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THE Heinz JOURNAL

Niles Guo Production Manager Rodolfo Scannone Web Manager Editors Allison Bott Joseph Babler Joe Carusso Joseph Marren Jocelyn Meehan Clayton Oeth Robin Park Leah Scott Rekha Vaitla

Volume 13 | Issue 2 | November 2016

ARTICLES Thinking About How to Properly Tax Internet and Cloud Based Businesses

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Brett D. Maxfield

Tepid Optimism in Sino-American Relations: Pragmatism and Policy Rationales

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Liza B. Williams

When Democracy Hurts: America’s Ill-Fated Policy in the War on Terror Erik Goepner

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Properly Tax Internet and Cloud Based Businesses

Thinking About How to Properly Tax Internet and Cloud Based Businesses1 Brett D. Maxfield “There is nothing more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.”

Oliver Wendell Holmes, Jr.2

Introduction This paper provides an analysis of how new technology-based business models, such as Uber and Airbnb, are disrupting the ability of state and local governments to collect taxes from once easily-regulated services. In particular, this paper explains how different jurisdictions are reacting to the loss of tax revenue allowed for by the development of new mobile applications and other web-based businesses that escape traditional taxation. To conclude the discussion, this paper details best practices for jurisdictions seeking guidance on how to respond to this recent evolution in public finance. Political analysts have recognized the immediacy of the problems posed by cloud-based business as evidenced by a Governing.com article which named ridesharing a top ten legislative issue for 2016. According to the article, “[as] cities have seen a surge of app-based driving services, including Uber, Lyft and Sidecar.... many mayors have issued cease-and-desist orders to the new companies, but a handful of tech-friendly localities have revised local regulations to welcome them.”3 Although, thus far, states have left regulation up to the discretion of city leaders, this trend 1 The term “Cloud” refers to hosted data storage and processing capabilities made possible via the internet. Thus, all cloud issues are internet issues, but not all internet issues are cloud issues. Therefore, understanding the internet, its history of evolution as well as how it has been taxed is essential to understanding the specific issue of cloud taxation. As Ernst and Young, LLP has recently articulated in a white paper: “Software sold through smartphone app stores actually consists of just the display and user interface components of sophisticated applications that mostly run in cloud data centers. Although there are a number of definitions for cloud computing, cloud computing as borderless commercial transactions conducted over a virtual network (e.g., the internet) in which goods or services are provided to a user (related or unrelated) anywhere in the world with access to such network. More specifically, new technology sector offerings range from software as a service (SaaS) to infrastructure as a service (IaaS) and platform as a service (PaaS). These, in turn, are being joined by hybrid and specialized services, such as business process-, data center-, database- and testing-and-development as a service. Cloud market size projections vary by definition, with the enterprise market for public SaaS and IaaS alone estimated to be growing from $18.3 billion worldwide in 2012 to $31.9 billion in 2017.” See http://www.ey.com/ Publication/vwLUAssets/EY_- _Cloud_taxation_issues_and _impacts/$FILE/EY-Cloud-taxation-issues-and-impacts.pdf, p.7. 2 O.W. Holmes, Jr. “The Path of the Law,” Harv. L. Rev. 10, (1897): 457, 469. 3 “2015’s Top 10 Legislative Issues to Watch,” Governing.com, Accessed April 12, 2016, http://www.governing.com/ topics/politics/gov-issues-to-watch-2015.html

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The Heinz Journal may not persist. Just last year, Colorado joined California as the second state that “[established] statewide rules for ridesharing companies,” not to mention that Colorado was the first state to do so by statute.4 Legislative activity up to this point in time indicates that states will take a variety of approaches to regulation.5 Some states, like Illinois and Michigan, will consider preempting local oversight by converting ridesharing into an entirely state-regulated enterprise.6 Other states may look to the District of Columbia (D.C.) model which “permits ridesharing but also deregulates taxi meter fares when passengers order rides online -- a concession meant to make the taxi industry more competitive.”7 Before proceeding too far with the conversation on local cloud taxation, it is necessary to examine how federal and state laws and their respective tax systems affect the ability of local governments to address their loss of tax revenue. This paper builds on that discussion to detail the relevant policies and procedures of how regulation operates in a particular jurisdiction. In doing so, this paper addresses the following three subjects: state and local taxation law, internet laws, and the applicable federal regulations. All three of these subjects have played a role in the evolution of cloud taxation and influenced responses to the problems created by these cloud-based businesses. Questions regarding tax jurisdiction in cyberspace and the authority to tax online transactions are forcing a reexamination of interstate commerce and must be answered as they arise. As readers may now sense, there is nothing simple about this subject. The beauty of these cloud-based businesses is in their apparent simplicity which ironically clashes with the deceptively complex nature of the legal matter. 4 Ibid. 5 Ibid. 6 Ibid. 7 Ibid.

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There is irony in that contradiction because the beauty of these cloud-based businesses is their apparent simplicity. Consumers utilize these services because they are intuitive, easy to use, and affordable. New Paradigms of Public Policy Evolving Out of the Digital Economy A variety of approaches have emerged in response to the growth of the digital economy. Some local governments have bought into participating in this new economy. For instance, cities like Los Angeles have made it their primary goal to foster a local digital economy by offering tax incentives to cloud-based businesses that relocate to their jurisdiction. Alternatively, some governments resist changes due to a desire to protect the old brick and mortar manufacturing and service-based economy as illustrated by the City of Boston’s fight with Uber. Meanwhile, other localities, like the City of Detroit, have resisted change despite being under severe pressure to raise public revenues after years of economic downturn. Local governments’ response to fast-paced technological developments is reactionary and therefore slow regardless of a given jurisdiction’s political stance. Cities which pride themselves as being on the cutting edge of technology, such as New York, San Francisco, and San Jose, invariably lag behind regardless of differences in their ability to respond to technological change. It does not matter if a particular locality embraces the evolution of the digital economy since most localities will still encounter disruptions as they struggle to integrate the new businesses with the old taxation schema. Even jurisdictions resistant to change still find that it is in their best interest to understand the new dynamics so that they can get a fair chance to tax these endeavors. The City of Flint, MI, might be an example of this type of jurisdiction.

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Properly Tax Internet and Cloud Based Businesses Crossing the Chasm of Public Policy Adop- policy innovation, early-adopting cities include tion to address the Cloud Tax Issue New York, San Francisco, and San Jose. The next market segment is the early adopters who comIn 1991, Dr. Geoffrey Moore published his now prise approximately fifteen percent of the marseminal book entitled Crossing the Chasm: ket share. These individuals do not want to be Marketing and Selling High-Tech Products to the first to try something that surpasses their Mainstream Customers. The text is a marketing risk tolerance. Nonetheless, early adopters are strategy guidebook of sorts for high-technology compelled to participate once they see others startups. Dr. Moore emphasizes the need for successfully innovate. Cities like Los Angeles, early stage companies to focus on niche cus- Chicago, and Boston fit this characterization. Of tomers in order to outlast the depletion of the course, people may disagree as to what market company’s investment capital. Such a notion is demographics particular cities fall under. relevant here because Dr. Moore’s bell curve illustration of product adoption is, in many ways, Widespread product endorsement by earapplicable to governments and other similar ly adopters is followed by the entrance of the consumers. early majority into the marketplace. The early majority includes people that like new things, but whose risk aversion must be quelled by a well-established precedent of success evidenced by case studies and publicity from recognized leaders. This segment of the market constitutes approximately thirty percent of the total market. The early majority is followed by the late majority which is comprised of individuals who would rather completely avoid change if not for a sense of obligation to that often does not develop until several years after the new technology has become integrated into society. The late majority makes up approximately forty-five percent of the market. Finally, the last Figure 1 five percent are the true laggards. This demoThe distribution curve informs those launching graphic includes people that refuse to change new products how most markets will likely re- until it is an absolute necessity do to so. spond. Approximately 5% of all potential customers are the innovators of new technology. This paper postulates that local governments This group of market participants is represent- will parallel Dr. Moore’s categorization, but with ed by the green segment of the curve. These weight redistributed towards early actors. This individuals seemed more enthusiastic about redistribution accounts for different underlying new technology and are willing to take risks to assumptions. Dr. Moore’s model is predicated adopt new products, or in this case, policies. on government spending money to get a new New technology would never be scalable with- technology, whereas this paper addresses ways out the early adopters as customers and advo- for government to increase tax revenue. Govcates. Early adopters are the people that wait ernments will likely be much more compelled to for days outside the Apple store in anticipation respond to innovation than localities will be to of the newest product release. As it relates to purchase new technology given budgetary con-

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The Heinz Journal straints. This difference, despite its size, does not override the applicability of Dr. Moore’s bell curve as it relates to the risk tolerance of local governments. There are significant risks in setting up new tax systems. For example, changes to the tax code will likely attract lawsuits from disgruntled taxpayers and opportunistic attorneys. A negative court ruling may all but guarantee the loss of a policymaker’s career. Even absent the threat of litigation, the administrative costs incurred in establishing new tax regimes are significant. The chasm between early adopters and the early majority is precisely where a product fails. If a product does not demonstrate enough value to win over the early majority, the company will likely run out of capital and file for bankruptcy without sustained investor support. As the chasm relates to local tax policy, there are innovative cities, counties, and states that will assume the risks to establish new tax regimes in order to capture the revenues enabled by new technologies.. Some of these innovators will be inspired by brilliant foresight, and others are motivated by desperation. Regardless of particular motivations, new technology for cloudbased tax policies will follow the same pattern encapsulated by Dr. Moore’s bell curve. Drawing on that analogy, this paper predicts how local governments will evolve. Dr. Moore’s work provides an insightful frame for discussing local responses to the emergence of a digital economy. This frame is especially of interest because product innovation has created the very need for policy innovation. Jurisdictions receptive to policy innovation will develop new paradigms as they endeavor to be more creative. Some of these risk tolerant jurisdictions will not survive litigation or other resistance. These failed tax policies will fall prey to the chasm between early adaptors and the early majority as

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the former is unable to persuade the latter to follow suit. There is only a chance that the late majority joins the trend, if the early majority first adopts the innovation. . It is at this point that a respective innovation is established as a true success and proven method. Proposition 13 serves as an example of policy innovation that failed to cross the chasm. Proposition 13’s failure to set the standard for other governments demonstrates this fact. Although Proposition 13 may forever remain law in California, only few states have and will ever adopt the basic policy. Massachusetts and Oregon, for example, passed similar, but not nearly as radical property tax regimes. In sum, one can say that Proposition 13 has failed in the public market place of public policy ideas. A History of Internet Taxation The history of internet and cloud taxation8 actually began long before the rise of the internet, or even computers for that matter. In 1944, the Supreme Court of the United States of America (SCOTUS) determined under which circumstances a state could collect taxes on goods delivered in their state, but sold by businesses located in another state. In the seminal case McLeod v. J.E. Dilworth Co.,9 a Tennessee based business took orders for goods from an Arkansas company via phone and mail. The Tennessee business collected payments and delivered the goods to common carriers10 within the State of Tennessee. Arkansas felt entitled to collect a sales tax on these transactions because the goods were delivered by common carrier for use by the purchasing company located in Arkansas. The Court ruled that for the purpose of sales tax, the sale took place where the goods were paid 8 See FN1. 9 McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944). 10 Common Carrier Law and Legal Definition, last accessed April 18, 2016, http://definitions.uslegal.com/c/ common-carrier/

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Properly Tax Internet and Cloud Based Businesses for and delivered. Here, the sale effectively took place in Tennessee because the money was received in-state and the goods were delivered instate to common carriers. Arkansas’ imposition of a sales tax on this transaction was effectively a tax on interstate commerce in violation of the Constitution. Under the commerce clause, of the amendment, interstate commerce is expressly the domain of the federal government. Nevertheless, the Court seemingly reversed their position when presented with a similar fact pattern in McGoldrick v. Berwind-White Coal Mining Co.11 In McGoldrick, a New York City sales tax on transactions by a Pennsylvania corporation was upheld by the Supreme Court. The Pennsylvania corporation had an office in New York City that not only sold items, but also made deliveries within the state of New York. This is the key distinction between McLeod and the present case McGolrick; in the latter case, the company forced to pay taxes had an office located within the state imposing a tax. In 1967, the Supreme Court revisited the issue related to tax jurisdiction in the case National Bellas Hess, Inc. v. Dept. of Revenue.12 In this case, a Missouri based corporation was licensed to conduct business only in their home state and Delaware. The only potential contact the business had with the aggrieved state, Illinois, came in the form of catalogues that it mailed twice a year. Orders from these magazines were received via mail in Missouri. The Court’s decision hinged on the determination of whether or not the Missouri company received any benefit from the state of Illinois which could justify the tax burden. The Court determined that transactions conducted purely via the postal service did not merit the imposition of a sales tax on the out-of-state company. 11 McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 (1940). 12 National Bellas Hess, Inc. v. Dep’t of Revenue , 386 U.S. 753 (1967).

