Countries sometimes wage tax wars. Taxes exist in a complex global environment. Companies sell across the world, are supplied from across the world, and produce across the world. What is a country to do when another country implements a policy that will hurt that country (or the firms in it) by imposing high taxes on the foreign earnings of companies from that country? Or, another country might impose a low tax rate, and as a result, capital might flee to that jurisdiction. What is a country to do?
Recently, the big push on many new initiatives at the OECD on taxes has realized that, in a global environment, in some cases tax policy may need to be done multilaterally. It is the statecraft analog to forming a UN and meeting together and seeing how countries can get along.
But, there have been two examples this week of more unilateral approaches. Rather than form a UN, you gas up your B-52s, and go drop bombs on a rouge nation. In this case, tax bombs.
We saw two of those bombs (or proposed bombs) this week. Earlier this week, the U.S. proposed a 100% tariff on certain French goods (including, of course, cheese and wine) to punish France for their new tax on digital services. Also earlier this week, Joe Biden’s presidential campaign proposed measures that would impose $200 billion worth of sanctions on countries that facilitate corporate tax avoidance.
While I was not at all surprised by Donald Trump willing to tax France in a unilateral way, I was a bit surprised at Joe Biden’s willingness to drop a tax bomb, instead of working through the issue multilaterally.
Tax bombing is not a new concept. I have in The Tax Museum a book called “The Tax Laws of Ohio”, published in 1920. In a section called, “Retaliatory provision”, the law notes, under Section 5436 of this century-old-law, “If the laws of another state, territory or nation authorize charges … taxes … exceeding the charges provided in this chapter, like amounts shall be charged against all… companies of such state, territory or nation…” Many states still have similar laws (as does Ohio, with strictly similar language). We have a similar provision in the Internal Revenue Code. Section 891 allows the President to double the rates of tax on citizens and corporations of certain foreign countries (indeed, the name of the section is “Doubling of rates of tax on citizens and corporations of certain foreign countries.”).
So which approach is better, the unilateral approach (tax bomb dropping), the multilateral approach (the OECD approach)? They have their costs and benefits. Like everything that is interesting, nothing is simple. It will be interesting to see how these two tax bombs play out, whether others are launched, and what is left when the smoke clears.
