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What do Idaho and Estonia have in Common? They may well both be overrepresented

Write-Off: The Tax Blog

One of the many amazing things about being originally from Idaho (as I proudly am) is that your vote for Senator counts more than 20 times as much as someone from California. Being from a small state gives an Idahoan much more say on what happens in the Senate (and other places!). There are some who believe this similar result exists in many different organizations beyond the U.S. Senate.

In the OECD, for example, there are 36 member states, and things are done “by consensus”. This means that Estonia, which has a population of 1.3 million and a GDP of $41 billion, sits equally with the U.S., with 325 million residents, and a GDP of $19.4 trillion. How these two states should both be represented in this body is tricky.

How much say should Estonia get, versus the U.S.? It is hard to know how to aggregate votes in a “fair” way—this was the same problem that in the U.S. gave us a House of Representatives (allocated by population), and a Senate (equal representation). When you have many different component groups of a political whole, each important to the whole, but not equally important, it is tricky to know how to allocate them power to make decisions for the whole—there is no right answer, and someone will likely end up feeling like the system mistreated them.

Taxwise, why does this matter?

The OECD is currently very busy examining different tax issues related to the base erosion and profit shifting (BEPS) project. Many of these issues deal with how income from a multinational corporation is apportioned across countries. Imagine that a multinational corporation has economic activity in the U.S., and in Estonia. You can reasonably apportion this income in many different ways, some of which, while overall tax neutral for the corporation, will result in more income going to Estonia (and nations like Estonia) and less to the U.S., or more to the U.S. and more to Estonia. If a certain set of rules will benefit smaller nations at the cost of larger nations like the U.S., it matters how a consensus is reached.

Depending on how the political process that reaches that consensus is formed, you might get very different outcomes.

I have no evidence that the process is broken, and that countries like the U.S. might take advantage of countries like Estonia, or vice versa. But I know this is a real concern shared by some. As our tax policy becomes more and more global, the process whereby these consensuses are built should be well understood. And, as we see policy coming from the OECD, understanding exactly how it benefits, and hurts, each individual nation is also important.

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