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All three cases focused on the degree to which the corporation made contact with the state wishing to impose a tax. This “nexus of contacts” consideration seems simple enough and is still at play in developing internet and cloud taxation policies. However, as a recent Ernst and Young white paper put it: “Business users or consumers can encounter potential new tax obligations and reporting burdens that vary from market to market. And if tension has been building between taxpayer and tax authority, the underlying reason is simply that the cloud is borderless and tax jurisdictions are not. But nothing is quite that simple in these early evolutionary days of cloud taxation. There are no familiar, cookie-cutter business models that tax authorities can readily understand. The existing tax law governing technology transactions are often perceived as outdated and inconsistent. The technology and business arrangements are such that even identifying the taxable location of either cloud service providers (CSPs) or their customers can be challenging.”13 In 1992, the Supreme Court visited the issue of state sales taxes for a fourth time in Quill Corp. v. North Dakota.14 In Quill, the Court focused on the nexus of contacts between the taxing state and the out-of-state business. The Court’s inquiry focused on the reasonableness for such an entity to expect to be burdened with a tax based upon the economic benefit it derived from contact with the outside state or protection from its laws. In doing this, the Court applied Nat’l Bellas Hess to North Dakota’s jurisdictional reach under their long arm statutes, 13 Channing Flynn, “Cloud Taxation Issues and Impacts,” EY, January 2015, http://www.ey.com/Publication/vwLUAssets/EY-cloud-taxation-issues-and-impacts/$FILE/EYcloud-taxation-issues-and-impacts.pdf. 14 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

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The Heinz Journal and in light of due process rights. These due process rights flow out of basic federal civil procedure jurisprudence including International Shoe Co. v. Washington15 and Burger King Corp. v. Rudzewicz.16 The Quill Court asked if the defendant had made sufficient contact with the forum state to expect to defend a lawsuit there. However, the Court did not require physical presence to establish jurisdiction. Instead, so long as the entity derived legal or economic benefits from North Dakota, there was sufficient contact. The court focused on both due process and Commerce Clause considerations in crafting a threepart test. The test consists of the following three questions: Does the party direct its sales to the residents of a state? Are contacts of the party with the state sufficient for due process purposes? And, is the tax related to the benefits the corporation receives from the state? The amount of in-state economic activity is a more important factor than physical presence therein or lack thereof. Although North Dakota satisfied the minimum contacts requirement for due process, it failed to satisfy the substantial nexus requirement of the Commerce Clause. This ruling reaffirmed the National Bellas Hess’ holding that jurisdiction should not be imposed on an entity whose only contact with a state was by mail.

To reiterate, under Quill, physical presence is not required by due process for jurisdiction, but it is required by the Commerce Clause or else a substantial nexus is not established. While this ruling upheld National Bellas Hess for the sake of stare decisis, its purpose was to send a message to Congress that it was the legislature’s responsibility to decide to what degree states should be able to tax parties only conducting business in-state by mail under their authority granted by the Commerce Clause. The notion, articulated by the Quill Court, that Congress should regulate how state and local governments can tax out-of-state vendors and buyers is a great idea, but it is one that has yet to be effectuated. Meanwhile, Congress has passed other laws which affect this matter in a different manner. Despite Congressional action, it is important to note how much discretion is still left to federal and state Courts to regulate this area. For example, the Illinois Supreme Court ruled in 2013 that the state’s Main Street Fairness Act, which imposed upon out of state retailers the duty to collect sales tax on annual sales of more than $10,000, violated the federal Internet Tax Freedom Act. The Internet Tax Freedom Act prohibits some, but not all, types of taxes on electronic commerce.17 At the time of the case, thirteen states had similar taxes yet to be challenged.18 Illinois was significant because it was the first state to overturn its own legislature.19 Illinois argued that affiliates in the state, who receive a percentage of any sales generated by customers that click to enact a sale through online merchants (i.e. Amazon) within the state, satisfied the nexus required for the collection of a sales tax.20 However, its own Supreme Court did not agree.

The Quill Court added that Congress should ultimately decide to what degree states should be allowed to burden interstate commerce with taxation. At that time, Congress had already considered legislation to overrule National Bellas Hess’ presence requirement more than once, but proposals consistently failed to gar17 Sal Robinson, “Illinois Supreme Court rules against ner adequate support.

15 International Shoe Co. v. Washington, 326 U.S. 310 (1945). 16 Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985).

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‘Amazon tax,” Melville House, October 23, 2013, http:// www.mhpbooks.com/illinois-supreme-court-rulesagainst-amazon-tax/. 18 Ibid. 19 Ibid. 20 Ibid.

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The value of this Main Street Fairness Act example is that it begs the question: “should tax jurisdiction be left to such a seemingly random process of policy making whereby different results come out of different states despite dealing with essentially the same facts before them?” When will these inconsistencies sufficiently interfere with interstate commerce such that Congress is compelled to mandate uniform state rules like the Court suggests in Quill?

Burger King appealed to the Supreme Court who reversed the Court of Appeals. The Court ruled that defendants purposefully availed themselves of the protection of Florida law, and therefore were subject to its’ courts’ jurisdiction. Due process was not found to be violated because the defendants should have reasonably anticipated being summoned into court in Florida for breach of contract as a result of their longstanding relationship with Burger King there.

Drawing Parallels between Civil Procedure The Burger King Court’s fairness test evolved and both Personal and Sales Tax Jurisdic- into a five factor reasonableness test in Asahi tions v. Superior Court.22 The five factor test in determining whether the assertion of personal jurisAs has already been mentioned, supra, there diction over a defendant violates due process is are many parallels between the jurisprudence as follows: (1) What is the burden on the defenof federal sales tax case law and federal civil dant?, (2) What are the interests of the forum procedure law regarding personal jurisdiction. state in the litigation?, (3) What is the interest of Specifically, Quill’s abandonment of the need the plaintiff in litigating the matter in that state?, for a physical presence per National Bellas Hess (4) Does the allowance of jurisdiction serve infor the sake of due process parallels reasoning terstate efficiency?, and (5) Does the allowance articulated in International Shoe Co. and Burg- of jurisdiction serve interstate policy interests? er King, supra.21 In International Shoe Co., the Court held that a person or entity may be sub- The Court in Asahi ruled that the burden on the ject to the jurisdiction of a state court, if the de- defendant was severe based on both the geofendant has minimum contacts with that state, graphic distance and legal dissimilarities beoutlines the limits on states’ long arm statutes tween Japan and the U.S. Plaintiff was not a Calimposed by due process as well as delineated ifornia resident, which diminished California’s requirements for valid service of process. In stake in the case. Neither interstate efficiency other words, the court detailed factors includ- nor interstate policy interests would have been ing the who, what, when, and where necessary furthered by granting jurisdiction to California to establish personal jurisdiction. over the defendant Asahi. The importance of these parallels with federal civil procedure jurisIn Burger King, the district court held that Florida prudence is that the Asahi test may prove useful had jurisdiction over a dispute between Burger in the area of sales tax legislation in justifying or King and a franchisee because of a state statute contesting a specific tax. extending jurisdiction to anyone in breach of a contract within the state. The Court of Appeals Also, this discussion shows that there is some reversed, ruling that, although the defendants consistency to the Supreme Court’s reasoning. had sufficient contact with Florida, it was still in The Supreme Court attempts to address differviolation of due process. ent issues with parallel logic. Accordingly, policy formulation will not occur in a vacuum. Instead, 21 International Shoe Co., 326 U.S. 310 (1945).

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22 Asahi v. Superior Court, 480 U.S. 102 (1987).

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The Heinz Journal a long history of related rationales for similar but different issues will instruct policymakers. This history is critical when thinking about how states23 should or should not be able to impose taxes upon cloud based ventures. Cyberjurisdiction The laws of civil procedure and personal jurisdiction, in the context of cyber law, have developed through cases concerning a state’s jurisdiction over an online business. This paper focuses on domestic tax issues related to new cloud based business models which is complicated enough it its own right. However, the matter is complicated further if one briefly considers international cloud-based companies. European headquartered cloud-based businesses merit a standalone paper with Brussels Regulation, the Rome I Convention, and other laws serving as the basis for discussion. These issues would arise because many new cloud-based companies that conduct business with the U.S. are popping up in Europe. At present, there is no multilateral convention to resolve Internet and e-commerce derived disputes over matters of jurisdiction, choice of law, nor conflict of law.

of Procedure Section 410.10 reads, “A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States.”24 By contrast, Massachusetts’ long arm statute is much more narrow, reading in part, “a court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a cause of action in law or equity arising from the person’s (a) transacting any business in this commonwealth, (b) contracting to supply services or things in this commonwealth (c) causing tortious injury by an act or omission in this commonwealth…”25

As mentioned, supra, every state in the U.S. has long arm statutes which attempt to impose jurisdiction over non-residents of the state if they have either engaged in tortuous behavior or conducted business within that state. Some states, like California, leave its statutes open-ended, simply expressing that it has as much jurisdiction over people outside of California as federally or its Constitution and the U.S. Constitution will allow. California Civil Code

The use of a long arm statute as justification for extending jurisdiction over a person or entity outside of a state is always first a due process under the 14th Amendment of the Constitution. This due process analysis was covered, supra, regarding International Shoe and the minimum contacts requirement valid jurisdiction over an out-of-state party. Still yet to be addressed is the matter of general jurisdiction. General jurisdiction is found when a party’s contacts with a state are so extensive that they are considered “systematic and continuous” as per the 1984 Supreme Court holding in Helicoperos Nacionales de Columbia. S.A. v. Hall.26 If a party falls within a state’s general jurisdiction, then that state has jurisdiction over that party, regardless of whether the claim satisfies the “systematic and continuous” activities requirement. Usually, a court will look to see if a party has established related items in the state, including incorporation, bank accounts, offices, etc. However, now a website also qualifies for general jurisdiction.27 In 2003, the 9th Circuit found that L.L. Bean, a Maine catalog retailer, fell under California’s general

23 See Hunter v. Pittsburgh, 207 U.S. 161 (1907): “Municipal corporations are political subdivisions of the state, created as convenient agencies for exercising such of the governmental powers of the state as may be entrusted to them....The number, nature, and duration of the powers conferred upon these corporations and the territory over which they shall be exercised rests in the absolute discretion of the state.” 207 U.S. 161, 178.

24 Cal. R. Civ. P. 410.10. 25 Mass. Gen Laws. ch. 223A, �� 3, see: http://www. lrcvaw.org/laws/malongarm.pdf. 26 Helicoperos Nacionales de Columbia. S.A. v. Hall, 466 U.S. 408 (1984).. 27 General Jurisdiction Law and Legal Definition, last accessed ________, http://definitions.uslegal.com/g/general-jurisdiction/.

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Properly Tax Internet and Cloud Based Businesses jurisdiction because of the Court interpreted the company’s website to be a virtual California because of its extensive marketing campaign in California and L.L. Bean’s relationships with California vendors.28 The Supreme Court has addressed this issue yet. The most famous cyber law case is Zippo Manufacturing Co. v. Zippo Dot Com, Inc.29 Here, the United States District Court for the Western District of Pennsylvania found personal jurisdiction over a California defendant providing services within the State of Pennsylvania, via its website. Rather than finding general jurisdiction through typical process, the court based its decision on a sliding scale test which related to website function and design. The court created a sliding scale between passive websites and interactive websites. According to the court, passive websites only posted information on one side. Meanwhile, interactive websites allowed customers to conduct business online or otherwise significantly interact via the website effectively establishing a “gray zone” in between the two. This case provides a useful analogy for cloud taxation despite the antiquated website design activity. In other words, one could anticipate the court’s use of parallel reasoning when addressing the issue of cloud taxation. For example, Airbnb and Uber could be located at one extreme of the continuum because these businesses have a physical interaction within states through their contractors and service providers. At the other extreme, might be mobile app games that users download onto cell phone like Words Withwith Friends and Candy Crush. Moreover, here is where technological advances would work in favor of the tax collector in a paradoxical way. For instance, it would be easier to track where the mobile apps were downloaded because, unlike Airbnb, all smartphones 28 Gator.com Corp. v. L.L. Bean, Inc., 341 F. 3d 1072 (9th Cir. 2003). 29 Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997).

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have GPS capabilities. Without that feature, it is difficult to identify what jurisdiction the renters are located in. Nevertheless, one can still get a fairly good idea of the rental’s jurisdiction based on its street address, which can then be digitally and automatically entered into a geospatial matrix that informs Airbnb which jurisdiction’s tax rate should apply. Thus, technology would make taxing these cloud business relatively easy in theory. However, the questions of the quantity and quality of contracts within the forum’s jurisdiction will still be preeminent in line with the tombs of jurisprudence that framed the approach of the subject of jurisdiction. Therefore, it is worthy to understand the way Zippo has influenced courts, and how courts have either found or rejected jurisdiction based on Zippo’s scale regarding business conducted in or over cyberspace. Passive Websites In the 1996 case Bensusan Restaurant Corp., v. King, a New York Federal District court ruled that a passive website, which only posted limited information like newspaper and magazine advertisements, did not justify establishing jurisdiction over an out-of-state company.30 A year later in Cybersell Inc. v. Cybersell Inc., the 9th Circuit ruled that a family-owned and operated computer consulting firm in Florida was not subject to jurisdiction in Arizona.31 The court concluded that although Cybersell’s mostly passive website made sales contact information accessible from Arizona, the company did not make specific efforts to market itself to Arizona residents, nor did it have any other type of contacts with the state. Thus, the court made it clear that the party must have done something more than just have a website which is accessible from the state. Rather, the party must have signified that 30 Bensusan Restaurant Corp., v. King 937 F.Supp. 295 (S.D. N.Y. 1996). 31 Cybersell Inc. v. Cybersell Inc., 130 F.3d 414 (9th Cir. 1997).

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The Heinz Journal it was seeking to target residents of the state. Notwithstanding that this decision contradicts the case, Inset Systems, Inc. v. Instruction Set, Inc. from just the previous year.32 In Inset Systems, Inc., a federal district court in Connecticut ruled that a website accessible within the state, which advertised for a Massachusetts-based business with a toll free phone number, had availed itself of the states’ jurisdiction. However, when this ruling was announced, it was seen as too expansive because it opened up the potential for most websites to have jurisdiction in all states in which their contact information was accessible via a website. Though the court did not make the distinction, it seems fairly obvious that a business in Massachusetts could expect to draw customers from its neighboring state of Connecticut, and thus could reasonably expect to be sought for jurisdiction in that state. The court would have probably ruled against jurisdiction, if the circumstances were different, e.g., if the company and website involved were similar and from a distant state like California.

the long-arm sales tax law. However, if the small business operates via eBay, then the portion of sales in that state is subject to taxation (keeping in mind, there are many potential inequities caused by this scheme which could have a cooling effect on starting and maintaining a small business through a channel like eBay, supra). A factor not considered in any of these cases was the distinction between providing services as opposed to products via the internet. , especially in the form of software in regards to the latter. This consideration was probably absent because of changes in technology and the significant length of time that had transpired since the rulings. Currently, cloud-based companies utilize a SaaS (software as a service) business model. Before this model, consumers would typically obtain software by going to a store in most states and buying a CD for their PC with Microsoft Office. Upon that transaction, the consumer would be charged with a sales tax. By comparison, today that same software can be bought online and downloaded, most likely without a sales tax collect. Instead, the software is effectively a good for sale that users pay a fee to download via the company’s website. This website is home to the most up-to-date product in the cloud. This information is accessible to users anywhere in the world with an internet connection, except perhaps in countries like China, which have major restrictions on internet access. From a tax perspective, SaaS should be viewed as a good, even though it is referred to as a service in the context of cloud-based businesses. Therefore, tax authorities should focus on these goods, which are more likely than not even on their radar, but which are very easy to track and trace in the era of big data.

