Corporate tax and American sovereignty

Treasury Secretary Janet Yellen has a great idea: a global tax system. It provides for a minimum corporation tax standardized in the industrialized countries and an expanded state authority to tax multinational companies. Coupled with the Biden administration’s plan to raise the U.S. corporate tax rate to 28% and eliminate preferences, the U.S. would revert to pre-2017 status as a high-tax jurisdiction and discourage domestic capital investment and production. It would be even more insidious if authority over taxation, one of the pillars of democratic governance, were ceded to a poorly defined international technocratic body or group of experts.

Such an erosion of sovereign democratic control should be evident. It has long shaped Europe and is part of the European Union’s drive to become a global regulatory superpower.

Ms. Yellen’s proposal stems from the longstanding efforts of major European nations to extend their tax power over US technology companies through what are known as digital taxes. Initiatives from France, Austria, Italy and the UK threatened to undermine efforts to harmonize corporate taxation in the EU and open a new front in a trade war with the US amid EU laws and opposition from Ireland and some Northern Europeans Must be approved unanimously In the member states, European leaders moved the debate to the Organization for Economic Co-operation and Development (OECD), a group of 37 high-income countries, including the US

The initiative was quickly expanded to include a minimum corporate income tax, another long-term EU target that could not be achieved internally or take effect internally if other developed countries did not participate. In this way, the European heads of state and government tried to reduce tax competition between EU member states and low-tax countries such as the USA, Switzerland, Singapore and Bermuda. Since Europe and most other industrialized countries are more reliant on sales taxes than corporate taxes, increasing these taxes would give their companies a cost advantage over US firms, especially since most sales taxes are reimbursed on exported products. US attempts over the years to gain such an export advantage have been hampered by World Trade Organization decisions.

The new Biden team is keen to work with Europe on bigger issues like the China challenge, climate change and World Trade Organization reform. A corporate tax negotiation could help secure European cooperation while ensuring domestic coverage for the tax hikes the Biden government needs to fund new spending.

If an agreement is reached on the OECD, the administration will likely adopt it as a “multilateral instrument” similar to the Paris Agreement and avoid submitting it to the Senate as a tax treaty. A precedent for this is even the multilateral agreement of the OECD of 2016 on the implementation of tax law measures to prevent ground erosion and profit shifting.

This approach would transfer significant national sovereignty over corporate taxation, which is of crucial importance for all economic policy, to an international regime still to be defined under the guidance of the OECD, an unelected multilateral institution. The EU has welcomed such transfers of power since its inception in order to avoid the difficulties of reaching consensus through political participation of the population. The WTO, too, has moved towards dispute settlement and interpretation of agreements through elite consensus and rule by technical experts, which is one reason the US has been so critical of its operations.

We need to know the extent to which this delegation would extend and which institution or process would handle disputes and their enforcement. Would the negotiated rules automatically be incorporated into the tax laws of the signatories, similar to how the EU rules have direct legal force in the Member States? If Arizona wanted to give a domestic or overseas semiconductor company tax breaks to build a manufacturing facility, would it need to get approval from OECD experts? Would other nations have the opportunity to question such tax incentives?

The institutions of European integration offer a warning. The EU now has a parliament that cannot legislate. a governing council of national leaders constrained by the modern equivalent of liberum veto, the principle of unanimity; a central bank that pays little attention to basic treaties when introducing fiscal policy changes in countries like Greece and Italy and when expanding EU debt issuance; a court of law that works in secret and passes transformational decisions that express the “teleological” spirit of the founding documents; and an unelected bureaucracy in the European Commission that proposes laws, regulates and distributes funding. These institutions all suffer from a democratic deficit and technocratic dominance that contradicts the Madisonian concept of government.

The WTO has some of the same problems, if not to the same extent. The US criticism of the trading group is largely based on this institution’s tendency to reinterpret its fundamental agreements and its unanimous failure to discipline rule violations such as mercantilist China or to address new areas such as digital commerce.

The Biden team should understand the street they are on. The Covid Relief Act and the Infrastructure Act also affect the federal system that has nurtured the democratic traditions in this country. Both are leveraging the central government’s buying, spending, and regulatory powers to overturn decades of local decisions and state control over everything from housing and infrastructure to labor laws. Surrendering corporate taxation to an undefined international agency, inevitably controlled by an unelected technocratic elite, would further undermine Madisonian principles. This would bring America closer to the EU governance model.

Mr. Duesterberg is a Senior Fellow at the Hudson Institute. From 1989 to 1993 he was Deputy Minister of Commerce for International Economic Policy.

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