, I presented theoretical and analytical bases for my argument that governments have viable and realistic reasons to participate in an international treaty that establishes a GET to fund global public goods. In this section, I add empirical support to this argument. I will demonstrate comparable cases in which governments cooperated and seemingly yielded some degree of their sovereignty—even in tax matters with the aim of achieving other interests and values. A. Global Taxes Proposed Recently by the UN, G20, EU, and Politicians Recently, a serious political and scholarly discussion has been taking place on the international level on the subject of global taxes and finance. In its 2012 report on global development, the UN proposed global taxes to raise more than $300 to $400 billion annually for development and for global challenges, such as fighting climate change.140 According to the UN proposal, a tax on carbon dioxide emissions in developed countries provides one option: a tax of $25 per ton would raise an estimated $250 billion per year.141 The tax could be collected by national authorities, but earmarked for international cooperation. The proposal also includes a small currency transaction tax of one half of a “basis point” (0.005 per cent) on all trading in four major currencies (the dollar, the euro, the yen, and the pound sterling), which could yield an estimated $40 billion per year for international cooperation.142 Additionally, the report suggests earmarking a portion of the proposed EU financial transaction tax—expected between $15 and $75 billion per year—for international cooperation.143 Finally, regular allocations of IMF special drawing rights (“SDR”) and the use of “idle” SDRs could yield about $100 billion per year for the

140. U.N. DEP’T OF INT’L ECON. & SOC. AFFAIRS, WORLD ECONOMIC AND SOCIAL SURVEY 2012, at 27 (2012), available at http://www.un.org/en/ development/desa/policy/wess/wess_current/2012wess.pdf (proposing carbon taxes and a currency transaction tax). 141. Id. at 27. 142. Id. at 46. 143. Id. at vii, 30.

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purchase of long‐term assets, which would then be used as development finance.144 The UN’s 2012 report finds that such global tax mechanisms are technically feasible and economically sensible. In a press conference concerning the report, Mr. Rob Vos—the Director of DESA’s Development Policy and Analysis Division and the main author of the survey—said that “[s]uch taxes [] make economic sense, as they help stimulate green growth and mitigate financial market instability. In short, such new financing mechanisms will help donor countries overcome their record of broken promises to benefit the world at large.”145 On a similar note, in December 2012, the UN International Telecommunication Union will discuss a proposal by the European Telecommunications Network Operators Association to impose a global Internet Tax targeting the largest web content providers, including Google, Facebook, Apple, and Netflix.146 ETNO described its proposal as “innovative” and stated that it was even adopted unanimously by its executive board.147 The proposal would “ensure an adequate return on investment in high bandwidth infrastructures” and require that “operating agencies . . . negotiate commercial agreements to achieve a sustainable system of fair

144. Id. at 35. 145. UN Proposes Mechanisms to Raise $400 Billion to Close Gap on Development Financing Needs, UN NEWS CENTRE (July 5, 2012), http://www.un.org/apps/news/story.asp?NewsID=42401. In support of these mechanisms, Jean-Pierre Rosso, the chairman of the World Economic Forum, said that these mechanisms are steps in the right direction toward coping with the challenges of globalization. UN Urges Countries to Impose Global Taxes, Raise $400 Billion, HUFFINGTON POST (July 5, 2012), http://www.huffingtonpost.com/2012/07/05/un-global-tax_n_1651759.html?utm _hp_ref=business. For a related statement by America politicians, see Becket Adams, President Obama: “Every Multinational Company Should Have to Pay a Basic Minimum Tax,” THE BLAZE (Feb. 15, 2012, 5:00 PM), http://www.theblaze.com/stories/president-obama-every-multinationalcompany-should-have-to-pay-a-basic-minimum-tax/. 146. See Declan McCullagh & Larry Downes, U.N. Could Tax U.S.-Based Web Sites, Leaked Docs Show, CNET (June 7, 2012, 11:58 PM), http://news.cnet.com/8301-1009_3-57449375-83/u.n-could-tax-u.s.-based-websites-leaked-docs-show/. 147. Id.


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compensation for telecommunications services.”148 However, Kenneth Anderson of American University and other commentators have critiqued the proposal, stating: This is essentially a stunt by the European Telecommunications body . . . . It’s one that pops up with increasing regularity because there is an underlying resentment that the U.S. has such a strong governance over the Internet. There’s an effort to push back against that, and also an effort among some that the UN be able to impose fees on various things. This proposal plays nicely into uniting those two things that some would like to do.149 Another recent effort came in the wake of the recent global financial crisis. Following the crisis, several political leaders called for a global tax on financial institutions and transactions. In November 2009 during the G20 meeting in Scotland, former UK Prime Minister Gordon Brown proposed to levy such a global tax on financial institutions to recover the global economy, curb future crisis, and address environmental concerns.150 Brown conceded that reaching a global agreement on such a plan would be difficult, but he insisted that the world needs a “better . . . social contract” and that Britain would like to move in this direction with other countries.151 The EU leaders supported this call.152

148. 149.