All of these cases analyze proper jurisdiction based upon an Internet business model of one variation or another. There are many more such cases on this subject, but these cases established the basic frameworks from which all other cases draw upon in their analysis. In reasoning by analogy, one can see how these cases could assist sales tax policy makers during their decisions about what types of Internet and cloud-based businesses should fall into their sales tax jurisdiction. The one factor that was not directly addressed in any of these cases regards the volume of business that an outof-state party can conduct within another state. In a long-arm sales tax context, the purposeful availment might be based on the business’ gross revenues o residents within the state. Hypothetically, an out-of-state purchase of a single The Commerce Clause and the Dormant $10 widget from a small family does not trigger Commerce Clause 32 Cybersell Inc. v. Cybersell Inc., 130 F.3d 414 (9th Cir. 1997).

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A brief explanation of the Commerce Clause

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Properly Tax Internet and Cloud Based Businesses and the Dormant Commerce Clause is very important to understanding the history and context of state tax jurisdiction. Article 1, Section 8, Clause 3 of the U.S. Constitution, also known as the Commerce Clause, allows Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.”33 The Commerce Clause grants Congress the authority to regulate interstate commerce and restricts states’ power to regulate matters which effect interstate commerce. This limitation on state authority to regulate interstate commerce is known as the Dormant Commerce Clause. This prohibition is implied, not explicit. There is much debate about the meaning of the word “commerce” because the Constitution does not define it. As a result, some argue that it is limited to trade or exchange, while others advocate for a much broader definition. Regardless of the other factors operating, this interpretation is dispositive of your stance on the balance between state and federal authority. How one views this definition ultimately determines how one sees the dividing line between federal and state police power, even though there are other factors in the balance.

cal schools.35 Instead the Court argued that true purpose of the Clause was to regulate the channels of commerce, the instrumentalities of commerce, and actions that substantially affect interstate commerce. The Court continued to cut back federal power in Morrison v. United States, by stating that the Violence Against Women Act was not justified by the Clause.36 Up to this time, many thought that the Warren Court’s use of the Clause to help the cause of civil rights was acceptable, but this ruling made it clear that the scope of that use would be curtailed moving forward. In addition, this ruling established the precedent that Congress could no longer invoke the Clause in the preamble to a law to secure its legitimacy.37 Two other cases regarding the Commerce Clause are relevant to this discussion. In Healy v. Beer Institute Inc., the Court stated that any attempt by a state to regulate conduct wholly outside of itself violates the Clause, regardless if the commerce sought to be regulated had effects within the state seeking to regulate.38 In this case, Connecticut required out-of-state beer merchants to show that their sales prices to wholesalers within the state were the same as those charged to surrounding New England states. The Court said this law was a violation of the Clause “on its face” for two reasons. First, because it applied to only those engaged in interstate commerce and, second, it was an attempt at an illegal protectionism. One should see how this case might be argued by analogy when it comes to Internet commerce and cloud taxation issues, especially with those aimed as some form of protectionism.

The Commerce Clause (“Clause”) has been used to uphold federal laws in areas that do not seemingly pertain to interstate “commerce”. For instance, in NLRB v. Jones & Laughlin Steel Corp., the Court took an extremely broad view of the Commerce Clauses’ implied meaning to encompass federal authority to regulate the states’ interests.34 In 1995, the Rehnquist Court limited on the Commerce Clause’s overreaching power in Lopez v. United States, stating that the In the remaining case Granholm v. Heald, Michfederal Gun Free School Zones Act of 1990 had gone too far in trying to regulate firearms in lo- 35 Lopez v. United States.

33 U.S. Const. art. I, § 8, cl. 3. 34 NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937).

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36 Morrison v. United States, 529 U.S. 598 (2000). 37 For a more detailed narration and in depth analysis see https://www.law.cornell.edu/wex/commerce_ clause. 38 Healy v. Beer Institute Inc., 491 U.S. 324, 336 (1989).

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The Heinz Journal igan and New York both had laws that allowed for wineries within each respective state to sell online to those within those states, but forbid out-of-state wineries to do the same.39 Both states laws were ruled to violate the Dormant Commerce Clause by favoring in-state wineries. Unlike Healy, this case specifically addressed online commerce albeit not the taxation of online commerce. Yet, it is a relevant case to keep in mind when thinking about the cloud taxation issue. The Internet Tax Freedom Act In 1998, Congress passed the Internet Tax Freedom Act to encourage further growth of the Internet and commerce via the Internet.40 This law has evolved over time and changed somewhat since its inception, but it can be best summarized in its initial purpose and effect by the words of a 2003 Congressional Budget Office (“CBO”) report. Besides posing “a three-year moratorium on new federal, state, and local access levies,” this law allowed existing taxes on sales over the Internet to remain in effect. In addition, it permitted governments to impose new taxes on such sales as long as they applied equally to sales made by other means, but it prohibited discriminatory taxes on Internet sales. The law did not give states and local governments the authority to require that remote sellers collect sales taxes.”41 This law prohibited federal, state and local taxation of Internet access, certain types of online commerce and other related potential taxes, such as bandwidth and email taxes.42 This act also established an Advisory Commission on 39 Granholm v. Heald, 544 U.S. 460 (2005). 40 Sal Robinson, “Illinois Supreme Court Rules against ‘Amazon Tax’”, Melville House Books, Accessed April 4, 2015. 41 U.S. Congressional Budget Office, Economic Issues in Taxing Internet and Mail-Order Sales, Washington, DC, 2003. 42 Ibid.

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Electronic Commerce to make recommendations about Internet taxation, including whether to require retailers to collect sales taxes on Internet purchases.43 The Commission was required to prepare a report: (1) examining how states and other countries tax the Internet; and (2) considering the effect of taxation on the ecommerce.44 Although the law had a cooling effect on states taxing online commerce, it did not prohibit taxation of online sales, as these may be taxed similar to mail order sales.45 It was extended several times by Congress, and became the Permanent Internet Freedom Act in 2014.46 From the perspective of this paper, the real lasting impact of this action by Congress is the policy analysis that came out of the Advisory Commission’s report, supra. This analysis was part of the initial action in 1998, but it did not make recommendations as per the protocol of the CBO guidelines.47 A similar follow up report worthy of note was published by the COB in 2003 entitled Economic Issues In Taxing Internet and Mail Order Sales,48 and the Congressional Research Service (“CRS”) built upon these reports in a report of 2013 entitled State Taxation of Internet Transactions.49 CBO 2003 Report The 2003 CBO report did an ideal job of developing a framework to analyze the issue of the states’ desire to tax online transactions. The report consisted of three sections. The first sec43 Ibid. 44 Ibid. 45 Wilson, Daniel. 2016. “House Votes To Permanently Block Internet Access Taxes - Law360.” Accessed April 4, 2015. http://www.law360.com/articles/665319/ house-votes-to-permanently-block-internet-access-taxes. 46 Ibid. 47 U.S. Congressional Budget Office, Economic Issues in Taxing Internet and Mail-Order Sales, Washington, DC, 2003. 48 Ibid. 49 Steven Maguire, State Taxation of Internet Transactions, Congressional Research Service, 2013.

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Properly Tax Internet and Cloud Based Businesses tion of the report was an overview of the causes and conditions leading up to the need to address the remote sales issue. This overview included a summary description of the effects that the internet’s unforeseen consequences were having on states budgets, inter alia, and an explanation of the debate over how to best collect on the billions of revenues that were being transacted tax free. These revenues would have otherwise been collected, but for the rise of the internet, via a coordinated effort to promote remote sellers in agreeing to collect these sales taxes in their states, either by an act of Congress or voluntarily, as per a MOU between states. The following table, per the Report, shows the amount that each state depended on sales tax as a source of revenue, and how differently each state was regarding the complexity of overlaying a system which could equitably address such a synthesis50:

Table 1a

50 Ibid. pp. 4-5.

Table 1b

Based upon on the above table, the CBO noted that the potential loss of revenue from remote purchases had generated the proposed idea that vendors should be required to collect use taxes for the states. The CBO referenced Quill in this analysis and interpreted it as: “only the Congress can give states the authority to require remote sellers to collect use taxes.”51 In addition, the CBO noted that the federal government’s only stake in the Internet sales tax debate was as a regulator of interstate commerce, and that the issue had no federal budgetary effects. The CBO then outlined five critical issues from a policy analysis perspective, which addressed whether Congress should iron out the wrinkles. Two policy arguments in favor for Congressional action to fix things included: (1) inefficiencies would result when differential commodities taxation causes tax-motivated decisions about consumption and production, and also when compliance costs increase and are imposed on remote sellers to collect and remit use taxes from multiple jurisdictions; and (2) a uniform system requiring remote sellers to collect taxes imposed by Congress would distribute the burden of sales taxes more equitably, and it would allow for more equitable treatment of people in comparable circumstances. Three policy arguments in favor of not 51 Ibid. pp. 7.

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The Heinz Journal including Congress in the matter included the idea that it will increase the size of government and eliminate a tax advantage that is helping the Internet grow to its economically desirable. The CBO then outlined issues which it considers the crux of the matter from a policy analysis as to whether Congress should iron out the wrinkles: there is an inefficiency that results when the differential taxation of commodities causes tax-motivated decisions about consumption and production, and also increases the compliance costs that would be imposed on remote size.52 It would also “impose a tax burden on remote sellers who, unlike local sellers, receive no compensating public service benefits (for example, fire and police protection).”53 Finally, it will “compromise the fiscal autonomy of states and local governments, which is guaranteed by the Constitution, if standardization of tax bases and rates is required to reduce compliance costs.”54 The result of this analysis and deliberation was the evolution of a compromise, which did not require Congress to act in the form of the Streamline Sales and Use Tax Agreement.55 The Streamline Sales and Use Tax Agreement The Streamlined Sales and Use Tax evolved out of a series of events in response to the Internet Tax Freedom Act and a fear that Congress might attempt to permanently prohibit states from collecting sales tax on online commerce.56 The Streamlined Sales Tax Project (SSTP) was created by the National Governor’s Association and the National Conference of State Legislatures in 1999 to address the sales tax collection issues resulting from internet commerce.57 Leaders 52 Ibid. 53 Ibid. 54 Ibid. 55 “Streamlined Sales Tax,” Streamlined Sales Tax Governing Board Inc, Accessed March 29, 2015, http://www. streamlinedsalestax.org/index.php?page=faqs. 56 Steven Maguire, State Taxation of Internet Transactions, Congressional Research Service, 2013. 57 Ibid.

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from both Associations were members of the Advisory Commission on Electronic Commerce during the time when the Internet Tax Freedom Act was being formulated in 1998.58 The result was that many states’ governors agreed to work together to develop a simpler and efficient sales tax system. The SSTP was dissolved once the Streamlined Sales and Use Tax Agreement (SSUTA) became effective in 2005.59 Today, 44 states and the District of Columbia are members of this regime, but only 24 of these states have passed legislation to adopt the regime as part of their state’s law.60 The Streamline Sales Tax Governing Board claims: “The Agreement minimizes costs and administrative burdens on retailers that collect sales tax, particularly retailers operating in multiple states. It encourages “remote sellers” selling over the Internet and by mail order to collect tax on sales to customers living in the Streamlined states. It levels the playing field so that local “brick-and-mortar” stores and remote sellers operate under the same rules. This Agreement ensures that all retailers can conduct their business in a fair, competitive environment.”61 However, as already mentioned, only 24 of the 44 states have passed the conforming legislation. Those states which have passed the legislation have a total population of 92,781,860, representing 33% of the country’s population.62 58 Ibid. 59 Ibid. 60 “Streamlined Sales Tax,” Streamlined Sales Tax Governing Board Inc, Accessed March 29, 2015, http://www. streamlinedsalestax.org/index.php?page=gen_3. 61 “Streamlined Sales Tax,” Streamlined Sales Tax Governing Board Inc, Accessed March 29, 2015, http://www. streamlinedsalestax.org/index.php?page=gen_1. 62 Ibid. The following states that have passed legislation to conform to the Streamlined Sale and Use Tax Agreement: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont,

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Properly Tax Internet and Cloud Based Businesses

See map, infra.63

Figure 2.

As the map illustrates, the full member states are not big economic powerhouse states and the Sunbelt states are merely advisory members. Although the Agreement stands as a logical solution, the national indifference towards the Agreement demonstrates the mass uncertainty surrounding it. Part of this uncertainty rests in the fact that this Agreement fails to directly address the cloud taxation issue. Thus, there rests a need for policy solutions to better clarify the details of the Agreement, thereby encouraging more states to adopt the regime. Aside from a lack of clarity, many other controversies exist with the Agreement. First and foremost, compliance with the Agreement is voluntary on the part of the sellers. Remote sellers who do not comply with the Agreement possess a competitive advantage over those who are compliant.64 Retailers with physical stores Washington, West Virginia, Wisconsin and Wyoming. 63 Ibid. 64 Washington State Department of Revenue, “Streamlined Sales and Use Tax Agreement”, Department of Revenue Washington State, Accessed April 4, 2015, http:// dor.wa.gov/Content/FindTaxesAndRates/RetailSalesTax/ DestinationBased/DepartmentStreamLineFAQ.aspx.

