Frontloaded Income Taxation of Old-Age Pensions : For Efficiency and Fairness in a World of International Labor Mobility

Abstract

A comparative inspection of the rules of cross-border pension taxation across member countries of the Organization of Economic Cooperation and Development (OECD) shows that the existing pattern is extremely diverse and inconsistent and generates unfair outcomes for individuals and for countries. This article argues that this double fairness dilemma cannot be solved within the current network of double taxation treaties. Instead, it proposes a new approach for the taxation of old-age pensions in a world of high and increasing cross-border mobility of workers and pensioners. The article demonstrates that a coordinated move to frontloaded pension taxation would pave the way for an international pension tax order that eliminates the double fairness dilemma. An additional innovative element of frontloaded pension taxation is presented: the separation of individual tax assessment and tax payment, which may help curb political opposition against frontloaded pension taxation and smooth transitional effects after its introduction.