Id. See UN’s Internet Tax Man Won’t Cometh Anytime Soon, ECOMMERCE TIMES (June 11, 2012, 10:25 AM), http://www.ecommercetimes.com/story/75346.html. 150. For video footage of the prime minister’s address, see BBC News (BBC television broadcast Nov. 7, 2009), available at http://www.youtube.com/watch?v=7sQ67ZPd1g0; see also Alastair Jamieson, G20: Gordon Brown Calls for Global Tax on Financial Transactions, THE TELEGRAPH (Nov. 7, 2009, 11:11 AM), http://www.telegraph.co.uk/ finance/newsbysector/banksandfinance/6520339/G20-Gordon-Brown-calls-forglobal-tax-on-financial-transactions.html; Laurence Norman & Paul Hannon, U.S., U.K. Split over Bank-Tax Proposal at G-20, WALL ST. J., Nov. 9, 2009, http://online.wsj.com/article/SB125771846183937079.html. 151. See also Jamieson, supra note 150. 152. Id.

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Following the 2009 summit, the G20 asked the IMF to submit suggestions on how the financial sector could make a fair and substantial contribution toward paying for any burden associated with governmental intervention in efforts to rejuvenate the banking system. In its final report, the IMF proposed to levy a Financial Stability Contribution (“FSC”) and a Financial Activities Tax (“FAT”) on financial institutions to recover the fiscal costs of bailing out banks during the crisis, to create a reserve fund for similar future situations, and to limit volatility and speculative activities in financial transactions.153 In my view, the FSC, in substance, is also a tax, regardless of its title as a contribution or tax. The IMF wrote explicitly in the report: The design of levies, and funds if established, should be guided by an internationally accepted set of principles, especially with a view to facilitating the resolution of cross-border institutions. These principles might cover the determination of the target size of the fund (if established), the level of annual levies and the base on which they are imposed, the treatment of foreign branches and foreign subsidiaries, and the treatment of different classes of creditors in case of resolution. This would facilitate cooperation across countries and help ensure a level playing field, including by avoiding double charging/taxation. Most importantly, it could facilitate resolution of cross-border institutions. The creation of a multi-country (e.g., pan-European) fund can be envisaged and is almost a necessity for closely integrated financial markets. It would provide a large impetus to addressing presently unresolved legal and operational issues—such as differing national insolvency regimes, lack of common triggers for intervention actions and approaches to supervision,

153.

INT’L MONETARY FUND, A FAIR AND SUBSTANTIAL CONTRIBUTION FINANCIAL SECTOR: FINAL REPORT OF THE G-20, at 5, 8, 20 (2010), available at http://www.imf.org/external/np/g20/pdf/062710b.pdf. The report was submitted for discussion during the G20 meeting in Toronto in June 2010. BY THE


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and varying deposit guarantee schemes across countries.154 The Financial Transaction Tax has not yet been adopted by the G20. However, the EU has made substantial progress toward the goal of imposing a European FTT.155 The EU Commission prepared a proposal for a European FTT in 2011, and on May 23, 2012, the European Parliament adopted an opinion supporting the Commission’s proposal.156 The EU believes that through the FTT, the financial sector will properly participate in the cost of rebuilding Europe’s economies and bolstering public finances.157 The proposed tax will generate significant revenues and help to ensure greater stability of financial markets, without posing undue risk to EU competitiveness.158 All of these proposals and discussions on global taxation strengthen my argument for the political feasibility of a GET to fund global public goods. Just a few years ago, these intensive discussions were not in the works. The world has changed, and politicians are now prepared to relinquish some degree of state sovereignty in the interest of effectively containing and staving off global threats. They do so not only to serve their interests, but also to fulfill their responsibility to current and future generations that live in an intensely global world. B. Growing Trends of Cooperation on Global Tax Issues Taxation has been traditionally conceived of as a core matter of the state, with each country wielding full power to determine 154. Id. at 15–16. 155. See Taxation of the Financial Sector, EUR. COMM’N, http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index _en.htm (last updated Feb. 21, 2013). 156. See European Parliament Votes in Favour of Financial Transaction Tax, EUR. COMMISSION (May 24, 2012), http://ec.europa.eu/ budget/news/article_en.cfm?id=201205241039; Parliament Adopts Ambitious Approach on Financial Transaction Tax, EUR. PARLIAMENT, (May 23, 2012, 12:38 PM), http://www.europarl.europa.eu/news/en/pressroom/content/ 20120523IPR45627/html/Parliament-adopts-ambitious-approach-on-financialtransaction-tax. 157. See Parliament Adopts Ambitious Approach on Financial Transaction Tax, supra note 156. 158. See id.