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are at an obvious disadvantage as well. It remains unclear, however, the effect on resellers. In 2008, the City of Chicago sued eBay and its subsidiary, StubHub, for not charging customers with city amusement taxes on tickets sold via the websites.65 While eBay did not have any offices in Chicago, StubHub possessed a property in the city.66 The city filed two separate complaints against each company requesting eBay and StubHub to disclose all records of sales in Illinois.67 EBay responded by releasing a public statement that taxing small internet businesses would prove to be cost prohibitive for these companies and detrimental to their sustainability.68 This same year Amazon and Overstock. com separately sued the State of New York seeking to overturn a law requiring retailers to pay taxes if they acquire New York state clients as a result of advertisements through web links.69 Both companies argued that the law was in violation of the Commerce Clause. Both cases were dismissed in 2009, and a New York appeals court upheld the dismissals in 2010.70 In 2013, New York’s Court of Appeals also upheld the rulings stating that the companies “established an in-state sales force” via their agreements with affiliates, which collected commissions for posting links on their websites.71 Why should states join the Streamline regime fully if they can keep their systems in place and tax as they wish? States like New York may lose more 65 Jane Mcentegart, “City of Chicago sues Ebay over Taxes on Event Tickets”, TomsGuide, Accessed April 5, 2015, http://www.tomsguide.com/us/eBay-taxes-chicago,news-1423.html. 66 Ibid. 67 Ibid. 68 Ibid. 69 Chris Dolmetsch, “Amazon, Overstock Lose Challenge to N.Y. Web Sales Tax,” Bloomberg, March 28, 2013, http://www.bloomberg.com/news/articles/2013-03-28/ amazon-overstock-lo,se-challenge-to-n-y-web-sales-tax. http://www.bloomberg.com/news/articles/2013-03-28/ amazon-overstock-lose-challenge-to-n-y-web-salestax. 70 Ibid. 71 Ibid.

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The Heinz Journal revenue by adjusting their practices and do not you, the buyer, have a fake overpriced hand want to bank on a voluntary system which they bag and cannot get your money back from the cannot enforce. fraudulent seller. However, you may be able to collect a refund on the sales tax paid on this The states that have made the Streamline Tax fraudulent transaction if you file an appeal to part of their legislature have not entered the late the State Tax Commission via eBay. This is all majority segment of the market yet (if states are hypothetical, but one can imagine there is no marketplaces for ideas about tax policy), which easy fix to this scenario. To be just, every state according to the Chasm thesis is essential for a collecting taxes on these types of transactions venture to thrive. Also, though they have almost would have to set up a special department for full saturation in the early majority segment of these types of problems. Consequently, the states, the states which have adopted the re- buyer will be left with a bunch of hoops to jump gime are more conservative. through before they can get the relatively small sum which the sales tax on such a transaction Winkles Upon Winkles Upon Winkles, the might engender, meaning most would likely not FTC, and Local Zoning Laws pursue trying to recapture this loss. Again, this is just an exercise of the imagination of what all There are many laws affecting the operation the complexities of the web of laws might inflict of the Internet and internet-based businesses. upon both consumers, states, and sellers or reThough these agency regulations may be unre- sellers as a result of a poorly planned sales tax lated to taxation issues, they play a role in shap- regime. ing the path toward possible solutions to the remote tax issue. One example is the FTC’s Con- In another example, imagine that the State of sumer Sentinel program, which has a mission California enters into an agreement with Airbnb to uncover, inter alia, internet fraud schemes.72 to have it collect the use tax from those using One of the largest problems discovered con- the service within the state which hotels colcerning online fraud is the sale of counterfeit lect. In exchange, the state would establish a products via sites like eBay, where the buyer is law prohibiting the local governments from retold and believes they are purchasing, for sake stricting their residents’ use of their properties of illustration, a Coach handbag, which has a for short term rentals within their jurisdictions. high retail price, but which they believe they This idea may seem farfetched, but this would are getting for a bargain from someone who mean billions of revenues long term, otherwise just needs to generate some fast income. Now lost to the state potentially, in exchange for takimagine the wrinkle a sales tax brings into this if ing away the local right to control land use as the buyer not only gets cheated out of the good short term rentals. One can see how a tax law they thought they were purchasing, but pays brokered by the state with a large internet or state sales tax on an inflated price for a good cloud based business, like Airbnb, could potenwhich is a fraud. This would add insult to injury tially have ripple effects into areas totally unif for example eBay collected the sales tax from foreseen or not properly planned for due to the the buyer, making it easy for the sellers, here large sums of money at stake in lost revenues. fraudulent, not to have to collect the tax. Now, No Cloud dwells in the Clouds 72 Federal Trade Commission, “Consumer Sentinel Network,” Federal Trade Commission, Accessed April 6, 2015. https://www.ftc.gov/enforcement/consumer-sentinel-network.

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To reiterate, the term “cloud” means that the local pc, server, or smartphone is accessing via the

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Properly Tax Internet and Cloud Based Businesses internet to a hosted server on which the data and software dwell. There are private clouds which are hosted on a private, on premise location owned or leased by the company which owns the cloud; there are also public or shared clouds with redundancy hosted by providers, such as Microsoft and Amazon, inter alia. Thus, no cloud is truly in the clouds. All clouds dwell on a physical geography, which may trigger general jurisdiction issues. These cloud data centers are often called farms. The location of a farm will almost certainly subject the owner of that farm to general jurisdiction within that state due to the significant contacts physically having a data center trigger regarding availment of the economic and legal benefits of a state. Public cloud computing is about borderless global networks because the same data and software can be located with redundancy in several countries, for example, the U.S., the E.U., and India. Therefore, the location of a public cloud cannot be pinpointed -- most small, medium-sized, and even large companies use public cloud services such as those offered by Amazon or Microsoft and do not know where the physical location of their vendor’s hosting infrastructure is located. Moreover, the space upon it is leased rather than owned (the business of providing cloud bandwidth is a SaaS in itself), which makes the question of which state is responsible for taxing public clouds unanswerable based on the physical location of the cloud, or at least less of a factor. There is always the small chance that a SaaS states that it uses Microsoft or Amazon, and the state tax collector happens to know that that specific provider has a data center within its state, but this is an outlier and stretching the boundary of minimum contacts. PriceWaterhouseCoopers (PWC) published a white paper in 2012 entitled How Does One Tax the Cloud? which asks a series of rhetorical question along this line of reasoning worthy of consideration: “If a state taxes at the point of use, what if services are free at the point of use? If tax is

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based on the location of the servers or the office of the cloud computing provider, will providers simply move to the lowest-tax jurisdiction? How does a provider or purchaser avoid being taxed in two locations simultaneously when states apply different sourcing rules for sales and use tax purposes?”73 Though most states have not even begun to address the tax issues arising out of the clouds, some do have their heads in the clouds when it comes to thinking about how to tax SaaS. In 2009, the State of Washington State specifically taxed SaaS providers for purposes of sales and use tax, as well as business and occupancy tax.74 In this same year, Missouri ruled that SaaS hosted outside the state was not subject to sales tax based on its understanding of minimum contacts,75 but New York determined that SaaS hosted out of state are taxable if accessed from a location within the state. New York stated that SaaS is “tangible personal property, the use of which occurs when accessed in New York, and that access constitutes a taxable transfer of possession of the software, because the customers gain constructive possession of the software, and gain the use of the software,” but hosting services are exempt in New York if those services can be purchased as software licenses.76 This already complicated process thus becomes progressively more convoluted. In Massachusetts, where SaaS is taxed, a local SaaS company that provided employment application collection and selection services was deemed tax exempt because the “customer was purchasing the information, not the use of the software.”77 It should also be noted that, according to PWC, many states do not tax services, and cloud computing/SaaS is often considered a service -- not 73 Jennifer Jensen, “How Does One Tax the Cloud,” PricewaterhouseCoopers, January 2012, pp 5. 74 Ibid. 75 Ibid. 76 Ibid. 77 Ibid.

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The Heinz Journal a good -- in the form of a software. Though, as the example of New York, supra, illustrates, this can go either way.78 Again, PWC asks some good questions for tax policy makers to consider: “A major challenge in the taxation of cloud offerings is in the tax classification of cloud services themselves. Is the offering a taxable or nontaxable service? Is it a data processing or information service? Is it the sale or lease of tangible personal property? While a significant number of states have addressed cloud services from a SaaS point of view, very few states have addressed tax classification from an IaaS or PaaS standpoint, and very few states have updated their statutes and regulations to address this emerging use of technology.”79 IaaS stands for infrastructure as a service, and PaaS stands for platform as a service, both are types of cloud offerings, and have been described in a simple manner previously, supra, as the SaaS of SaaS, but this is not technically correct. However, this paper aims to offer a simplistic explanation for those who are not tech-savvy. While a company might not wish to have a private cloud due to it triggering jurisdiction within the state where it is physically located, tax benefits are often offered by states to encourage companies to locate their clouds or data farms within their borders. However, this is a matter to negotiate with the state and local jurisdiction prior to committing to a location. According to PWC, some states see private cloud services as ripe for tax purposes, but in other states, service transactions are not.80 However, the lease of tangible personal property is generally subject to tax, and the State of Vermont has suggested that computer memory is tangible per78 Ibid. 79 Ibid. 80 Ibid., pp. 6.

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sonal property even though it has yet to tax it as such. Thus, states may start taxing the hosting or maintenance of a website on a server as a sale, or lease, of tangible personal property.81 Furthermore: “Of potentially greater consequence are the possible nexus implications of leasing tangible personal property in a state. Leased property in a state may create nexus for both income tax and sales and use tax in the state where the assets are located. Using a private cloud could create an income tax filing requirement and a sales and use tax collection responsibility for the company. The sales and use tax collection responsibility would apply to all the company‘s transactions in the state, not just those dealing with acquiring private cloud computing services.” Some states have taken steps which threaten to tax the nexus consequences of a private cloud within their borders.82 The State of Texas had a regulation that made any retailer which owned or used tangible personal property within the state, including a computer server or software, subject to sales and use taxes.83 However, in 2011, Texas reversed this position; this example illustrates that states are becoming aware of these issues.84 The state of Washington has voiced to many software headquartered companies within the state that “ownership of or rights in computer software, including master copies of software, digital goods, or digital codes, stored on servers located in the state” will not be used as factor in determining whether a party has substantial nexus.85 Of course, this is not for the direct benefit of the companies headquartered in the state, but for their clients, 81 Ibid. 82 Ibid. 83 Ibid. 84 Ibid. 85 Ibid.

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Properly Tax Internet and Cloud Based Businesses since any physically-located headquartered traditional tax revenues but issues of equity, companies are already subject to the jurisdic- economic viability, and the creation of new regtion. ulations to protect consumers, while facing the death or decline of historic industries. This new States want to attract data farms. Giving tax economy has been called by many names -- digbreaks is often the key to a state attracting big ital, share, on demand, and the disruptive econcompanies to locate a data center in its juris- omy -- and it is all these things. The Internet, diction. The states which are “the frontrunners SaaS-based businesses leveraging cloud techin a race to attract server farms and data cen- nology, and smartphones have transformed ters through tax incentives include Alabama, economic patterns worldwide and will continue Kentucky, New York, North Carolina, Oklahoma, to change and evolve. How can state and local Tennessee, and Virginia.”86 In 2007, the state of governments keep up with the changes and Washington decided that data farms would no address them satisfactorily? What role should longer get a tax break.87 Microsoft and Yahoo the federal government play in this? There is an stopped construction of their centers in Wash- ever expanding web of interwoven systems of ington, and Microsoft moved its center to Tex- law, policy, and technology which serve as the as.88 As a result Washington temporarily rein- contextual backdrop of the narrow issue of how stated the tax exemption, but the repeal of the can a city properly tax Airbnb, Uber, or other tax incentive has seriously harmed the ability of SaaS based businesses. the state to continue to keep and attract new centers. The neighboring state of Oregon, on   the other hand, has attracted a Facebook data Conclusion center via generous tax incentives.89 In January of 2015, House Speaker John BoehBack to the Beginning: Uber and Airbnb ner made a statement that Congress would revisit the Internet sales tax issue within the year. In January of 2015, the State of Virginia reported Congress has been studying this issue for years. that it had received $1.7 million in taxes from Several bills addressing the issue have been proonline travel companies, such as Hotel.com, posed but have failed to gain enough support to but none from Airbnb which had around 2,500 pass. In 2013, the Congressional Research Serlistings in the state at the time.90 Similarly, Uber vice published a report entitled State Taxation and other SaaS companies made more efficient of Internet Services, supra, which narrates the as a result of GPS-enabled smartphones and following summary of one of the bills proposed SaaS business models “continue to undercut to address the issue in its basic outlines, later the licensed, regulated and revenue producing” referencing other bills with similar features, traditional industries.91 State and local govern- both of which are based upon the Streamline ments are faced not only with the declines in Sales and Use Tax Agreement, supra: 86 Ibid., 8. 87 Ibid. 88 Ibid. 89 Ibid. 90 Frank Shafroth, “Unforeseen Fiscal Challenges of Uber-Like Services,”Governing, March 2015. 91 Conor Friedersdorf, “In an Era of Uber and Lyft, One City’s Taxi Regulations Make No Sense,” The Atlantic, March 23, 2015.

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“Under S. 1452, Congress would have granted authority to states to compel out-ofstate vendors to collect sales taxes, on the condition that 10 states comprising at least 20% of the total population of all states imposing a sales tax have implemented the SSUTA.The legislation also included

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The Heinz Journal additional requirements for administering the new sales tax system after the SSUTA adoption threshold has been achieved. The requirements included, but were not limited to a centralized, one-stop multi-state registration system; uniform definitions of products and product-based exemptions; single tax rate per taxing jurisdiction with a single additional rate for food and drugs; single, state-level administration of sales and use taxes; uniform rules for sourcing (i.e., the tax rate imposed is based on the origin or destination of the product); uniform procedures for certification of tax information service providers; uniform rules for filing returns and performing audits; and reasonable compensation for sellers collecting and remitting taxes. The SSUTA generally includes these provisions, though some modifications to the SSUTA or the legislation would have been necessary for enactment.”92

knows this. Some states have taken preliminary measures with the SSUTA and got mediocre results because it is voluntary and unenforceable, for the most part. Ultimately, this should be a federal solution, but such a solution could pose potential conflicts of zoning laws and existing ordinances by local jurisdictions. The answer seems to be a federal law which outlines as above who, what, where, and why internet/ SaaS/cloud business should be, while specifically giving implementation power to the states and local governments as to all other issues affected by such economic activity so that local governance trumps. In other words, the federal law would only preempt state and local laws as to sales and use taxation, but not give a license for disruption upon local customs with the force of a preemptive law. This would be the first step toward a multinational reciprocal sales and use treaty with the E.U. and other such initiatives toward modern tax policy.

