As governments scramble for revenue to fund aging populations and infrastructure, some are pivoting toward “big picture” global reforms. However, these ambitious proposals often skip over the messy details that make them unworkable in the real world.
If we want sustainable growth, we should focus on perfecting the basics of domestic taxation—not chasing administrative “unicorns.” Here are three popular ideas that need a serious dose of reality.
1. The Mirage of “Global Formulary Apportionment”
The idea is simple: stop trying to track every transaction and just divvy up a company’s global profits based on a formula (like where their sales or employees are). But there’s a fatal flaw: there is no global definition of “income.”
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The Measurement Problem: Countries disagree on how to treat R&D, capital investments, and inventory. Without a unified starting point for what “taxable profit” even is, any formula is just a guess.
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The US State Lesson: Many US states use this system, but even they can’t agree. In 2026, 37 out of 45 states use only sales to apportion taxes—a shift driven by the desire to avoid taxing local investment or jobs.
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A Better Way: Instead of complex formulas, policymakers should look at cash-flow-based systems (like those in Latvia or Estonia) that simplify the tax base and encourage immediate investment.
2. The Fallacy of Tax Harmonization
Some advocates dream of a “tax utopia” where every country has the same rules to eliminate tax competition. They often claim massive revenue losses from “misalignment,” but the scale is often exaggerated.
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Missing the Forest for the Trees: The Tax Justice Network recently argued that differences in US and EU rules cost the EU “5 times Greenland’s GDP” (about $16.6 billion). While that sounds large, it’s tiny compared to the nearly $4 trillion US investment position in Europe.
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The Real Revenue Gap: If EU countries need cash, they shouldn’t obsess over “tax conquest.” The annual VAT compliance gap is 33 times larger than the “Greenland” figure, and policy gaps leave hundreds of billions on the table. Fixing your own VAT system is far more effective than forcing the rest of the world to change.
3. The Danger of Taxing “Gross” Revenue
In a rush to tax cross-border digital services, some nations are making a classic economic mistake: taxing total revenue instead of net profit.
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Ignoring Costs: When you tax gross income, you ignore the business’s costs. This effectively penalizes low-margin companies and can lead to taxes that exceed actual profits.
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The IMF Warning: A 2025 study by economists Li Liu, Alexander Klemm, and Parijat Lal found that a 1% increase in withholding taxes on royalties reduces those flows by 4%. For technical fees, the drop is one-to-one.
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The UN Treaty Risk: Despite these warnings, the UN Tax Committee added Article 12AA to its model treaty in 2025, facilitating these harmful gross-basis taxes. Analysis from Oxford Economics suggests that any revenue gained from Article 12AA would be wiped out by the resulting drop in services trade and investment.
The Bottom Line
Whether it’s a “one-size-fits-all” global formula or ignoring the costs of doing business, these radical shifts ignore basic economics. The most successful tax systems aren’t the most “global”—they are the ones that prioritize simplicity, neutrality, and stability. Would you like me to create a summary table comparing the projected revenue gains versus the economic risks of these three policies?