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its own tax laws and rules. No limitations have yet been imposed on sovereign countries in the exercise of their taxing authority, whether by other countries, by international rules, or by institutions. International cooperation in tax matters has thus far been limited in comparison to international cooperation on trade, monetary, or other economic issues. However, over the last decade this scene has changed. Countries no longer enjoy absolute sovereignty in fixing their tax laws and rules.159 Globalization has increased tax competition, which in turn has limited the tax autonomy of sovereign countries.160 Tax havens have curtailed the taxation powers of countries.161 E-commerce has decreased the aggregate tax pie of all countries. Constitutional norms too now limit countries in their ability to set their own tax laws.162 Contemporary international norms restrict the tax jurisdiction of countries.163 As a result, we see a growing trend of cooperation on global tax issues. Indirect taxes, customs, and tariffs have been removed to advance international trade. The last decade has witnessed a proliferation of bilateral tax treaties. Multilateral tax treaties are being discussed, and free tax zones are being established, reflecting increased cooperation between countries. Further, there is a steady increase in the exchange of information. Cooperative tax measures are being both discussed and implemented.164 In sum, “[m]ajor theoretical developments in tax policy are now arising not through solely national political and legal processes but 159. See Insop Pak, International Finance and State Sovereignty: Global Governance in the International Tax Regime, 10 ANN. SURV. INT’L & COMP. L. 165, 187–94 (2004). 160. Cf. GEORGE SOROS, GEORGE SOROS ON GLOBALIZATION 51–53 (2002). 161. See id. at 52–53. 162. See WESTBERG, supra note 23, at 67–69. 163. See id. 164. See Tracy A. Kaye, European Tax Harmonization and the Implications for U.S. Tax Policy, 19 B.C. INT’L & COMP. L. REV. 109, 110 (1996); H. Onno Ruding, Tax Harmonization in Europe: The Pros and Cons, 54 TAX L. REV. 101, 101 (2000); Daniel Shaviro, Money on the Table?: Responding to Cross-Border Tax Arbitrage, 3 CHI. J. INT’L L. 317, 317–18 (2002); Stephen G. Utz, Tax Harmonization and Coordination in Europe and America, 9 CONN. J. INT’L L. 767, 767–69 (1994).


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through the interactions of nongovernmental actors in transnational settings.”165 One clear example of intensive international cooperation on global tax matters is the cooperation in the battle against harmful tax competition.166 Countries agree in this regard to set international rules and frameworks that limit their taxing powers. Respecting these new international norms, nations have changed their tax laws accordingly and continue to consider these norms as they create new tax legislation. Cooperative efforts have even been made to coordinate national tax rates.167 It is also important to notice that in this process, the OECD has played a central role as a supranational institution. Diane Ring discussed the role of the OECD in deterring harmful tax competition and reached a somewhat more conservative conclusion on its role and constraints.168 According to Ring, as the story of tax competition revealed, the OECD played an important role and succeeded in achieving some of its goals.169 At the same time, however, it limited its project compared to its original vision due to U.S. opposition and opposing actions of other international organizations concerned about the loss of their tax sovereignty.170 165. Allison Christians, Sovereignty, Taxation and Social Contract, 18 MINN. J. INT’L L. 99, 99 (2009). 166. See generally Benjamin R. Hartman, Coercing Cooperation from Offshore Financial Centers: Identity and Coincidence of International Obligations Against Money Laundering and Harmful Tax Competition, 24 B.C. INT’L & COMP. L. REV. 253 (2001) (noting that G7 nations threatened sanctions to coerce cooperation of offshore financial centers for harmful tax competition); David Spencer & J.C. Sharman, International Tax Cooperation, 18 J. INT’L TAXATION 34 (2007) (identifying challenges and solutions to tax competition among countries); ASS’N OF CHARTERED CERTIFIED ACCOUNTANTS, COMPETITION OR COORDINATION? REASSESSING TAX IN A GLOBAL ENVIRONMENT 3 (2009), available at http://www.accaglobal.com/content/dam/ acca/global/PDF-technical/tax-publications/Competitionorcoordination.pdf (finding that most leading nations have cooperated to combat tax havens). 167. See Michael P. Devereux & Clemens Fuest, Corporate Income Tax Coordination in the European Union 3–6 (Oxford Univ. Ctr. For Bus. Taxation, Working Paper No. 09/10, 2009), available at http://www.sbs.ox.ac.uk/ centres/tax/Documents/policy_articles/TransferPolicydocumentVersion0311 Website.pdf. 168. See Ring, supra note 13, at 703–15. 169. Id. at 717–18. 170. Id.