The reason this has not passed in my opinion is that the states do not want to give up more power to the federal government and Congress 92 Steven Maguire, “State Taxation of Internet Transactions,” 2013. Accessed March 23, 2015. https://www.fas. org/sgp/crs/misc/R41853.pdf, p. 14.

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Tepid Optimism in Sino-American Relations

Tepid Optimism in Sino-American Relations: Pragmatism and Policy Rationales Liza B. Williams

PhD Candidate in Political Science Brown University Department of Political Science Abstract: This article reviews several United States policy alternatives in Sino-American relations. I consider the nature of the security competition between China and the United States and review major scholarly debates about the meaning of China’s ascendancy in international relations. I ask how China’s rise should influence American foreign policy and explain why pessimistic policy undermines stability in East Asia and harms prospects for peace in the bilateral relationship. My argument suggests that the most reasonable approach to Sino-American relations is a policy strategy I term “tepid optimism.” Introduction Since the end of the Cold War, most realist international relations scholars have written that a revisionist China will destabilize East Asian security and produce conflict in Sino-American relations.1 Some analysts have attributed the end of America’s “unipolar moment” to the impressive rise of China’s economy, pace of trade liberalization, and growing caches of hard and soft power.2 Predictions that emphasize pessimism in bilateral U.S.-China relations argue generally that “peace-producing mechanisms” and “stability-reinforcing factors” are impotent in the face of security competition brought on by growing Chinese power.3 Suggesting that tension will spiral, these accounts not only misunderstand regional relations, but also ignore mounting empirical evidence 1 For accounts that are generally pessimistic about the security problems that arise from a strong China, see, for example, the following articles: Richard K. Betts, “Wealth, Power, and Instability: East Asia and the United States after the Cold War,” International Security, 18.3 (Winter 1993/94) 34–77; Aaron L. Friedberg, “Ripe for Rivalry: Prospects for Peace in a Multipolar Asia,” International Security, 18.3 (Winter 1993/94): 5-33; Charles A. Kupchan, “After Pax Americana: Benign Power, Regional Integration, and the Sources of Stable Multipolarity,” International Security, 23.3 (Fall 1998): 40–79; John J. Mearsheimer, The Tragedy of Great Power Politics (NY, NY: W.W. Norton, 2001). 2 See, for example, two illustrative articles clarifying his standpoint that a rising China has provoked counterbalancing and increasing multipolarization in the region and in Sino-American bilateral relations: Christopher Layne, “China’s Challenge to U.S. Hegemony,” Current History: A Journal of Contemporary World Affairs (January 2008) 13–18; Christopher Layne, “The Waning of U.S. Hegemony: Myth or Reality? A Review Essay,” International Security, 34.1 (Summer 2009) 142–172. 3 Aaron L. Friedberg, “The Future of U.S.-China Relations: Is Conflict Inevitable?” International Security, 30.2 (Fall 2005) 41.

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The Heinz Journal of a pattern showing that a more powerful China has not yet led to concerted counterbalanc- Positive Engagement Prevents Zero-Sum ing by regional neighbors.4 Outcomes Security tensions in the Sino-American bilateral relationship have been consistently offset by peace-promoting mechanisms like the expansion of economic trade ties and the credible commitments that the People’s Republic of China (PRC) has pledged through membership in international institutions. Although a sudden crisis in cross-straits relations between China and Taiwan could conceivably shatter the tenuous cooperation in the Sino-American relationship, this possibility should not be the singular determinant of policy prescriptions; moreover, significant rapprochement in the cross-straits relationship after 2008 with the Republic of China’s (ROC’s) election of President Ma Ying-jeou should diminish the overall concern. Broadly, however, it is conceivable that Washington and Beijing could be brought to blows if either government dramatically shifted toward a nationalistic foreign policy or embraced disengagement strategies. These concerns about a shift to a more nationalistic stance by either the United States or China are real, but relative continuity in Sino-American relations since the end of the Cold War suggests that tepid optimism ought to characterize any attempt by Washington to develop regional policy. Tepid optimism practices balanced pragmatism by engaging China in order to prevent the type of security competition that will unfold if full-scale containment becomes the preferred policy choice of political elites in Washington. While a possible confrontation between China and the United States is possible, tepid optimism can incentivize beneficial outcomes that will strengthen diplomatic stability in the Sino-American bilateral relationship. 4 David Kang, “Getting Asia Wrong: The Need for New Analytical Frameworks,” International Security, 27.4 (Spring 2003): 57–85.

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This paper embraces the thesis forwarded by Thomas J. Christensen suggesting that when policy decisions are made, the best approach to understanding the Sino-American bilateral relationship demands a synthetic view of positive- and zero-sum analytic views on the rise of China.5 Christensen has put it this way: “Even if straightforward and full-spectrum containment were attempted by the United States, it would be counterproductive, not only because it would raise China’s ire, but because it would reduce Washington’s relative power in the region.”6 Thus, positive engagement for Christensen is the answer because it will actually guard against zero-sum worries; this idea is what I invoke when I suggest that tepid optimism is the best approach to American foreign policy development for the region. The last two decades have shown that trade and mutual interests in stability in East Asia have consistently undercut the presence of competition-inducing factors between the United States and China. In his comprehensive consideration of various prospects for future U.S-China relations, Aaron L. Friedberg tentatively commits himself to the view that tensions will continue unabated, but will be tempered by “offsetting effects” that will produce managed peace. He argues that an 5 Thomas J. Christensen, “Fostering Stability or Creating a Monster? The Rise of China and U.S. Policy toward East Asia,” International Security, 31.1 (Summer 2006): 81– 126; Thomas J. Christensen, “Posing Problems without Catching Up: China’s Rise and Challenges for U.S. Security Policy,” International Security, 25.4 (Spring 2001) 5–40. While some scholars have portrayed Christensen as a general pessimist, his approach to policy development seems to be illustrative of comprising insights from across the theoretical perspectives. In Fostering Stability (2006), he has revised his early statements about how East Asian security should be structured and has evinced a decidedly “moderate” perspective that “mixes elements of positive-sum and zero-sum thinking” (83). 6 Ibid, pp. 125.

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Tepid Optimism in Sino-American Relations “underlying compatibility…[of] strategic interests” will mitigate the full onslaught of the security dilemma brought on by the rise of China.7 The guarded stances embodied in the views of Friedberg and Christensen capture a pragmatic vision. Comparatively speaking, this sort of balanced pragmatism in the development of American policy toward China is far better than adhering to the false belief that our choices are strictly either hubristic optimism on one hand or stubborn pessimism on the other. Why Pessimism Cannot Endure in the Sino-American Relationship

learning from history.10 China, he thinks, is not constrained by the structural conditions that neorealism foretells, but is instead rational enough to know that an aggressive bid for hegemony would not advance its core interests. In short, Kirshner shows how structural varieties of realism have certain defects; with the advent of offensive realism in the style of Mearsheimer’s view, theory has erroneously led to exaggerated policy prescriptions about securing East Asia and providing for a peaceful rise of China. While Kirshner sees the potential for China to destabilize security and peace in the region and for Sino-American rivalry to continue, he does not think a security crisis is inevitable. For example, he has explained how the hegemony of the U.S. dollar in the international monetary landscape could become upset by competition with China if unsound policy recommendations further undermine Bretton Woods II agreements. With dollar-denominated reserve currency holdings at roughly $1.5 trillion and increasing, sharp turns in Chinese financial policies could make the stability of the dollar more “shaky,” especially in light of the post2008 global financial crisis which has called into question the dollar’s long-term value.11 Thus, we can see how these insights might suggest that the United States should take a pragmatic position on reforming policy in a way that will allow for its hegemonic leadership to continue. For instance, the reserve status of the dollar can be stabilized if the Federal Reserve quickly intervenes in financial crises and follows policies that create liquid markets.12

It seems misguided to embrace a strict stance of pessimism toward the rise of China as framed in the doctrine of offensive realism since Jonathan Kirshner has masterfully demonstrated how John J. Mearsheimer’s logic “self-defeats” on its own terms. Kirshner explains how Mearsheimer’s views conflate the meaningful consequences of “being a hegemon and bidding for hegemony.”8 If we follow Kirshner’s dismemberment of Mearsheimer’s view, China’s survival as a state is indeed “not in jeopardy if it does not aggressively bid to dominate all of Asia,” and the U.S. does not need to pursue policies that will “strangle the Confucian baby in its cradle.”9 Endorsing classical realism as having more “analytical purchase” than its neostructuralist cousins, Kirshner suggests that the core tenets of this approach can helpfully elucidate approaches to China. Classical realists, Kirshner argues, are broadly united in seeing, first, how power shapes the actual world; second, how the status quo ought not to be privileged, but instead Beckley’s Argument: American Declinist be seen as dynamic; and finally, that “politics Views are Unjustifiable matter” in a decisive sense because it permits 7 Friedberg, “Future of U.S.-China Relations”, 42–45. 8 Jonathan Kirshner, “The Tragedy of Offensive Realism: Classical Realism and the Rise of China,” European Journal of International Relations, XX.X (17 August 2010): 9, 12, 1 – 23. 9 Ibid.

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10 Ibid, pp. 2-9. 11 Ibid, pp. 7; see also Michael Beckley, “China’s Century? Why America’s Edge Will Endure,” International Security, 36.3 (Winter 2011/12) 47. 12 Barry J. Eichengreen. Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. New York: Oxford University Press, 2011.

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While Mearsheimer’s offensive realism unravels in its promotion of policy recommendations for the U.S.-China bilateral relationship, it is similarly reckless to believe in the invulnerability of American primacy. The combined effects of trade interdependence and institutional engagement may have subdued the direct challenge of Chinese revisionist aspirations, but this has not put to full rest their ability to frustrate American security interests. In his article China’s Century? Why America’s Edge Will Endure, Michael Beckley has recently argued that declinist accounts of American power are misguided because they do not follow a dynamic analysis that compares the United States and China across a sufficiently large-n set of economic, technological, and military factors since the end of the Cold War. He writes: “The widespread misperception that China is catching up to the United States stems from a number of analytical flaws, the most common…is the tendency to draw conclusions…that compare China only to its former self.”13 Beckley thinks that a “false belief” in American decline has been produced by misguided understandings of how globalization redistributes power capabilities, resources, and human capital. Relying upon neoliberal insights from Robert Keohane and Joseph Nye, Beckley’s argument depends upon the view that globalization has not recalibrated matrices of power between China and the United States, but instead, processes of global production have tended to favor American economic superiority and the persistence of hegemony. The spread of technology in the new era of globalization, he contends, has only widened the power differentials between the two and given the United States power-resource advantages in wealth, innovation, and military capabilities. Beckley’s argument offers reason to question the sort of predictions that Indian economist 13 Michael Beckley, “China’s Century? Why America’s Edge Will Endure,” International Security, 36.3 (Winter 2011/12) 43–44, 41–78.

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Avrind Subramanian has made in his Foreign Affairs article, “The Inevitable Superpower: Why China’s Dominance is a Sure Thing,” where he denounces American economic conceit, stating that his projections of key growth indices offer evidence that: “…the gap between China and the United States in 2030 will be similar to that between the United States and its rivals in the mid-1970s, the heyday of U.S. hegemony, and greater than that between the United Kingdom and its rivals during the halcyon days of the British Empire, in 1870. In short, China’s future economic dominance is more imminent and will be both greater and more varied than is currently supposed.”14 While Beckley seeks to dismiss declinist views not only for their seeming inaccuracy in the face of two decades of enduring American hegemony, his purpose is most critically aimed at the “jingoistic and protectionist policies”15 that such declinist arguments endorse. His attack centers upon meshing hegemonic stability theory with power transition theory in a way that produces aggressive retreats from current American foreign policy rationales that favor positive engagement. He cautions explicitly against the United States adopting neomercantilist trade policies or withdrawing from its commitments in East Asia and Europe.16 A reduction in U.S. diplomatic cooperation and economic engagement, in his estimation, will be costly and only exacerbate security tensions. Social Ideational Factors Matter to a Sound Bilateral Policy

14 Arvind Subramanian, “The Inevitable Superpower: Why China’s Dominance is a Sure Thing” Foreign Affairs 90.5 (September/October 2011) 69 -70. 15 Ibid, pp. 77, 41-78. 16 Ibid, pp. 78.

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Tepid Optimism in Sino-American Relations Beckley’s account explains especially well why a sound strategic vision ought to embrace the notion that continuation of American leadership will be pivotal for structuring future Sino-American relations, but his view does not sufficiently account for social ideational factors and overlooks elements that could end systemic unipolarity. China has consistently sought to “delegitimate” and “deconcentrate” American power in a way that could bring about a transition from unipolarity to multipolarity.17 These combined strategies make American primacy less durable than it may seem on Beckley’s account, but it does not mean that multipolarization will necessarily induce full-scale war. Following the argument of Randall L. Schweller and Xiaoyu Pu, Chinese strategies have clearly sought to expand political influence through institutional pathways that have been geared toward “modification of Pax Americana, not a direct challenge to it.”18 Just because China cannot currently compete with the United States on economic and military grounds, does not mean that it cannot problematize the realization of U.S. security interests in the Asia-Pacific region.

