Minimal corporate tax rates and environment-as-a-human-right have something in common, other things not.
Two developments last month demonstrate the breadth of what can be called “international law.” First is the matter of corporate tax havens. Some countries offer lower corporate tax rates than others and allow businesses to incorporate there–often independent of how much business is done in the low-tax country. The corporations then shift where their profits are reported, eroding the tax bases of the higher-tax countries where the companies actually do much of their business. The biggest corporate tax havens are Ireland, Caribbean island countries (collectively), Singapore, Switzerland, and the Netherlands. Those frustrated countries whose corporate tax bases have eroded have long sought an agreement to reduce this behavior by corporations. The substantial progress toward one is most evident in a multi-page document [PDF] developed by the Organisation for Economic Co-operation and Development (38 wealthy countries) and the Group of Twenty (some of the world’s largest economies). Among other things, this calls for countries to have a minimum 15% corporate income tax.
Second is relationship between human rights and the environment. Some scholars and activists have long asserted that if countries are obligated to realize their residents’ rights to for an adequate standard of living and health, then surely they must also ensure a clean and safe natural environment. After all, a polluted and unsafe environment would undermine standards of living and health. To that end, the UN Human Rights Council–a body of 47 rotating member countries–in a decision [PDF] last month “Recognize[d] the right to a clean, healthy and sustainable environment as a human right that is important for the enjoyment of human rights.”
Although each of these can be called “international law,” the situations’ characters, problem structures, requisite forms of agreements, and consequent interpretations diverge. The matter of corporate taxation is relatively close to countries’ core interests (i.e., generating revenue and facilitating economic growth) and readily quantified to assess compliance. It also presents a classic collective action problem: The countries are collectively better off if they all keep their taxes high but each would be individually better off setting its taxes lower than the others. If this sounds familiar, it’s because the countries are essentially trying to establish a cartel, in which numerous sellers agree to fix their prices above the market equilibrium in order to extract supra-normal quasi-monopoly profits. Here, the countries are “selling” the right to be incorporated there, and the “price” is the corporate tax rate.
Such cartels are difficult to maintain because, in the absence of a legally enforceable contract, members will defect by lowering prices. The instability of the Organization of the Petroleum Exporting Countries (OPEC) indicates this. While the OECD/G20 document is akin to a memorandum of understanding, a contract-like treaty with clear definitions, enforcement provisions, and universal participation will be necessary for the tax “cartel” to succeed. If just one country does not ratify such an eventual treaty, then it could reap great revenue by undermining its “competition” by setting a lower tax rate. Of the world’s 195 countries, 136 endorsed the nonbinding statement. This suggests that enacting an effective treaty will be challenging.
In contrast, a clean, healthy and sustainable environment is relatively distant from countries’ core interests and difficult to assess objectively. Furthermore, one country’s environment has only minor impacts on most others. The problem structure here is, in some ways, the easier one of raising the average well-being of the world’s people. If some percent–say 80%–of countries comply then this could constitute a genuine improvement. What’s needed is not a treaty with clear definitions, enforcement provisions, and universal participation, but instead increasing shared expectations of what it means for a country to be a member in good standing of the international order. Such expectations need not even be written, although doing so can help further develop them.
The foreseeable problem is that scholars, activists, and other motivated observers will use this decision as the basis of accusations that some countries have violated international law by failing to ensure a clean, healthy and sustainable environment. However, the decisions of a 47-member international council are not legally binding. It is my belief that many people who work in highly normative areas–human rights and environmental protection chief among them–suffer from the moralistic fallacy. In this inverse of the better-known naturalistic fallacy, one wrongly derives a descriptive “is” statement from a normative “ought” one. That is, the rough logic is that failing to ensure a clean, healthy and sustainable environment ought to violate international law, and thus it does.