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The OECD also played a central role in discussions on international cooperation on e-commerce taxation issues. Arthur Cockfield conducted a detailed analysis of the OECD role in ecommerce taxation and concluded that “the OECD is increasingly acting as an informal (lower case) world tax organization in contrast to the sometimes touted need for a formal (upper case) World Tax Organization that could impose binding tax rules on participating nations.”171 In sum, I view this growing trend of cooperation in global tax issues as indicative of further and deeper international cooperation on such issues. In this sense, it adds further clout to my argument for the political feasibility of the GET. It also enhances the viability of the GTF, given the key role of the OECD in espousing international tax norms. This becomes even clearer in the next case study, which highlights the growing supranational role of international institutions on global economic issues. C. The Supranational Role of International Institutions on Global Economic Issues My third case study supporting the argument for the GET’s political feasibility is the clear development of international and supranational172 institutions charged with administration of global economic issues. These institutions are gradually assuming the far-reaching powers of states, replacing the state in matters that used to be solely within the sovereignty of that territorial state. In this context, I use the WTO and the IMF as examples of international organizations that establish supranational rules on trade and monetary policy and limit territorial state authority and sovereignty, in the same way as the OECD participates in international tax matters. This fundamental change in international world order and the gradual movement towards a supranational order in the era of globalization bolsters my argument in favor of the feasibility of a GET. As articulated on the WTO website, “The [WTO] deals with the rules of trade between nations at a global or near-global 171. Cockfield, supra note 13, at 186. 172. For a discussion of the definition of “supranational,” see Laurence Helfer & Anne-Marie Slaughter, Toward a Theory of Effective Supranational Adjudication, 107 YALE L.J. 273, 287–89 (1997).


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level.”173 At the heart of the system, WTO agreements are negotiated and signed by 153 countries, providing the legal ground rules for international commerce, which obligate governments to maintain their trade policies within agreed limits.174 In addition, the WTO constitutes a global or semi-global forum for negotiating trade issues between member states to continue the development of a global trade system.175 The WTO establishes and runs a dispute settlement system to resolve international trade issues.176 Importantly, the WTO goes much further than just trade issues. For instance, the WTO also institutes rules on the protection of intellectual property, on health and on safety measures, and it significantly influences human rights law, labor law, and competition law.177 With the ever-expanding role of the WTO, the organization has become a central international actor with tremendous powers to limit state action and policy-making. Scholars have extensively discussed the growing powers of the WTO, in many cases leveling criticism against it; the Seattle riots of 1999 are just one example of a source of critical commentary.178 As Jeffery Atik wrote: 173. See Understanding the WTO: Basics, WORLD TRADE ORG., http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm (last visited Mar. 1, 2013) (exemplifying one such supranational institution). 174. Id. 175. Id. 176. Id. 177. See Andrew T. Guzman, Global Governance and the WTO, 45 HARV. INT’L L.J. 303, 303–04 (2004) (arguing that the WTO should expand its role to include non-trade issues in order to remain effective and reliable). 178. See John O. McGinnis & Mark L. Movsesian, The World Trade Constitution, 114 HARV. L. REV. 511, 543 (2000); Paul B. Stephan, The New International Law—Legitimacy, Accountability, Authority, and Freedom in the New Global Order, 70 U. COLO. L. REV. 1555, 1560 (1999). For a broader discussion of the implications of the WTO’s assumption of increasing power, see generally Claire R. Kelly, Power, Linkage and Accommodation: The WTO as an International Actor and Its Influence on Other Actors and Regimes, 24 BERKELEY J. INT’L L. 79 (2006); John O. McGinnis, The World Trade Organization as a Structure of Liberty, 28 HARV. J.L. & PUB. POL’Y 81 (2004); Gregory C. Shaffer, The World Trade Organization Under Challenge: Democracy and the Law and Politics of the WTO’s Treatment of Trade and Environment Matters, 25 HARV. ENVTL. L. REV. 1 (2001); G. Richard Shell, Trade Legalism and International Relations Theory: An Analysis of the World Trade Organization, 44 DUKE L.J. 829 (1995).