Liberal institutionalism and decisive advantages in hard power for the United States may not be able to offset security collisions to the extent China’s grand foreign policy strategy continues to call for greater autonomy within the Asia-Pacific region and a greater voice in the international community. Without a cooperative China, the United States will have a difficult time solving security relationships in the Asian region and beyond, including: (1) halting the Iranian and North Korean nuclear weapons programs;19 (2) managing recurrent flares in PRC-ROC hostilities and resolving disputes surrounding China’s assertion of autonomy in the South China Seas;20 (3) bringing about the end of humanitarian crises in Africa;21 and, (4) slowing the fight against secure borders and international terrorism.22 China’s search to purchase energy resources and fuel its extraordinary growth have frustrated American security interests, but Washington has also been blocked on a number of key matters as a result of China’s motivation to correct certain historical embarrassments like reoccurring U.S. weapons sales to Taiwan.

China’s rise will transform regional political arrangements in the upcoming decades through a politics of contestation and resistance. If the PRC’s revisionist impulses grow and are not sufficiently accommodated in institutional arrangements, China could grow increasingly more capable at hampering and obstructing American power vis-à-vis the post-1945 regime that was constructed in global governance institutions like the United Nations, the IMF, and the World Bank.

As Chinese power grows, the real complexity in American foreign policy will center on how to gain her help in solving crucial security matters. As Deborah Welch Larson and Alexei Sevchenko have contended, China is a vital intermediary in security questions. Since China can either

Can Liberal Institutionalism Work?

17 Randall L. Schweller and Xiaoyu Pu, “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline,” International Security, 36.1 (Summer 2011): 41–71. 18 Ibid, pp. 53, 41-71.

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19 Michael Singh, “The Sino-Iranian Tango: Why the Nuclear Deal is Good for China” Foreign Affairs (July 21, 2015). Available online at: https://www.foreignaffairs. com/articles/china/2015-07-21/sino-iranian-tango 20 Sheldon W. Simon, “The US Rebalance and Southeast Asia: A Work in Progress,” Asian Survey 55. 3 (May/June 2015), 572 – 595. 21 Luke Patey and Zhang Chun, “Improving the Sino-African Relationship: What Beijing Can Do,” Foreign Affairs (December 7, 2015). Available online at: https://www. foreignaffairs.com/articles/africa/2015-12-07/improving-sino-african-relationship 22 From “Executive Summary,” Global Trends 2025: A Transformed World (National Intelligence Council, November 2008), pp. viii-xii.

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The Heinz Journal obstruct or facilitate the resolution of security problems that the United States has sought to resolve, global stability can be achieved if the United States accommodates China’s interests in social mobility. Based on case studies of China and Russia since the end of the Cold War, Welch Larson and Sevchenko use social identity theory to explain how China can be induced to cooperate on security issues and global governance matters if the United States recognizes the PRC’s rising status.23 Chinese strength will mean that American foreign policy will have to navigate the channels of distinctive interests that Beijing seeks. Thus, a view that only emphasizes American primacy does not fully appreciate how Washington’s power will not be best served by unilateralism.

classical realism is not enough; any thoroughgoing attempt at developing American policy demands analytical eclecticism. This is a sound prerogative for approaching the bilateral relationship. olicy rationales ought to be guided by a posture of tepid optimism. Washington must continue to positively engage China in order to prevent the security dilemma foretold by neorealism. China is capable of contesting American security interests and has enough power to obstruct progress in stopping the advance of nuclear programs in North Korea and Iran, in securing borders and stopping weapons trafficking, and in ending international humanitarian crises like those faced in Burma and Sudan. It could also take a “nuclear option” and decide to dump its large dollar-denominated reserve currencies if it was pushed into a naval chalConcluding Thoughts – Toward Analytical lenge in the South China Sea. Although unlikely, Eclecticism in Sino-American Security plausible reasons exist that suggest that Christensen’s advocacy for positive engagement to If growing power means that China will expand foreclose zero-sum worries is the best panacea her interests – as she has over the past two de- for realizing American interests in the region. cades – then Robert Gilpin’s counsel will come to bear on the ability of the United States to resolve security interests in the way that it would like. However, as Friedberg has advocated, 23 Deborah Welch Larson and Alexei Shevchenko, “Status Seekers: Chinese and Russian Responses to U.S. Primacy,” International Security, 34.4 (Spring 2010) 63–95.

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When Democracy Hurts

When Democracy Hurts: America’s Ill-Fated Policy in the War on Terror Erik Goepner Abstract: The U.S government aggressively promoted democracy in Afghanistan, Iraq, and the broader region as a key policy within its war on terror strategy. This paper traces how democracy promotion came to be selected as one of the critical war on terror policies and then evaluates that decision in light of the scholarly research and (now declassified) intelligence available to policymakers at the time. An empirical analysis of the data suggests the policy choice has not helped achieve U.S. objectives in the war on terror and may have inadvertently contributed to the extended civil conflicts in Iraq and Afghanistan. The findings have potentially significant implications for future counter-terrorism and counter-insurgency policies, such as the evolving American response to the Islamic State. Introduction On September 20, 2001, President George Bush declared America’s war on terror had begun. After the Bush administration assessed early success in Afghanistan, spreading democracy became one of their key policies supporting America’s war on terror strategy. Over time, the President came to view democracy promotion as a potentially transformational change agent not only for Afghanistan and Iraq, but also the broader region. In the years since, however, significant questions have emerged regarding the feasibility and sustainability of democracy in those countries. This paper begins by tracing the decision-making process that resulted in attempts to democratize Afghanistan, Iraq, and the broader region as part of the war on terror. The next two sections analyze that policy choice in light of the scholarly research and (now declassified) intelligence available at that time. The fourth section analyzes the democratization policy choice based on the current research, armed with the benefit of hindsight. Section five analyzes measures of effectiveness regarding the policy choice to democratize; first in broad terms of its effect on the war on terror, and then more specifically with polity measures to determine how the level of democracy has changed. The final section explores potential causal links between the policy choice and observed outcomes, presents policy recommendations, and offers concluding thoughts. As will be shown, the data appears to confirm what the research and intelligence suggested: effective democracies were unlikely to take hold in either Afghanistan or Iraq. Moreover, the implementation of democratic processes and institutions in Afghanistan and Iraq may have unwittingly contributed to the length of civil conflict in both countries and the emergence of groups such as the Islamic State.

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The Heinz Journal Tracing the Decision to Democratize Afghanistan

were confusing and chaotic for all Americans. National security policymakers focused first on defending the homeland, then on attacking al-Qaeda.4 The first expression of any policy towards Afghanistan that was not threat-related came in the form of humanitarian aid, with military-style Meals Ready to Eat (MREs) airdropped for Afghans. What a future government in Afghanistan might look like received scant attention.

The decision to institute democratic forms of government as a policy response to the attacks of 9/11 came quickly, perhaps haphazardly, and was initially limited to Afghanistan. Once U.S. policymakers assessed Afghanistan as an initial success, however, they began to conceive of democratization as a policy option that could transform the broader Muslim world and re- The lack of attention paid to Afghan governance duce the underlying causes of terrorism.1 resulted in part from the speed and success of military operations. Within the initial week of As America prepared to destroy and defeat airstrikes, Pakistani and U.N. officials began al-Qaeda, removing the Taliban was not a fore- pressuring the U.S. government to slow the adgone conclusion. Planning efforts left open the vance so that an interim government could be possibility that the Taliban might cooperate suf- put in place before the Northern Alliance took ficiently and, therefore, be allowed to remain Kabul.5 Despite those attempts, the Northern in power.2 Two weeks after the attacks of 9/11, Alliance did enter Kabul and establish a quathe CIA initiated covert operations in coordina- si-government before a broad-based, internation with the Northern Alliance. The first formal tionally recognized interim government could expression of regime change appears to have be appointed. occurred after that at an October 3 meeting of the principals. At that meeting, Secretary of On November 10, President Bush spoke before State Powell stressed the need for political lead- the U.N. General Assembly, where he articulatership to be available in Kabul to fill the void left ed his support of U.N.-led efforts to broker a by the removal of the Taliban, leadership that post-Taliban government that would represent represented all of the Afghan people.3 U.S. mil- all Afghans.6 Several days later during a meeting itary operations at this time focused on a light between presidents Bush and Putin, both leadAmerican ground presence, utilizing Northern ers stressed the importance of a “broad-based Alliance ground troops augmented by limited government” and the significance of the U.N. in CIA and special operations forces, all of which the process.7 Weeks later, President Bush delivwould be supported by American airpower. Policymakers were not initially concerned with the issue of Afghan governance. The days immediately following the terror attacks of 9/11 1 Council on Global Terrorism, State of the Struggle: Report on the Battle against Global Terrorism, ed. Lee Hamilton and Justine A. Rosenthal (Washington, D.C: Council on Global Terrorism : Brooking Institution Press, 2006), 83. 2 Bob Woodward, Bush at War (New York: Simon & Schuster, 2003), 130. 3 Ibid, pp. 191-2.

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4 National Commission on Terrorist Attacks upon the United States, Thomas H. Kean, and Lee Hamilton, The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks Upon the United States (Government Printing Office, 2011), 330–2. 5 Peter Baker, Molly Moore and Kamram Khan, “Rebels Delay Move Against Kabul; Devising Plan for New Government in Afghanistan Becomes Priority,” The Washington Post, October 11, 2001, sec. A SECTION. 6 George Bush (United Nations General Assembly, New York, November 10, 2001), http://georgewbush-whitehouse.archives.gov/news/releases/2001/11/20011110-3. html. 7 “National Security Advisor Briefs Press,” White House

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When Democracy Hurts ered a speech aboard the USS Enterprise during which he commented on Afghan governance, “Most of all, that country needs a just and stable government. America is working with all concerned parties to help form such a government. After years of oppression, the Afghan people -including women -- deserve a government that protects the rights and dignity of all its people.” He concluded: “America is pleased by the Afghan progress.”8 Less than three months after the terror attacks of 9/11, the U.N.-brokered talks concluded in Bonn, Germany. The talks emphasized the central role of Afghans, with plans for the U.N. and international community to take a supporting position.9 Afghans would govern themselves, assisted by a light international footprint to help bolster their capacity.10 The final agreement read, in part, “Acknowledging the right of the people of Afghanistan to freely determine their own political future in accordance with the principles of Islam, democracy, [and] pluralism…” Hamid Karzai took the oath as interim President of Afghanistan on December 22, 2001. Iraq Five years before the U.S. invaded, Congress and President Clinton had enacted a law authorizing $97 million for opposition forces who might remove Saddam from power and promote democracy in Iraq.11 President Bush, though, needed little legislative encouragement. By this Archives, November 15, 2001, http://georgewbush-whitehouse.archives.gov/news/releases/2001/11/20011115-9. html. 8 “President: We’re Fighting to Win - And Win We Will,” White House Archives, December 7, 2001, http:// georgewbush-whitehouse.archives.gov/news/releases/2001/12/20011207. html. 9 Simon Chesterman, “Walking Softly in Afghanistan: The Future of UN State-Building,” Survival 44, no. 3 (September 2002): 39. 10 Ibid., 38. 11 Bob Woodward, Plan of Attack: The Definitive Account of the Decision to Invade Iraq (New York: Simon & Schuster, 2004), 10.

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point in the war on terror, buoyed by perceived success in Afghanistan, the president frequently articulated his conviction that America had a responsibility to free people. To those who critiqued his position as potentially paternalistic, he responded that freed citizens would not see it that way; they would see it as liberation.12 In January 2003, the President met with several Iraqi dissidents. They articulated a favorable picture of what a post-Saddam Iraq could look like. Each spoke optimistically of democracy’s future in Iraq, noting the technological skills of the citizenry and dismissing assessments that highlighted the Sunni-Shia rift. The President engaged them in an aggressive give and take. For most of his questions they had compelling answers, but when asked about the possibility of the U.S. being seen as imposing its will, they had no response.13 Concurrently, Vice President Cheney became concerned the State Department was failing to embrace the President’s vision for democracy in Iraq and the potential transformation democracy could drive in the Middle East. He believed that Secretary Powell and others at State viewed democracy in Iraq and the region as unattainable.14 Already somewhat marginalized before 9/11, this event appears to have further isolated Secretary Powell and diminished his ability to influence policy-making within the Bush administration.15 Two weeks before the invasion, Doug Feith, the Under Secretary of Defense, briefed the President and the National Security Council on U.S. objectives with respect to Iraq. These objectives included moving Iraq towards democracy, with Iraq to then serve as a model for the region to follow. Most of the objectives focused on po12 Ibid., 88. 13 Ibid., 258-60. 14 Ibid., 284. 15 Woodward, Bush at War, 13-14.

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The Heinz Journal litical and societal issues, rather than military ones. 16As the weighting of the objectives suggested, the promotion of democracy was used as partial justification for the invasion of Iraq.17 U.S.-led coalition airstrikes began on March 20, 2003. In October 2003, during a meeting with the Japanese prime minister, President Bush again drew parallels between ongoing efforts in the war on terror and World War II. He noted that, just as America and Japan enjoyed a positive relationship after the war, at some point in the future the Iraqi and American presidents would share a similar relationship.18 Eight months after the invasion of Iraq, President Bush presented a “new policy, a forward strategy of freedom in the Middle East.”19 The President’s lofty ambitions for the Middle East and the parallels he drew to World War II suggest he felt a responsibility to liberate the “oppressed” and that he viewed the war on terror as a potentially transformative period for the world.

strategy.21 During his second inaugural address, he implied that the wars in Iraq and Afghanistan were partly about freedom and, by extension, democracy. He used the words “freedom,” “liberty,” “democracy,” or some variant thereof 46 times.22 In his State of the Union addresses prior to the first elections in Afghanistan, President Bush used democratizing language an average of 23 times per speech. In the addresses that came after the elections, the average was 36 instances—a 57 percent increase.23 Further, he viewed his democratization policies a success. For example, his 2006 National Security Strategy celebrated the “extraordinary progress in the expansion of freedom, democracy, and human dignity” that had occurred since 2002 and noted America’s commitment to continue building on that progress.

