Towards an International Tax Order for the Taxation of Retirement Income

In the last decades all over the world pension policy reforms have tried to account for the changing demographic and socio-economic framework. An excellent starting point for economic analyses of reform strategies is the Mirrlees Review which argues that pension policy should simultaneously address pension benefit design and the taxation of pensions. We focus on old-age pension taxation and address policy conflicts which come along with international migration of citizens as employees and pensioners. The widely implemented system of deferred income taxation of pensions benefits generates problems of international tax equity when workers who were exempted from income tax on their old-age pension saving emigrate and receive pension benefits in another country. We argue that it is unlikely to solve these problems in double taxation treaties and propose to amend deferred income taxation with the equivalent system of pre-taxed pension benefits. This amendment seems politically viable, since it keeps two attractive features of deferred income taxation, viz. intertemporal neutrality and preferential taxation in comparison to traditional comprehensive income taxation, but avoids inequitable income tax revenue losses, when pensioners emigrate. In order to achieve international equity among EU member countries we regard a multilaterally coordinated system of pre-taxed pension benefits taxation as a superior strategy to single-country measures or complicated renegotiations of bilateral double taxation treaties.