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The WTO is feared as a super-government, driven by the logic of free trade to override national preferences. Perhaps the most frightening aspect of the WTO is its facelessness. The absence of identifiable personalities in the WTO invites the projection of our worst fears about globalization. .... Although the WTO is still of recent origin, it yields considerable (and unexpected) power. The substantive terms of its agreements limit the scope of action for national regulation, stripping power away from states. Its enhanced dispute resolution mimics a form of hierarchical supremacy: WTO rules act as a super-constitutional text with a force superior to ordinary national enactments. Once the WTO Dispute Settlement Body finds that a national measure is inconsistent with a WTO obligation, the WTO member is expected to bring its law into conformity. Although national law does not automatically melt away like inconsistent state law in the United States, the mark of WTO supremacy is apparent: national law is expected to give way.179 As compared to the WTO, “[t]he IMF promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in debt or members that require assistance in poverty reduction.”180 The IMF currently has a global membership of nearly 188 countries.181 Upon joining, each IMF member of the IMF is assigned a quota, based broadly on its relative size in the world economy.182

179. Jeffery Atik, Democratizing the WTO, 33 GEO. WASH. INT’L L. REV. 451, 451–52 (2001) (footnotes omitted). 180. Overview, supra note 93. 181. Id. 182. See IMF Quotas, INT’L MONETARY FUND (Aug. 24, 2012), http://www.imf.org/external/np/exr/facts/quotas.htm.


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The IMF role has developed dramatically since its creation. It is not the aim of this section to describe the IMF in detail, but rather to outline and emphasize its current role as a global institution that sets rules and designs monetary policy on a supranational basis, limiting nation state policy-making in the monetary field. Today, the IMF role is influential in its ability to prevent any member state from pursuing its own monetary policy, independently from the IMF. In addition, the IMF wields tremendous power in setting loan conditions. A state requiring an IMF loan must comply with all conditions stipulated by the IMF for receiving a loan.183 In the past, these conditions generally related to the macroeconomic running of the country, but of late, they touch more on the countries’ microeconomic issues—and even to the extent of actually intervening in its legislation. This is especially true in relation to countries that suffer a severe financial crisis and require the assistance of the IMF, as was the case in Argentina184 and Russia for instance.185 Further, the IMF has developed and implemented uniform standards and codes of conduct in the financial field that influence the daily behavior of domestic banks, insurance companies, and financial institutions.186 These norms, which used to be a matter for the independent determination of nation states, have now become an internationally determined matter, subject to international norms.187 Standards-setting groups are composed of national representatives and experts, and the IMF monitors and compels compliance with the norms these groups create. One step forward in the direction of my GET proposal was even taken recently, when 183. See IMF Conditionality, INT’L MONETARY FUND (Sept. 26, 2012), http://www.imf.org/external/np/exr/facts/conditio.htm. 184. See David Asp, Note, Argentina’s Mystery of Capital: Why the International Monetary Fund Needs Hernando de Soto, 12 MINN. J. GLOBAL TRADE 383, 384 (2003). 185. See RANDALL W. STONE, INT’L MONETARY FUND, IMF GOVERNANCE AND FINANCIAL CRISES WITH SYSTEMIC IMPORTANCE 6 (2008), available at http://www.ieo-imf.org/ieo/files/completedevaluations/05212008BP08_14.pdf. 186. See Robert P. Delonis, Note, International Financial Standards and Codes: Mandatory Regulation Without Representation, 36 N.Y.U. J. INT’L L. & POL. 563, 575–81 (2004). 187. See generally id. (discussing the history and function of international institutions that are important to the standards and codes movement).