However, the 2006 elections that brought Hamas to power in the Palestinian Territories may have had a tamping effect on the Bush administration’s push for broader democratization. The Hamas victory, along with Islamist In June 2004, the United States transferred pow- inroads made in elections by the Muslim Brother to an interim Iraqi government and the first erhood in Egypt and Hezbollah in Lebanon, Iraqi elections were held in January 2005.20 brought a chorus of criticism against the President.24 Researchers and political commentaAfter the Elections tors suggest his administration responded by de-emphasizing democracy promotion.25 HowAfter the first elections in Afghanistan and Iraq, President Bush intensified his calls for democ- 21 Raphael Perl, “Combating Terrorism: The Challenge of racy in the Middle East, publically promoting de- Measuring Effectiveness,” Library of Congress (Washington, D.C.: Congressional Research Service, November 23, mocracy as a cornerstone of his war on terror 2005), 4. 16 Woodward, Plan of Attack, 328. 17 Jeremy Sharp, “U.S. Democracy Promotion Policy in the Middle East: The Islamist Dilemma” (Washington, D.C.: Congressional Research Service, 2006), 1. 18 Woodward, Plan of Attack, 419. 19 Mark N. Katz, Leaving without Losing: The War on Terror after Iraq and Afghanistan (Baltimore: Johns Hopkins University Press, 2012), 23–4. 20 Dominic Johnson and Dominic Tierney, Failing to Win: Perceptions of Victory and Defeat in International Politics, First Edition edition (Cambridge, Mass: Harvard University Press, 2006), 245.

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22 Helene Cooper, “Talking Softly About Democracy Promotion,” The New York Times, January 30, 2009, sec. U.S. / Politics, http://www.nytimes.com/2009/01/30/us/ politics/ 30web-cooper.html. 23 Data derived from State of the Union texts, 20022008, available at washingtonpost.com. 24 Steven R. Weisman, “Bush Defends His Goal of Spreading Democracy to the Mideast,” The New York Times, January 27, 2006, sec. Washington, http://www. nytimes.com/2006/01/ 27/politics/27diplo.html. 25 Katz, Leaving without Losing, 23–4; Glenn Kessler, “U.S. Policy Seen as Big Loser in Palestinian Vote,” The Washington Post, January 28, 2006, sec. World, http:// www. washingtonpost.com/wp-dyn/content/arti-

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When Democracy Hurts ever, a review of the President’s subsequent State of the Union addresses calls that assessment into question. While 2005 does appear to have been the apex for pro-democracy rhetoric, the 2008 address—two years after Hamas’ victory—placed second. A word count indicates that President Bush’s use of pro-democracy language actually increased by 14 percent in the addresses delivered after the January 2006 Hamas victory, as compared to those delivered before.26 Analyzing Democratization as a Policy Choice in the War on Terror The pre-9/11 scholarly research The scholarly research provides insight into two key questions regarding the U.S. policy choice to promote democracy as part of the war on terror strategy. First, the research helps answer the question: should democracy have been expected to succeed in Afghanistan and Iraq? More broadly, the scholarly research can help answer a second question: are democratic forms of government less likely to experience terror attacks as compared to other polities? This second question is relevant as the Bush administration believed democracy would help alleviate the underlying causes of terrorism. The majority of the research available prior to regime change in Afghanistan and Iraq suggested that successfully establishing a functioning democracy would be unlikely in either country. Eminent democratic theorist Seymour Martin Lipset argued that an enduring democracy requires a visible connection between government efficacy and legitimacy, one that the population can observe. Progress in either the political or economic arenas are needed, he said, to build perceived legitimacy and help cement democcle/2006/01/27/AR2006012701562.html. 26 Data derived from State of the Union texts, 20022008, available at washingtonpost.com.

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racy.27 That was unlikely in Afghanistan and Iraq, with neither population having any experience in building a framework of legitimacy out of political or economic performance. Regarding democracy in Muslim-majority states, a sizeable corpus of research cautioned that many of the cultural and institutional foundations that enable democracy could not be found within the Islamic tradition.28 Lipset noted that culture is “extraordinarily difficult to manipulate,” and he assessed the likelihood of successful democracies taking root in Muslim-majority countries as “doubtful.”29 A minority of scholars assessed these obstacles as surmountable.30 With respect to Afghanistan, Harvard economist Robert Barro observed that democracy was unlikely to take hold because of low education levels, the marginalization of women, and a population divided by a patchwork of ethnicities.31 Fareed Zakaria stressed the potential problems associated with ethnic fractionalization and democracy, noting the chance of war could actually increase if democracy were introduced in a country that did not yet have a liberal culture or institutions.32 Similarly, Amitai Etzioni, a former advisor to President Carter, highlighted the difficulties associated with a society jumping from “the Stone Age to even a relatively modern one.” He pointed to the myriad failed experiences of the World Bank and U.S. foreign-aid programs, concluding that democracy would fail in Afghanistan.33 These observations highlight the 27 Seymour Martin Lipset, “The Social Requisites of Democracy Revisited: 1993 Presidential Address,” American Sociological Review 59, no. 1 (February 1, 1994): 6, 17. 28 Alfred C. Stepan, “Religion, Democracy, and the ‘Twin Tolerations,’” Journal of Democracy 11, no. 4 (2000): 47. 29 Seymour Martin Lipset, “The Centrality of Political Culture,” Journal of Democracy 1, no. 4 (1990): 82–3. 30 John L. Esposito and John Obert Voll, Islam and Democracy (Oxford University Press, 1996). 31 Robert Barro, “Don’t Bank on Democracy in Afghanistan,” Business Week, January 21, 2002, 18. 32 Fareed Zakaria, “The Rise of Illiberal Democracy,” Foreign Affairs, December 1997, 35. 33 Amitai Etzioni, “USA Can’t Impose Democracy on

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The Heinz Journal discrepancy between the aspirations of President Bush (and his national security team) and the numerous obstacles that the pre-9/11 research had already identified.

Agency report asserted that Shia preferences could not be accurately assessed because of the fear and repression they were living under.37 Several months later, the CIA released another assessment indicating the potential for demoThe pre-war intelligence cratic stability would be “limited” over the next two years, but a US-led coalition “could” prepare The Bush administration planned the Iraq War the way for democracy in five to 10 years.38 over an extended period of time and authorities have now declassified much of the pre-war The National Intelligence Council (NIC) pubintelligence that was then available to planners. lished two Intelligence Community Assessments Conversely, for the war in Afghanistan, essen- in January 2003, which the Senate Select Comtially no intelligence regarding governance is- mittee on Intelligence subsequently described sues is available since the war came shortly af- as the “best available ‘baseline’” of prewar aster 9/11 and neither the White House nor the sessments on Iraq.39 Those reports described military had any plans for Afghanistan prior to democratic concepts as “alien to most Arab those attacks, beyond tactical plans to kill or Middle Eastern political cultures.”40 The NIC also capture bin Laden.34 Much of the available in- noted, “Iraqi political culture does not foster libtelligence regarding Afghanistan comes from eralism or democracy.” As a result, the potential the 9/11 Commission Report, but it does not in- for democracy in Iraq was assessed as a “long, clude information that would be useful for an- difficult, and probably turbulent process.”41 In a alyzing the decision to democratize. Therefore, particularly prescient set of comments, the NIC no analysis of the policy choice to promote de- concluded that “political transformation is the mocracy in Afghanistan is provided here. task…least susceptible to outside intervention and management.”42 The policy choice to promote democracy in Iraq appears to have discounted significant portions The post-9/11 scholarly research of the pre-war intelligence. In August 2002, a CIA report noted that Iraqi culture has been “in- Since the two wars began, the research has hospitable to democracy.” The report went on burgeoned, enabling a more critical examinato say that, absent comprehensive and endur- tion of the Bush administration’s policy choice ing U.S. and western support, the likelihood of to aggressively promote democracy as part of achieving even “partial democratic successes” its overall war on terror strategy. Scholars have was “poor.”35 Later that year, the CIA issued a advanced a number of compelling arguments slightly more optimistic assessment, which said about the Bush administration’s policymaking most Shia would conclude that a “secular and process and why democracy has proved so democratic Iraq served their interests.”36 At the problematic in both countries. As to the former, same time, however, a Defense Intelligence Afghans,” USA Today, October 10, 2001. 34 National Commission on Terrorist Attacks upon the United States, Thomas H. Kean, and Lee Hamilton, The 9/11 Commission Report, 135–7, 208, 332. 35 United States Senate Select Committee on Intelligence, “Report on Prewar Intelligence Assessments About Postwar Iraq” (Washington, D.C., May 25, 2007), 103. 36 Ibid., 100.

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37 Ibid., 93-4. 38 Ibid., 97. 39 Ibid., 4. 40 National Intelligence Council, “Regional Consequences of Regime Change in Iraq,” January 2003, 30. 41 National Intelligence Council, “Principal Challenges in Post-Saddam Iraq,” January 2003, 5, http://www.foia.cia. gov/document/0005674817. 42 Ibid., 9.

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When Democracy Hurts James Pfiffner suggests President Bush did not employ a systematic decision-making process with respect to Iraq, preferring substantive discussions with only a small cadre of his closest advisors.43 Such an approach could inadvertently promote groupthink and be susceptible to ignoring contradictory intelligence and research. Regarding attempts to democratize both countries, researchers point to a long list of challenges: the historic lack of Muslim-majority states adopting democratic norms, ethnic and / or religious fractionalization, lack of liberal institutions or culture, poor rule of law, and the animus felt towards the U.S., the chief democracy promoter, by many in the Muslim world.44 Two additional arguments help further explain why democracy proved so problematic in Afghanistan and Iraq. The first focuses on how the Bush administration promoted democracy and the second looks at who was being democratized. While the idea of America promoting democracy abroad is not new, how it has been promoted has changed over time. Jonathan Monten outlines the two predominate ways in which America has historically sought to export democracy.45 The first, and preferred choice until the 20th century, relied on the use of America’s example, akin to the shining city on a hill. America’s efforts to win other nations to democratic forms of governance primarily took place within America’s borders; other nations could see the example and be enticed to emulate it. Monten refers to the second method as “vindicationism.” 43 James Pfiffner, “Decisionmaking, Intelligence, and the Iraq War,” in Intelligence and National Security Policymaking on Iraq: British and American Perspectives (College Station, TX: Texas A&M University Press, 2008), 217–8. 44 Zakaria, “The Rise of Illiberal Democracy”; Bernard Lewis, “The Roots of Muslim Rage,” The Atlantic 266, no. 3 (1990): 47–60; Samuel P. Huntington, “The Lonely Superpower,” Foreign Affairs 78, no. 2 (March 1, 1999): 35–49. 45 Jonathan Monten, “The Roots of the Bush Doctrine: Power, Nationalism, and Democracy Promotion in U.S. Strategy,” International Security 29, no. 4 (April 1, 2005): 112–115.

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It includes setting a positive example, but adds active, external measures to promote democracy. President Bush, Monten aserts, embraced a version of vindicationism-plus by going even further and adding a coercive element. Monten argues the U.S.’s hegemonic status not only made coercion possible, but in some respects almost unavoidable.46 Had U.S. power not been such an overmatch for any would-be competitor, the Bush administration would likely have been less bold. This boldness was accompanied by a conviction that the use of U.S. power was morally correct—policymakers believed their use of power was virtuous. As a result, they did not consider that their actions might be viewed as coercive, unwelcome, or self-seeking.47 Moreover, the Bush administration believed democratic success would beget democratic success, such that bandwagoning would result as opposed to other nations trying to balance against U.S. power.48 Assumed bandwagoning also contributed to the expectation that U.S. military power would facilitate a pacific transition to democracy for countries beyond Iraq and Afghanistan. As the President claimed, a “free Iraq can be an example of reform and progress to all the Middle East.”49 The second argument looks at who was to be democratized. It does not appear, for example, that U.S. policymakers gave any consideration to the mental health challenges facing the Afghan and Iraqi populations. Specifically, the effects of decades of severe trauma visited upon both populations before the U.S. invaded were ignored. A meta-analysis of conflict-affected and refugee populations published in the Journal of the American Medical Association suggests that PTSD rates among the Iraqi and Afghan populations may have been as high as 50 percent at 46 Ibid., 116. 47 Ibid., 146. 48 Ibid., 148-9. 49 Ibid., 150.

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The Heinz Journal the time the U.S. first launched military strikes in 2001 and 2003 (see figure below).50 In addition to extremely high rates of PTSD, the data also suggests that the Afghan and Iraqi populations already had quite high rates of major depression, too. The meta-analysis indicates that over 40 percent of the 47 million Iraqis and Afghans who were exposed to high amounts of terror and multiple, potentially traumatic events (e.g., being tortured, exposed to war, being forcibly displaced from their homes) likely met the criterion for Major Depressive Disorder.51 Those criteria—exposure to multiple traumatic events and high terror rates—were present in Afghanistan for 20 of the 21 years preceding the U.S. invasion, while Iraq met those conditions for the immediately preceding 17 years.

Figure 1 - Estimated PTSD rates by population type

An array of destabilizing behaviors and cognitive impediments that are inimical to democracy formation accompany these high rates of 50 Steel Z et al., “Association of Torture and Other Potentially Traumatic Events with Mental Health Outcomes among Populations Exposed to Mass Conflict and Displacement: A Systematic Review and Meta-Analysis,” JAMA 302, no. 5 (August 5, 2009): 543. The chart is reprinted from Erik Goepner, “An Enduring Argument Against Counterinsurgency,” Small Wars Journal, September 27, 2012, http://smallwarsjournal.com/jrnl/art/ an-enduring-argument-against-counterinsurgency. 51 See Gibney, Cornett, Wood, & Haschke, (2012) Political Terror Scale 1976-2012. From the Political Terror Scale Web site: http://www.politicalterrorscale.org/.

