Trump Deals Blow to Global Tax Bureaucracy

U.S. President Donald Trump shook up the recent G7 meeting in Canada by declining to sign a joint statement with the other countries’ leaders. Considering the content of that statement, the president made the correct decision.

Admittedly, the clash at the summit over the shape of future trade relations among the G7 countries is less clear-cut. But regarding tax policy, the president had no other choice than to oppose the statement’s endorsement of “international efforts to deliver fair, progressive, effective, and efficient tax systems.”

Such efforts may seem innocuous, but they are quite the opposite. The G7 is promoting a one-size-fits-all approach to tax policy, which unambiguously favors larger, more intrusive governments at the expense of individual economic freedom.

The statement follows the lead of international policy organizations, such as the Organization for Economic Co-operation and Development (OECD).

The communique recommits the signatories to promote “the global implementation of international standards and addressing base erosion and profit shifting.” The BEPS project aims to centralize and harmonize global tax rules, with the goal of increasing effective tax rates on international firms. The project was born out of a renewed concern among tax collectors that diverse international tax systems allow some corporate profits to go untaxed.

The world’s diverse tax systems, however, have the virtue of generating pressure to keep business taxes in check. These competitive pressures have been a boon to global economic growth and investment. They are undermined by the efforts described in the G7 statement, which is intended to motivate countries to crack down on tax arbitrage through intrusive extraterritorial “fixes” to the supposed BEPS problem.

One outgrowth of the BEPS project is an interim digital transactions tax proposed by the European Commission. Aimed at the same perceived problem as the BEPS project, the new tax would be a 3 percent levy on revenue from online advertising, the sale of user data, and facilitated user interactions. It is nothing more than a poorly disguised attempt to extract additional revenue from large companies based in the United States, however negligible their presence may be in any given country.

Fortunately, the global implementation of the international standards prescribed by the OECD is a distant dream, so the commission wants to tax away itself. The EU’s new digital tax, however, is built upon the work done in the BEPS project. This explains why the tax bureaucracies of the OECD’s European Union members are heavily promoting extraterritorial and unilateral departures from the standard global tax system.

In its fervent ambition to eliminate companies’ tax planning, the OECD may also be inadvertently opening the door to global double taxation. Ironically, curbing double taxation was one of the OECD’s most important and beneficial early contributions to the global economy.

Even more intrusive than the CbC rules is the OECD’s new protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The protocol is one element of a new and complicated international tax information-sharing regime.

Fortunately, as in the case of BEPS, the United States has not fully implemented the protocol. It would mandate that the Internal Revenue Service automatically share bulk taxpayer information with governments worldwide, many of which—like China, Nigeria, and Russia—are either corrupt or hostile toward the United States and other Western countries, or both.

Although it is only one of 34 member states, the United States provides more than 20 percent of the OECD’s budget. As the largest funder of its research, the United States should direct the OECD to turn its focus toward a more diverse set of policy goals, such as ways to streamline and shrink the size of government and lower taxes.

By their aggressive, persistent, and lopsided advocacy of more taxation, global organizations such as the OECD have demonstrated they have broken free from the member governments that fund their operations. These international bureaucracies are, for the most part, not being held accountable by member governments, or have even been egged on by some to pursue an agenda to undermine U.S. policy objectives. The EU digital tax and the new information-sharing proposals are vivid examples of anti-American policies funded to a significant degree by U.S. taxpayers.

To follow up on the momentum of the historic and positive tax reform of 2017, the United States should also stick to its strategy of encouraging businesses to grow and produce in America. The new, lower corporate tax rate and other business reforms, such as “expensing,” have combined to make the United States one of the most attractive new investment locations in the world.

The OECD’s base erosion project would be a step backward for the United States, reducing the country’s attractiveness to investors. Rather than luring commerce with business-friendly policies, BEPS creates new barriers, making life more difficult for entrepreneurs and incentivizing them to leave and do business elsewhere.

By making it clear that the United States does not support the OECD or the G7 in their quest to raise taxes, the Trump administration is sending a strong signal to the global community: America is open for business.