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the previous IMF head, Dominique Strauss-Kahn, called for the introduction of a global currency backed by a global central bank, which would act as the “lender of last resort” in the event of severe economic crisis; however, Strauss-Kahn added, “I fear we are still very far from that level of global collaboration.”188 D. The Streamlined Sales and Use Tax Agreement in the United States Each U.S. state levies a sales and use tax within its jurisdiction.189 In 2010, the revenues of general sales taxes amounted to about $224.5 billion.190 Forty-five states impose this tax through their own state legislation.191 Each state establishes its own tax base, its own tax rate, and its own tax law.192 Meanwhile, the U.S. Constitution places limitations on the states’ taxation authority. To satisfy the requirements of the Due Process Clause of the Constitution, the state must establish “minimal contact” with the taxpayer in order for the tax to be constitutional.193 An even higher threshold of a “substantial nexus” is required according to the Commerce Clause, which binds state taxation to the fairness standards of interstate commerce.194 188. Concluding Remarks by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, at the High Level Conference on the International Monetary System, INT’L MONETARY FUND (May 11, 2010), http://www.imf.org/external/np/speeches/2010/051110.htm. 189. See MELISSA BRAYBOOKS ET AL., U.S. CENSUS BUREAU, STATE GOVERNMENT TAX COLLECTIONS REPORT: 2010, at 3 (2011), available at http://www2.census.gov/govs/statetax/2010stcreport.pdf. 190. Id. at 2. 191. Id. at 3. 192. JOHN F. DUE & JOHN L. MIKESELL, SALES TAXATION: STATE AND LOCAL STRUCTURE AND ADMINISTRATION 1 (1st ed., 1983); RICHARD POMP & OLIVER OLDMAN, STATE AND LOCAL TAXATION (4th ed., 2001). 193. Quill Corp. v. North Dakota, 504 U.S. 298, 312 (1992) (“Due process centrally concerns the fundamental fairness of governmental activity. Thus, at the most general level, the due process nexus analysis requires that we ask whether an individual’s connections with a State are substantial enough to legitimate the State’s exercise of power over him.”). 194. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) (“These decisions have considered not the formal language of the tax statute but rather its practical effect, and have sustained a tax against Commerce Clause challenge when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”).


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The sales and use tax faces tremendous challenges in ecommerce transactions similar to those facing the international tax regime, especially after a ruling by the Supreme Court in Quill Corp. v. North Dakota that states cannot levy a sales and use tax on electronic out-of-state sales to customers in the state when the vendors’ only connection with the state is “‘by common carrier or the United States mail.’”195 Notably, the petitioner, Quill Corporation, had argued that Congress was the “appropriate body to determine the extent to which out-of-state vendors should be held responsible for remitting sales and use taxes to states in which their only connection with customers is by common carrier or the United States mail.”196 This argument was partly accepted in legislation in the Internet Tax Freedom Act of 1998, which took action to exempt several Internet services from taxation.197 New legislation in some states introduces “Amazon Laws” to overcome the Quill decision and replace it with an affiliated nexus test.198 Another 195. See Quill Corp., 504 U.S. at 314–15 (quoting Nat’l Bellas Hess, Inc. v. Dep’t of Revenue, 386 U.S. 753, 758 (1967), overruled by Quill Corp.); see also U.S. GEN. ACCOUNTING OFFICE, SALES TAXES—ELECTRONIC COMMERCE GROWTH PRESENTS CHALLENGES; REVENUE LOSSES ARE UNCERTAIN 4 (2000), available at http://www.gao.gov/new.items/g600165.pdf; Walter Hellerstein, State Taxation of Electronic Commerce, 52 TAX. L. REV. 425, 440 (1997); Edward Morse, State Taxation of Internet Commerce: Something New Under the Sun, 30 CREIGHTON L. REV. 1113, 1145 (1997). 196. Brief for Petitioner at 47, Quill Corp., 504 U.S. at 298 (No. 90-194), 1991 WL 538773. 197. See Kevin J. Smith, Internet Taxes: Congressional Efforts to Control States’ Ability to Tax the World Wide Web, 7 RICH. J.L. & TECH. 3 (2000); JOINT COMM. ON TAXATION, OVERVIEW OF ISSUES RELATED TO THE INTERNET TAX FREEDOM ACT AND OF PROPOSALS TO EXTEND OR MODIFY THE ACT 4 (2001), available at http://www.jct.gov/x-64-01.pdf. 198. For a detailed discussion of Amazon Laws and their constitutionality, see generally Amazon.com, LLC v. N.Y. State Dep’t of Taxation & Fin., 877 N.Y.S.2d 842 (N.Y. Sup. Ct. 2009); David Gamage & Devin J. Heckman, A Better Way Forward for State Taxation of E-Commerce, 92 B.U. L REV. 483 (2012); Scott W. Gaylord & Andrew J. Haile, Constitutional Threats in the ECommerce Jungle: First Amendment and Dormant Commerce Clause Limits on Amazon Laws and Use Tax Reporting Statutes, 89 N.C. L. REV. 2011 (2011); Andrew J. Haile, Affiliate Nexus in E-Commerce, 33 CARDOZO L. REV. 1803 (2011); Thomas H. Steele et al., No Solicitations: The ‘Amazon’ Laws and the Perils of Affiliate Advertising, 59 ST. TAX NOTES 939 (2011); Travis Cavanaugh, Note, Iowa Can Do Better Than the Affiliate Tax: A Proposal for an Intermedi-

