The international tax system's foundation is under unprecedented strain, having weathered BEPS 1.0, BEPS 2.0 with its two pillars, and now facing a competing UN initiative. But at the base of a lot of these is a specter of residence taxation. Yariv Brauner’s You Play, You Pay Mobility, Territory, and Exclusive Source Taxation in the 21^st Century forcefully outlines the problems of residency-based system and advantages for source as the exclusive means. It also addresses many of the critiques of using source as a basis for taxation. Finally, it presents some guidance on how to think of exclusive source-based international tax rules, with an emphasis that, even here, cooperation is needed, but a first mover could push the project along.

Brauner starts with the problems of residency taxation. For human beings there was a sense of the personal nature of taxation that made residency-based income tax seem natural. Linked to these were ideas of the benefit theory or ability-to-pay. But state benefits do not just accrue to residents. Ability-to-pay too is mostly about progressivity and not a connection between states and taxpayers. In the more mobile world, these justifications look even more strained. And for those who care about progressivity, residency-based taxation, which often counts days, really allows some of the wealthiest people to escape taxation in general.

On the taxation of corporations, residency makes even less sense. Corporations do not really have a physical nature. The two major tests, place of incorporation and effective management are also easily gamed. Furthermore, corporations’ gains are more dispersed, and residency-based taxation here denies many less wealthy countries their fair share of the taxing pie.

Brauner then outlines why source as a single basis makes more sense. A great deal of the drama in international taxation involves double taxation between residency and source jurisdictions. Source itself would eliminate these. It would lessen significant tensions then and contribute to better coordinate tax rules among states. Furthermore, an exclusive source would help to unify the treatment of corporations and human beings in the tax situation. Investment choices about whether to use the corporate form are lessened.

Brauner provides a strong case for source taxation through his response to critiques of source-based taxation. Frequently, the attack on source and source rules is that there is no economic basis for them. But Brauner points out that economic efficiency is not the true goal of the international tax regime. Rather, source rules like many of the other rules represent a political compromise between various states. Indeed, part of the reason that source is garnering more attention is that many other countries outside the OECD are agitating for a greater share of the pie.

The second half of the paper is impressive for its menu of options. One that is important is the issue of business income. Brauner, because he moves away from the idea of residency, pushes against the antiquated permanent establishment concept. While seen of as a sourcing rule, the permanent establishment is really a residence-based tax system masquerading as source. Brauner provides two options, either allowing residual income to get distributed amongst all permanent establishments rather than to the corporation’s residence or eliminate permanent establishment together. He points out that the second of these, while radical, is not crazy, because currently enforcement with country-by-country reporting and automatic exchanges of information makes it easier and it handles issues like the digital economy much better. What hampers such a change again is more political, particularly since wealthy residence states, like the U.S., would lose their residual taxing rights. Brauner also points out though that a lot of the residence states are also still large source states. And the current global push is against allowing all the taxing powers to lie with these residence states.

Brauner closes it with a response to some of the realities. One of the biggest is whether the OECD countries that are mostly residence countries will cooperate and how to reach an agreement on these. While residence countries may want to keep the system they have, it is already cracking under pressure from the digital economy, and the political pressures of other countries that shows a shift in power. Additionally, while universality from the outset in source rules is impossible, there are mechanisms that move it there. Pressures build to resolve conflicts that lead toward double taxation. Indeed, over the last decade, unilateral actions by some states led to other states adopting something.

Bruaner’s piece raises some points. First, there are numerous critiques of moving toward a pure source-based system. But one thing we need to think about is the old saying of not letting the perfect be the enemy of the good. Sure, a source-based system as Brauner acknowledges can have a lot of problems there. But the goal is really trying to find something that is better than what we have. There will still always be risks of conflicts and double taxation. Sole source-based international tax rules too are not simple. But in many of these dimensions, the framework is an overall improvement from our current situation.

Additionally, the paper hints at something that has been brewing in the international tax debate, formulary apportionment. The connection between source-based taxation and apportionment, particularly on something like the sales factor, is strong. The two may indeed encourage each other. Moving one may then help spur the change toward the other, and in some ways, perhaps source-based taxation is a lower hanging fruit.

Finally, Brauner helps to reveal something else. The rules here are often couched in economics and the battle of capital neutralities. But these economic views, while important, cannot dominate the discussion. In many ways, international taxation, like a lot of aspects of taxation, are about power, the state, and the relations between states. They talk too about the society in which we live in too. In that way, focusing more on the fact that these rules shape the market rather than the other way around is a useful framing we should all take to heart. Bruaner’s piece reveals just how much our system then is really a set of ad hoc compromises between the powers of states and not really tied to some market economic reality that exists in nature.