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Congress Goes AWOL on Global Taxation

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By Mitch Phillips Reuters Posted July 25, 2021 7:56 pm Smaller font Descrease article font size -A Larger font Increase article font size A+

The Biden Administration is planning the biggest overhaul to American taxation in decades, and you’d think members of Congress might have something to say about it. But no, for the most part a strange silence has greeted Treasury Secretary

Janet Yellen’s

bid to rope the United States into a revamp of global tax rules that by design robs Congress of its sovereignty over tax matters.

We’ve described the details of global tax rules being negotiated at the Organization for Economic Cooperation and Development. The plan would create a new method for other countries to tax American tech companies (although this is billed as a tax on any big, global firm), and also would establish a global minimum corporate-tax rate of 15%. As the New York Sun reminds us, this is a fundamental affront to American constitutional governance.

A bedrock principle since the country’s beginning has been that the power to tax must rest with the representatives elected by the people who pay the tax. Washington has always sought to defend this principle in the international sphere. The Senate has ratified dozens of tax treaties with foreign governments. These agreements try to ensure that a foreign government won’t impose taxes on income Congress already has taxed within the U.S., or to which Congress might lay claim because the company is headquartered in America.

Constitutional principles aside, this is good economic policy. Despite their flaws, current global rules broadly try to hand taxing authority to the jurisdiction where a company’s investors and managers have taken risks, engaged in product development or research and the like. This arrangement lets Congress experiment with tax laws it believes are best suited to the U.S. economy, and allows voters to pass judgment on lawmakers’ successes and failures.

***

The tax rules the OECD contemplates and Ms. Yellen supports are very different. The tech tax is an immediate threat to Congress’s constitutional power. Foreign leaders admit the point of the proposals is to redistribute to them some of the corporate revenue the U.S. Congress now taxes (or not).

This would allow sclerotic European countries to tax successful U.S. firms solely by dint of housing consumers rather than encouraging investment and risk-taking—while blunting the benefit of any incentives Congress wants to provide. There’s a reason French and German officials favor this approach over economic reforms to encourage the development of their own tech companies. They can piggyback off the work U.S. lawmakers have done to foster a vibrant economy in America.

The global minimum tax might seem like less of a threat to Congress’s prerogatives only because the OECD’s proposed rate of 15% is lower than the rate Congress might impose. But here too Ms. Yellen wants to encroach on Capitol Hill’s constitutional authority.

By binding the U.S. to the OECD’s complex system for calculating a minimum tax, Ms. Yellen is limiting the ability of a future Congress to change tax rates and the exemptions, deductions and other rules of the U.S. code. Meanwhile, she’s signaling U.S. assent to a system that might allow foreign governments to tax corporate revenue Congress deliberately chose not to tax, in order to “top up” corporate taxes to some desired minimum.

***

If this sounds familiar, it’s because the Obama-Biden Administration attempted the same gambit with the Iran nuclear deal in 2015. The idea there was to sign the U.S. up to agreements that would create facts on the ground that Congress would find hard to reverse. Something similar is underway as John Kerry jets around the world negotiating American commitments ahead of another global climate summit later this year.

When will Congress stand up for itself?

Sen. Mike Crapo

and

Rep. Kevin Brady,

ranking Republicans on Congress’s tax-writing committees, warned Ms. Yellen in a letter last week not to surrender any part of the U.S. tax base to foreign governments. They also requested closer consultation between Treasury and Congress before Ms. Yellen goes any further in global negotiations. Other Republicans should awake from their slumbers and fight too.

As for Democrats, they’re either silent or supportive of Ms. Yellen’s global gambit. Some may underestimate the threat OECD proposals pose to their own power as lawmakers. Others, especially progressives, may welcome the opportunity to insulate their high-tax policies from future Republican Congresses.

Either way they’re making an historic mistake. Congress’s constitutional role in setting tax policy for the U.S. and its citizens is central to self-government. No taxation without representation. The French helped America win the revolution under that banner, but that doesn’t mean Emmanuel Macron should be able to write U.S. tax policy.

Wonder Land: Republicans are running on culture, while Democrats press economics. Image: Reuters/Go Nakamura

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