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In previous articles, we have argued that European Court of Justice's reliance on nondiscrimination as the basis for its decisions did not (and could not) satisfy commonly accepted tax policy norms, such as fairness, adminstrability, production of desired levels of revenues, avoidance of double taxation, fiscal policy goals, inter-nation fiscal equity, and so on. In addition, we argued that the Court cannot achieve consistent and coherent results by requiring nondiscrimination in both origin and destination countries for transactions involving the tax systems of more than one member state. We demonstrated that – in the absence of harmonized income tax bases and rates – the Court had entered a "labyrinth of impossibility." Ruth Mason and Michael Knoll claim to have discovered a single, normative criterion that not only resolves this dilemma, but also explains the existing nondiscrimination tax jurisprudence of both the European Court of Justice and the United States Supreme Court. In fact, their crucial, but unrealistic, assumption that taxpayers can never move from one state to another confines the actual scope of their analysis to a very small set of cases involving cross-border workers. Although they endorse economic efficiency as the guidestar for judicial decisions regarding tax discrimination, Mason and Knoll fail to provide any evidence that their proposed norm would reduce tax-induced distortions more than competing norms, even in the limited situations to which their analysis applies. Nor do they make a convincing case that they have found the key to understanding the confusing and inconsistent U.S. and EU judicial decisions, which are not confined to cross-border workers. Finally, implementation of their proposed norm by legislation or litigation is not practical, given the particular tax systems that they say would be required. In short, their proposed norm does not provide a way out of the "labyrinth of impossibility" created by a nondiscrimination approach to taxation of international transactions.

This article analyzes a complex line of recent decisions in which the European Court of Justice has set forth its vision of a nondiscriminatory system for taxing corporate income distributed as dividends within the European Union. We begin by identifying the principal tax policy issues that arise in constructing a system for taxing cross-border dividends and then review the standard solutions found in national legislation and international tax treaties. Against that background, we examine in detail a dozen of the Court's decisions, half of which have been handed down since 2006. Our conclusion is that the ECJ is applying a standard of nondiscrimination to evaluate national tax laws in a manner totally divorced from the underlying tax policy norms that produced the legislation at issue. Some, but not all, of the decisions seem to require nondiscrimination based on the destination, but not the origin, of corporate investment. The result is a jurisprudence that fails to hold together substantively, functionally, and rhetorically. In many instances, this result follows from largely formalistic distinctions made by the Court, such as whether a withholding tax on dividends should be considered corporate or shareholder taxation.

In recent years, the European Court of Justice (ECJ) has invalidated many income tax law provisions of EU member states as violating the guarantees of the European constitutional treaties of freedom of movement for goods, services, persons, and capital. These decisions have not, however, been matched by significant European income tax legislation, because no European political institution has the power to enact such legislation without unanimous consent from the member states. Under the treaties, the member states have retained a veto power over income tax legislation. In this Article, we describe how the developing ECJ jurisprudence threatens the ability of member states to use tax incentives to stimulate their domestic economies and to resolve problems of international double taxation. We conclude that the ECJ approach is ultimately incoherent because it constitutes an impossible quest – in the absence of harmonized income tax bases and rates throughout Europe – to eliminate discrimination based on both origin and destination of economic activity. We also compare the ECJ's jurisprudence with the resolution of related issues in the U.S. taxation of interstate commerce and international taxation. Finally, we consider the potential responses of both the European Union and the United States to these developments.

In previous articles, we have argued that the European Court of Justice's reliance on nondiscrimination as the basis for its decisions did not (and could not) satisfy commonly accepted tax policy norms, such as fairness, administrability, economic efficiency, production of desired levels of revenues, avoidance of double taxation, fiscal policy goals, inter-nation equity, and so on. In addition, we argued that the court cannot achieve consistent and coherent results by requiring nondiscrimination in both origin and destination countries for transactions involving the tax systems of more than one member state. We demonstrated that – in the absence of harmonized income tax bases and rates – the court had entered a "labyrinth of impossibility." Ruth Mason and Michael Knoll claim to have discovered a single normative criterion that not only resolves this dilemma, but also explains the existing nondiscrimination tax jurisprudence of both the European Court of Justice and the United States Supreme Court. Although they endorse economic efficiency as the lodestar for judicial decisions regarding tax discrimination, Mason and Knoll fail to provide any evidence that their proposed norm would reduce tax-induced distortions more than competing efficiency norms, even in the limited situations to which their analysis applies. In fact, their crucial, but unrealistic, assumption that taxpayers can never change their residences from one state to another confines the actual scope of their analysis to a very small set of cases involving cross-border workers. That analysis is further limited by an unrealistic assumption of flat-rate taxation for individual income. Nor do they make a convincing case that they have found the key to understanding the confusing and inconsistent U.S. and EU judicial decisions, which are not confined to cross-border workers. Finally, implementation of their proposed norm by legislation or litigation is not practical, given the particular tax systems that they say would be required. In short, their proposed norm does not provide a way out of the "labyrinth of impossibility" created by a nondiscrimination approach to taxation of international transactions.

In recent years, the European Court of Justice (ECJ) has invalidated many income tax law provisions of European Union (EU) member states as violating European constitutional treaty guarantees of freedom of movement for goods, services, persons, and capital. These decisions have not, however, been matched by significant EU income tax legislation, because no EU political institution has the power to enact such legislation without unanimous consent from the member states. In this Article, we describe how the developing ECJ jurisprudence threatens the ability of member states to use tax incentives to stimulate their domestic economies and to resolve problems of international double taxation. We conclude that the ECJ approach is ultimately incoherent because it is a quest for an unattainable goal in the absence of harmonized income tax bases and rates: to eliminate discrimination based on both origin and destination of economic activity. We also compare the ECJ's jurisprudence with the resolution of related issues in international taxation and the U.S. taxation of interstate commerce, and we consider the potential responses of both the European Union and the United States to these developments.