Opinion

OECD Tax Plan: Joe, Just Say No

As President-elect Joe Biden prepares to take office and make good on his promise to reverse the Trump tax cuts, he should do everything within his power to avoid piling on with a heavy dose of new international taxes. With the United States squarely in its sights, a recent Organization for Economic Cooperation and Development tax proposal aims to transfer taxing rights between nations, target the profits of large technology companies and other multinational companies, and impose a minimum tax rate across borders.

The OECD plan is made up of two initiatives. The first, Pillar One, is designed to address the explosive growth in the digital economy that is allegedly eroding the OECD’s tax base. Pillar One would construct a legal framework for profit-shifting that would permit some countries to have tax authority over the corporate income conventionally booked in other countries.

It should be of no surprise that the Pillar One initiative has little to do with tax erosion and is all about targeting large U.S. technology companies. For example, say a U.S. online social media company makes its revenues from advertisements posted on its free online app. When a French company buys ad space from the U.S. social media company, under the proposed tax plan, a portion of the U.S. social media company’s profits are now subject to taxation in France. On the other hand, if a French company buys ad space a U.S. newspaper for the benefit of American readers, neither company is exposed to these cross-border taxes.

This inconsistency highlights the Luddite-like tax scheme set up to target U.S. high tech companies and to benefit the world’s economies at the expense of U.S. tax coffers. Moreover, how you define the digital economy could swallow up other major corporations that merely use e-commerce to sell goods and services.

Because some foreign countries have high tax rates, U.S. companies would pay more, which would lead to repressed business growth and diminished opportunities for American businesses. For U.S. policymakers, an erosion of its tax base could not come at a worse time, as the country struggles to rebuild from shutdowns and as Congress seems unable to provide additional relief to families and workers hurt during the pandemic.

Effectively, these proposed taxes act as protectionist tariffs. The increased tax exposure, as proposed in the OECD plan, would significantly threaten U.S. leadership in technology and innovation. The result could well lead to a balkanization of the global tech landscape. If one country imposes higher taxes to shield its domestic businesses, others will follow suit to protect theirs.

The OECD plan’s other initiative is to set a global minimum tax rate, referred to as Pillar Two. The point of this initiative is to reduce companies from moving their operations to low-tax countries, otherwise known as venue shopping. The losers from this initiative would be low-tax countries at the expense of costly and potentially fiscally irresponsible countries.

By setting a minimum tax rate, Pillar Two is tantamount to price fixing. Taxes can be an effective way for nations to compete, in the same way that some countries attract business by offering lower wages, subsidies and other incentives. By eliminating competition, companies will pay more.

When it comes to global warming, there is a great irony to all of this. While Biden has promised to rejoin the Paris Agreement, taxes will now be applied to such international services as insurance and reinsurance – the very services needed to backstop against storms, protect citizens from catastrophic events like earthquakes and incentivize mitigation and resilience. While the OECD says it is concerned about global warming and investing in sustainable infrastructure, it now plans to tax the world’s means for protection. This will certainly mean higher insurance premiums for consumers.

The OECD tax proposal is little more than an opportunistic scheme designed to increase the tax coffers of some at the expense of the United States. It threatens double taxation and represents implicit tariffs, and it would inflict additional costs on U.S. corporations. Taxing corporations will not spare consumers the expense, as businesses will simply raise their prices to recoup their losses or leave the market.

With the OECD planning to wrap up its tax work and reach an international agreement by the middle of next year — and assuming that Biden’s senior staff can even make it on board by then — there will be little time for the new administration to adequately digest the more than 900 pages of regulations and analyze its effect on the U.S. treasury and U.S. corporations.

Given this time pressure, the risk of a declining U.S. tax base and the reversal of the previous administration’s tax cuts, the potential fiscal impact on the U.S. economy could be disastrous. Facing a weakened economic and a fiscally drained tax base, the incoming president will be challenged to roll out and finance any new initiatives and programs.

By raising international taxes and limiting competition, this plan runs counter to the OECD’s goal to “stimulate economic progress and world trade.” When it comes to the OECD tax scheme, Joe, for the sake of consumers, just say no.

Steve Pociask is president and CEO of the American Consumer Institute, a nonprofit education and research organization.

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