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proposal suggested a withdrawal tax through the seller, who would transfer the tax revenues to the “source country”—i.e., “the seller’s country”—according to one view,199 or the “destination country”— i.e., the “buyer’s country”—according to a different view.200 However, the leading argument called for harmonization of sales tax laws among the different states.201 This argument for harmonization of sales tax laws became a reality in the Streamlined Sales Tax Project (“SSTP”).202 The initiative for the project came from twenty-four states who had deeply internalized the implications of their diminished sales tax revenues on e-commerce transactions and understood the risk of a race to the bottom as a result of tax competition between the states—and even worse, the risk of losing the tax altogether if the Internet Tax Freedom Act were to be applied generally to any ecommerce transaction.203 Given these pressures, the states were ready to concede some of their tax sovereignty. After two years of ary Tax, 97 IOWA L. REV. 567 (2012); Daniel T. Cowan, Recent Development, New York’s Unconstitutional Tax on the Internet: Amazon.com v. New York State Department of Taxation & Finance and the Dormant Commerce Clause, 88 N.C. L. REV. 1423 (2010). 199. See Jonathan Bick, Implementing E-commerce Tax Policy, 13 HARV. J.L. & TECH. 597, 599 (2000). 200. See John A. Swain, State Sales and Use Tax Jurisdiction: An Economic Nexus Standard for the Twenty-First Century, 38 GA. L. REV. 343, 351– 52 (2003). 201. See Charles E. McLure, Jr., Radical Reform of the State Sales and Use Tax: Achieving Simplicity, Economic Neutrality, and Fairness, 13 HARV. J.L. & TECH 567, 569 (2000); see also Wendy Trahan, Note, The Future of Sales and Use Tax on Electronic Commerce: Promoting Uniformity After Quill, 21 VA. TAX REV. 101, 103 (2001). 202. noi s cr d roFon the Streamlined Sales Tax project, see generally Brian Galle, Designing Interstate Institutions: The Example of the Streamlined Sales and Use Tax Agreement (“SSUTA”), 40 U.C. DAVIS L. REV. 1381 (2007); Samantha L. Cowne, Note, The Streamlined Sales and Use Tax Agreement: How Entrepreneurs Can Plan for the Uncertain Future of E-Commerce Sales Taxation, 4 ENTREPRENEURIAL BUS. L.J. 133 (2009); Gregory R. Evans, Comment, Separate but Taxed: A Rejection of the Streamlined Sales Tax Project Through a Commerce Clause and Federalist Analysis, 56 AM. U. L. REV. 421 (2006); About Us, STREAMLINED SALES TAX GOVERNING BOARD, www.streamlinedsalestax.org/index.php?page=About-Us (last visited Mar. 2, 2013). 203. Abous Us, supra note 202.


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research, discussion, and negotiation, the states reached the Streamlined Sale and Use Tax Agreement (“SSUTA”).204 The SSUTA designs a harmonized model of sales tax to be adapted by its member states that reduces the differences between the states’ definitions, tax bases, and rates of sales tax—thereby standardizing the major tax base definitions.205 It establishes uniform sourcing rules for all taxable transactions, including mail orders and telecommunication services.206 Through a central, electronic registration system, the SSUTA enables all member states to simplify and optimize their tax administration.207 Finally, the SSUTA sets the rules for state entry and withdrawal from the agreement.208 As of today, twenty-two states are member states of the SSUTA.209 Thus, the SSUTA shows that sovereign states are indeed ready to compromise some of their sovereignty in order to retain their tax power. In this case, states did so by way of cooperation with other states. The SSUTA even titles the relationship of its member states as “Cooperating Sovereigns” and describes it as follows: “This Agreement is among individual cooperating sovereigns in furtherance of their governmental functions. The Agreement provides a mechanism among the member states to establish and maintain a cooperative, simplified system for the application and administration of sales and use taxes under the duly adopted law of each member state.”210 I would argue that there are significant similarities between the challenges of levying a sales tax on cross-state ecommerce transactions and the challenges of levying an income tax on cross-country e-commerce income. Accordingly, the resolution of sales tax challenges by the SSUTA should influence the proposed solution for the taxation of global e-commerce income. 204. Streamlined Sales and Use Tax Agreement, Nov. 12, 2002 (as amended May 24, 2012), available at http://www.streamlinedsalestax.org/ uploads/downloads/Archive/SSUTA/SSUTA%20As%20Amended%205-2412.pdf [hereinafter SSUTA]. 205. See id. art. I, § 102. 206. See id. art. III, §§ 310–14. 207. See id. art. I, § 102. 208. See id. art. VIII. 209. State Info, STREAMLINED SALES TAX GOVERNING BOARD, http://www.streamlinedsalestax.org/index.php?page=state-info (last visited Mar. 2, 2013). 210. SSUTA, supra note 204, at § 1101.