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mental disorders. The destabilizing behaviors include an increase in substance abuse, selfharm, and the harming of others.52 As trauma levels increase, these pockets of instability can proliferate and cause societal-wide problems. The destabilizing behaviors and cognitive impediments result in decreased initiative, trust levels, reasoning skills, and ability to concentrate.53 Finally, people who have been heavily traumatized, similar to the Afghans and Iraqis, are more likely to yield to learned helplessness.54 This psychological phenomenon man52 Rangaswamy Srinivasa Murthy et al., “The World Health Report 2001 - Mental Health: New Understanding, New Hope,” WHO, accessed January 6, 2015, http:// www.who.int/ whr/2001/en/; American Psychiatric Association, Diagnostic and Statistical Manual of Mental Disorders, DSM Library (American Psychiatric Association, 2013), http://dsm.psychiatryonline.org.mutex.gmu.edu/ doi/book/10.1176/appi.books.9780890425596; Deborah J Schofield et al., “The Personal and National Costs of Mental Health Conditions: Impacts on Income, Taxes, Government Support Payments due to Lost Labour Force Participation,” BMC Psychiatry 11, no. 1 (2011): 72; Stephen A. Stansfeld, Rebecca Fuhrer, and Jenny Head, “Impact of Common Mental Disorders on Sickness Absence in an Occupational Cohort Study,” Occupational and Environmental Medicine 68, no. 6 (June 1, 2011): 408–13; E. Fuller Torrey, “Violent Behavior by Individuals With Serious Mental Illness,” Psychiatric Services 45, no. 7 (July 1, 1994): 653–62; Jeffrey Swanson et al., “Violence and Severe Mental Disorder in Clinical and Community Populations: The Effects of Psychotic Symptoms, Comorbidity, and Lack of Treatment,” Psychiatry 60, no. 1 (1997): 1–22; Terrance J. Wade and David J. Pevalin, “Marital Transitions and Mental Health,” Journal of Health and Social Behavior 45, no. 2 (June 1, 2004): 155–70. 53 American Psychiatric Association, Diagnostic and Statistical Manual of Mental Disorders; Chris R. Brewin et al., “Memory for Emotionally Neutral Information in Posttraumatic Stress Disorder: A Meta-Analytic Investigation,” Journal of Abnormal Psychology 116, no. 3 (2007): 448–63; Pia Pechtel and Diego A. Pizzagalli, “Effects of Early Life Stress on Cognitive and Affective Function: An Integrated Review of Human Literature,” Psychopharmacology 214, no. 1 (March 2011): 55–70. 54 Steven Maier, “Exposure to the Stressor Environment Prevents the Temporal Dissipation of Behavioral Depression/Learned Helplessness,” Biological Psychiatry 49, no. 9 (May 1, 2001): 763; Neta Bargai, Gershon Ben-Shakhar, and Arieh Shalev, “Posttraumatic Stress Disorder and

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When Democracy Hurts ifests over time as individuals increasingly perceive no connection between their own efforts and the resulting outcomes; self-efficacy gives way to hopelessness. As a result, they no longer put forth effort, instead they surrender to their circumstances.55 The behavioral and cognitive changes that frequently accompany severe trauma would appear to inhibit the successful implementation of democratic forms of governance.

Islamist-inspired terror attacks in America from 1988 to 2000. That compares to four attacks from 2002 to 2014.57 While the number of successful attacks dropped by one, another 63 Islamist-inspired terror attacks against the homeland were thwarted over that same period, suggesting efforts to democratize have done little to address the underlying causes of terrorism focused against America.58

The number of fatalities caused by terrorist Measuring the Effectiveness of Democratiza- have also climbed since 2001. Just under 6,500 tion in the War on Terror people were killed worldwide per year in terror attacks during the 12 years prior to 9/11. That This section begins by analyzing several mea- number has risen 46 percent to an average surements related to the overall war on terror. of just under 9,500 fatalities per year for the Although this paper has focused on just one 12 years since. The before and after numbers component of the war on terror strategy—the for U.S. citizens killed by acts of terrorism are promotion of democracy—macro indicators similarly disconcerting: on average, 45 were provide a useful starting point. The analysis will killed per year before 9/11 and 64 for each year then focus on measures specifically related to since.59 governance and democracy. A final macro measurement for the war on terAmerica’s efforts in the war on terror have not ror examines the number of Islamist-inspired achieved the desired objectives. Whether mea- groups identified by the Department of State sured by the number of global terror attacks, as foreign terrorist organizations (FTOs) and attacks on U.S. soil, fatalities caused by terror- the size of those groups. Since 2000, the overall ists, Islamist-inspired terror groups, or fighters number of FTOs has increased by 86 percent, aligned with Islamist-inspired terror groups, the from 29 to 54. The subset comprised of Islameasurements suggest U.S. efforts in the war mist-inspired FTOs, though, has mushroomed on terror have achieved disappointing results. from 13 to 37 groups, an increase of 185 perIn the 12 years prior to 9/11, terrorists worldwide committed an average of slightly more 57 National Consortium for the Study of Terrorism and than 3,200 attacks annually. In 2001, that num- Responses to Terrorism (START). (2013). Global Terber dropped to under 1,900. Since the U.S. ini- rorism Database [globalterrorismdb_0814dist-1.xlsx]. tiated its war on terror, the average number Retrieved from http://www.start.umd.edu/gtd. of attacks has reached nearly 4,300 per year.56 58 David Inserra and James Phillips, “67 Islamist TerrorSpecific to the U.S. homeland, there were five ist Plots Since 9/11: Spike in Plots Inspired by Terrorist Depression in Battered Women: The Mediating Role of Learned Helplessness,” Journal of Family Violence 22, no. 5 (June 6, 2007): 268, 272, 274. 55 Lyn Abramson, Martin Seligman, and John Teasdale, “Learned Helplessness in Humans: Critique and Reformulation,” Journal of Abnormal Psychology 87, no. 1 (1978): 50. 56 Data from the Global Terrorism Database, available at http://www.start.umd.edu/gtd/.

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Groups, Unrest in Middle East,” The Heritage Foundation, April 22, 2015, http://www.heritage.org/research/ reports/2015/04/67-islamist-terrorist-plots-since-911spike-in-plots-inspired-by-terrorist-groups-unrest-inmiddle-east. 59 Data from the National Consortium for the Study of Terrorism and Responses to Terrorism (START). (2013). Global Terrorism Database [globalterrorismdb_0814dist-1.xlsx]. Retrieved from http://www.start. umd.edu/gtd.

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The Heinz Journal cent.60 Moreover, the number of fighters within those Islamist-inspired FTOs has risen from an estimated 32,200 in 2000 to more than 110,000 by 2013.61

improved by nearly 6 percent from 5.26 to 4.96 (NOTE: declining scores indicate improvement. Freedom House scores range from 1 “most free” to 7 “least free”).62 Moreover, the modest improvement occurred while the global averThese macro measurements suggest the U.S. age for civil and political rights worsened.63 has not achieved its objectives in the war on terror. Instead, U.S. efforts have regrettably As for Afghanistan and Iraq, they had the lowest been associated with a deterioration in key ar- possible Freedom House scores for the years eas. U.S. objectives to protect Americans, de- prior to 9/11 (i.e., 7). Scores for both countries stroy al-Qaeda, and destroy other terror groups have improved since, though neither has yet with global reach appear further from reach to- been listed among the 125 countries meeting day than when the war on terror began. While the definition of an “electoral democracy.” this does not mean that policies to implement democracy are the cause, it is notable that ef- The Polity IV Project from the Center for Sysforts to democratize Afghanistan, Iraq, and the temic Peace provides a final governance meabroader region have not resulted in any mea- surement. It assess Afghanistan as unchanged surable progress towards achieving the critical since 2001. Throughout those 13 years, the PolU.S. objectives. ity IV Project has assessed the country as “moderately fragmented,” meaning 10 to 25 percent Unlike the broad measures of performance of Afghanistan is ruled by authorities unconwhich have worsened since 2001, governance nected to the central government.64 However, and democracy measures are not as clear-cut. the assessment of Iraq has changed rather draFreedom House’s political rights and civil liber- matically. In the decade prior to the U.S. invaties indicators show a marginal improvement sion, Iraq was assessed as extremely autocratic. since 2001 for the 47 Muslim-majority coun- Beginning in 2003 and continuing for the next tries. The average political rights and civil liber- six years, the assessment changed to “seriously ties scores for all Muslim-majority states were fragmented,” with between 25 and 50 percent essentially identical in the years prior to, and of the country being ruled by authorities that including, 2001. Since that time, scores have were not connected to the central government. Then, beginning in 2010, Iraq was listed as “slightly democratic” and that assessment has 60 Bureau of Public Affairs Department of State. The remained through 2014, the last year recordOffice of Website Management, “2000 (Patterns of Globed.65 The presence of the Islamic State in wide al Terrorism),” March 23, 2006, http://www.state.gov/j/ ct/rls/crt/ 2000/; Bureau of Public Affairs Department of State. The Office of Website Management, “Country Reports on Terrorism 2013,” U.S. Department of State, April 30, 2014, http:// www.state.gov/j/ct/rls/crt/2013/ index.htm; Martha Crenshaw, “Mapping Militant Organizations,” Stanford University, accessed March 27, 2015, http://web.stanford.edu/ group/mappingmilitants/cgibin/groups. 61 Martha Crenshaw, “Mapping Militant Organizations,” Stanford University, accessed March 27, 2015, http://web. stanford.edu/group/mappingmilitants/cgi-bin/groups. See also Department of State Country Reports and Patterns of Global Terrorism at http://www. state.gov/j/ct/ rls/crt/.

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62 Data from https://freedomhouse.org/report-types/ freedom-world#.VTwGJBd422k. 63 Arch Puddington, “Discarding Democracy: A Return to the Iron Fist,” Freedom House, 2015, https://freedomhouse.org/report/freedom-world-2015/discarding-democracy-return-iron-fist#.VRIay2Z422k. 64 Monty Marshall, Ted Gurr, and Keith Jaggers, “Political Regime Characteristics and Transitions, 1800-2013: Dataset Users’ Manual” (Vienna, VA: Center for Systemic Peace, 2014), 13. 65 Monty Marshall, Ted Gurr, and Keith Jaggers. 2015. Polity IV Project: Political Regime Characteristics and Transitions, 1800-2014. [p4v2014-2.xls]. Retrieved from http://

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When Democracy Hurts swaths of the country does not yet appear to have influenced the polity score for Iraq. Conclusion Exploring potential causality

were suppressed by the barrel of a gun. In a democracy, the government is expected to address the citizenry’s grievances through legislation, the delivery of basic services, constituency work, and so on. A heavily traumatized population, however, is unlikely to produce the cadre necessary for effective governance. As a result, grievances may have escalated in both countries, thereby increasing the motivation to rebel. The motivation to rebel, which includes grievances, is positively related to both the likelihood of a civil war occurring and the length of the war.66

The U.S. government’s policy choices to try and democratize Afghanistan, Iraq, and the broader region have not resulted in the achievement of U.S. objectives. Moreover, the policies to democratize may have contributed to the extended civil wars in both Afghanistan and Iraq. The potential causal link between the policies to promote democracy and the enduring civil Policy recommendations conflicts in Iraq and Afghanistan could be an increased motivation on the part of the popula- 1. Assess the foreign population before impletion to rebel. menting policies that will significantly affect and involve them. Policies designed to introduce democracy may have increased the motivation for civil conflict Had the U.S. assessed the Afghan and Iraqi in both countries. By removing the autocratic populations before invading, the effects of the regimes and introducing representative forms decades of trauma could have been estimated of government, previously repressed ethnic, and used to modify U.S. policies, as well as exreligious and other fractionalized groups were pectations. The medical literature on trauma, now encouraged to express their grievanc- the mental disorders that often result, and their es and aspirations. Moreover, they were en- negative manifestations is comprehensive and couraged to expect a responsive government, easily available to policy-makers. one that would actively work on their behalf. However, without pre-existing liberal cultural 2. Avoid imposing democratic forms of governnorms and institutions, there was neither the ment on foreign populations. framework nor the inclination to mediate those grievances. The opportunity to bring grievances The scholarly research and intelligences availinto the public sphere absent the mechanisms able before the U.S. invasions contained nuto peacefully deal with them may have inten- merous warnings on the difficulties of democsified the problems. Expectations were raised ratizing. The warnings pointed to the lack of and then went unmet, leading to an increase in successful democracies in Muslim-majority grievances. Potentially, these increased griev- countries. Additionally, neither Afghanistan nor ances fueled the civil conflicts. Iraq had the pre-existing liberal cultural norms or institutions associated with successful deAdditionally, the negative and destabilizing effects of the trauma experienced by both popu- 66 Paul Collier, Anke Hoeffler, and Dominic Rohner, lations may have intensified grievances. Under “Beyond Greed and Grievance: Feasibility and Civil War,” Oxford Economic Papers 61, no. 1 (January 1, 2009): 1–27; the Taliban and Saddam Hussein, the popula- Paul Collier, Anke Hoeffler, and Måns Söderbom, “On tions’ grievances were likely intense, but they the Duration of Civil War,” Journal of Peace Research 41, www.systemicpeace.org/inscrdata.html.

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no. 3 (May 1, 2004): 253–73.

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The Heinz Journal mocracy formation. Finally, it was quite unlikely The decision to include democracy promotion that the U.S. would be viewed as a credible pro- as a key policy of the war on terror did not hapmoter of democracy.67 pen immediately, but gained momentum in response to the perceived early successes in Af3. Do not conflate U.S. desires with U.S. inter- ghanistan. Policymakers apparently missed or ests. ignored research and intelligence that warned of substantial challenges to successfully democIn the war on terror, the number one interest ratizing Afghanistan and Iraq. Research since was to protect Americans and the second was that time has corroborated the earlier research. to destroy al-Qaeda. Bringing representative The empirical analysis indicates that attempts forms of government to Afghans and Iraqis was to democratize did not help achieve the desired a noble desire on America’s part, but it was not outcomes in the war on terror, though minor a U.S. interest. Instead, policies that focused on gains in democratic measures were observed. democratizing both countries may have inter- In the future, policymakers may want to avoid fered with the success of other U.S. policies by imposing democracy on foreign populations exacerbating grievances among the Afghan and until they have both assessed the host populaIraqi populations. tion’s capacity and determined that a U.S. interest is at stake. Concluding thoughts 67 See, for instance, Bernard Lewis, “The Roots of Muslim Rage,” The Atlantic, September 1990.

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The Heinz Journal Volume 13, Issue 2