Remapping the Fiscal State After the Global Financial Crisis

Abstract

The global financial crisis (GFC) refocuses attention on the capacity of states to regulate global finance. In this article, I argue that states are augmenting their regulatory capacity by promoting the interpenetration of national economic surveillance systems. I develop this argument by exploring the recent efforts of powerful states to address a particular form of offshore regulatory escape: tax evasion. Previous analyses of offshore processes have been framed by strong assumptions about the geographic domains of states and markets. I present a new analytic framework that weakens these geographic assumptions and explains why some states are more able than others to address offshore tax evasion through unilateral, bilateral, and multilateral channels. The framework is applied to explain the mechanisms through which powerful states have reclaimed evaded taxes and forced global transparency standards on tax havens after the GFC. I conclude that the regulatory changes brought about by recent attacks on tax havens constitute an important remapping of the fiscal state. These attacks provide an interesting case study of the ways in which states are augmenting their capacity to regulate a range of cross-border financial flows.

Keywords:

• fiscal sovereignty
• global financial regulation
• tax havens
• state power

Notes

1 Under the Revenue Rule, fiscal sovereignty can be defined only as domestic sovereignty: the (nonexclusive) authority to tax within a given territory.

2 Rixen’s (2008) theoretical framework describes the conditions under which treaties are likely to be agreed to voluntarily.

3 In 2006, it was revealed that the CIA and U.S. Treasury had compelled SWIFT to open its database of international transactions to identify terrorism-related financial transactions. Belgium, the headquarters for the SWIFT consortium, declared the arrangement unlawful under domestic law. The program was widely criticized for stripping foreign citizens of their privacy protections and for lacking democratic oversight (Lichtblau and Risen 2006).

4 Sharman (2006), Rawlings (2007), Maurer (2008), and Shaxson (2011) are notable exceptions. Here, however, the focus is on interstate relations.

5 Most of the provisions of this act passed the U.S. Senate as part of the Hiring Incentives to Restore Employment Act (2010).

6 In the United Kingdom, for example, the draft Finance Bill (2011) proposed that HMRC’s surveillance powers be extended so that information can be requested from third parties on behalf of treaty partners. In January 2011, the U.S. Internal Revenue Service (IRS) proposed a draft rule requiring that financial institutions that are resident in the United States report interest payments to nonresident deposit holders. These rules are intended to help the IRS meet its future treaty obligations.

7 This strategy is outlined explicitly in a Swiss Federal Council (2009) report entitled Strategic Directions for Switzerland’s Financial Market Policy. In April 2010, the Swiss Bankers Association (2010b) released a similar strategy paper entitled 2015 Financial Centre Strategy.

8 Countermeasures were threatened, but never applied, as part of the OECD’s original campaign against harmful tax competition that began in 1996 (see Sharman 2006).

9 An earlier European Parliament draft directive, strongly opposed by the United Kingdom, sought to make market access conditional on the country of domicile exchanging tax information automatically with EU countries.

10 Future work may fruitfully develop the notion of regulatory space, defined as a common set of regulatory forces to which an economic agent is subject by virtue of his or her residence and citizenship status. A theoretical framework is required that: (1) conceives of different regulatory spaces as overlapping in both a jurisdictional and territorial sense and as anchored to, but not dominated by, states; (2) recognizes that people and firms actively shape the regulatory spaces they confront through financial and legal innovation as well as engagement with the state (see Shaxson 2011; Hudson 2000, 281); (3) accounts for latent regulatory gaps (e.g., undiscovered loopholes created by the intersection of tax treaties); and (4) explains the manner in which relative state capacity influences the spatial extent and evolution of regulatory spaces (i.e., through tax and trade treaties, international soft law, and so forth).

11 I thank two anonymous referees for drawing my attention to these parallels.