Obama Advocates European Ideas on Taxes

It may be time for another letter from Tom Cotton.

Cotton, the Republican senator from Arkansas, had been in office only a few weeks back in March when he got 46 senators to sign on to an open letter to the leadership of Iran. The letter pointed out that agreements made by President Obama on Iran’s nuclear program were subject to approval, in most cases, by Cotton and his fellow senators.

The president again is attempting to bypass Congress, this time on the issue of global tax policy. The Organization for Economic Cooperation and Development (OECD), the Paris-based organization of three-dozen nations who support market economics, has released a paper on what it considers a growing problem of businesses arranging their corporate structures to minimize tax burden.

This creates a problem for member countries, it says, because they lose tax revenue, for individuals because they have to shoulder the additional burden and even for the companies themselves, it says, because they “may face significant reputational risk if their effective tax rate is considered too low.”

That’s right … part of the reason member countries tax their corporations so much is to help those corporations maintain their reputations.

The Obama Treasury Department already is signaling, without any consultation with Congress, U.S. support for a major rewrite of corporate tax law along the lines of what is described in the OECD’s new “Action Plan on Base Erosion and Profit Shifting.”

The titles of the proposed “actions” strike fear into every free market-loving heart: “Establishing international coherence of corporate income taxation;” “Restoring the full effects and benefits of international standards;” “Ensuring transparency while promoting increased certainty and predictability;” and “From agreed policies to tax rules: the need for a swift implementation of the measures.

In other words, eliminate tax competition, in which countries lower tax rates to attract investment; strengthen the standards that keep everyone in as bad a shape as everyone else; make it permanent and predictable and, of course, do so quickly.

The first step is to establish how much corporate activity the U.S. has to ensure its “losses” to more competitive countries can be tracked and its corporate profits sufficiently taxed. That means a massive and unprecedented gathering of information on U.S. corporations by the IRS.

It would be a good thing and within the statutory authority of the IRS to do this to enforce U.S. law. But this is being done to enable foreign governments to rummage around in the books of American corporations to determine the “fair share” they should pay in this new global tax scheme.

The IRS is said to be requesting sensitive information, such as a complete legal and ownership structure chart, that is unrelated to actual taxable activities in a country. The changes the organization proposes would require U.S. firms to disclose consolidated financial statements to foreign governments, which never before had been required, and to do so in every foreign jurisdiction in which the corporation operate with none of the usual U.S. confidentiality safeguards.

Using the organization’s own metric, this is a horrible idea. It won’t help the U.S. collect more tax revenue; it won’t reduce the burden of other taxpayers in the U.S. and it certainly won’t help the corporations that have to turn over all this internal information so other countries can collect more tax revenue. In fact, since the additional information would help foreign governments collect more from U.S. companies and because those companies could then claim those payments as losses, it would reduce U.S. tax revenues.

It’s time for Cotton—or someone else in Congress—to remind the organization and member countries that Congress, not the Treasury Department, sets tax policy for the United States and the promises the Obama administration is making won’t likely make it into law.

It worked then. Iran dramatically changed its behavior in negotiations once it understood the nation was not behind the president’ plan. And it would work again.

After all, given the high value member countries place on predictability, Congress would do our partners a favor by letting them know the president is making promises he is highly unlikely to be able to keep.