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Based on the SSUTA, I assert that we can and should make the following conclusions about the viability of a GET. First, sovereigns are ready to compromise their sovereignty to keep their tax revenues. The SSUTA began as a project to address diminished sales tax revenues. This decline and its threat to the states induced them to cooperate to change their internal tax laws in accordance with the SSUTA tax model. For a long time, tax laws had been considered the very core of state sovereignty— that is, tax laws were considered fully immune from outside intervention. The SSUTA indicates a change in this attitude. Taxation sovereignty, like sovereignty in general, is also changing. The concept of cooperative sovereignty is gaining increasing acceptance in tax law as well. As this trend gains strength, it indicates the political feasibility of my proposed global tax model, the GET. As countries continue to lose tax revenues on global ecommerce income, they will seek global cooperation, and the need for cooperation will only increase as lost tax revenues accumulate. At some point in the future, in my view, countries will accept the level of cooperation required by the GET model proposed in this Article and in my recent article, Global Taxation of Cross Border E-Commerce Income.211 I am aware that there is a difference between cooperation among the states of the U.S. and the international cooperation of nation states, and I am similarly aware of the considerably greater difficulties that would accompany an attempt to reach a GET agreement in comparison to the SSUTA. Nevertheless, I argue that a GET is feasible and that the SSUTA precedent strengthens my argument. Second, the process involved in negotiating and designing the SSUTA is of great importance in the study and design of the GET. The research was conducted by a number of small working groups representing various states and professionals.212 The SSUTA design was also subjected to the general supervision of the public and directed by a coordinating committee.213 For instance, a supreme “management committee” determined policy and was responsible for the administration of the project in its entirety.214 211. 212. 213. 214.

Azam, supra note 4. See SSUTA, supra note 204, at § 1101. Id. Id.


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A similar process would be of benefit in creating an infrastructure for the GET. Third, the centralized management of the tax model and its emphasis on technology to regulate the tax proved successful in levying a sales tax on e-commerce transactions. This too constitutes a precedent, reflecting the feasibility of a GET, which would similarly use a centralized body to manage the tax and employ technology for its enforcement. In sum, the U.S. faced great challenges in levying a sales tax on e-commerce transactions in response to the severe decline in tax revenues, and this pressure forced the states to compromise some of their tax sovereignty. Against these odds, states agreed to coordinate their internal sales tax laws in accordance with the SSUTA. I use this case study to argue that a similar development is taking place in the international system. While there are obvious differences between cooperation among states in a federal system compared to cooperation among countries in the international system, the similarities for purposes of designing an e-commerce tax are great, and many valuable lessons can be learned from it. Given that countries are now willing to compromise some of their tax sovereignty to levy taxes on global e-commerce income, it is only a matter of time before the loss of tax revenues will be significant enough to compel countries to adopt the GET. VI. CONCLUSION Political obstacles face my proposed GET to fund global public goods. These obstacles make my argument for the tax model more difficult, but by no means impossible. I am convinced that despite all of these challenges, the proposed tax regime is politically feasible. The new world order does not solely conceive of state sovereignty as full and exclusive power within a bordered territory, but rather as a member of a global community that employs supranational governance and builds global sovereignty. The GET is politically feasible as the only way to fairly impose a tax on global e-commerce income without infringing on the economic and political status of countries relative to each other. Accordingly, the GET serves the interests of governments as realist politicians. It also serves governments under a liberal political theory because it advances the values of fair taxation and regard for the global welfare and development by funding global public goods. This aspect

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of the tax regime—using the tax revenues to fund global public goods—particularly enhances the political feasibility of the regime. Countries, from both a realist and liberal perspective, have a global interest and value in financing global public goods in a manner that benefit them similarly. The GET to fund global public goods achieves these values in addition to meeting an important global need. For these reasons, my proposed GET regime presents a politically feasible model in the globalized world of the twenty-first century. I posit that this proposal is not merely optimistic thinking, but rather a well-founded idea theoretically, analytically, and empirically. The numerous empirical case studies provided in this Article support the model and demonstrate that the world has changed and is ready to accept new ideas. I conclude this Article by challenging political leaders to make the GET’s political feasibility a political reality.

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