National Security & Defense

The Corner

Jack Lew’s Answer to the EU’s $14 Billion Shakedown of Apple: a Worldwide Tax Cartel

U.S. Treasury secretary Jack Lew wrote a piece in Monday’s Wall Street Journal protesting the European Union’s $14.5 billion shakedown of Apple. Lew called the move “unfair,” “contrary to well established legal principles,” and noted that the move “threatens to undermine the overall business climate in Europe.”

I agree with the description of the EU’s actions. At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.

Until now, the Obama administration has pushed back against this and other similar tax cases. But as Lew’s op-ed demonstrates, the reason these guys have been somewhat on the right side of this debate is that they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system.

Most important for U.S. taxpayers, the European Commission’s actions also threaten to erode America’s corporate tax base. U.S. companies could claim foreign tax credits against their U.S. tax bill for any tax-related payments to European Union member states.

In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. Lew goes on to complain about corporate avoidance: U.S. companies’ ability to not be taxed at 35 percent of their income (no matter where the income is earned) by not bringing home income earned abroad. And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel:

In recent years we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development. But the fundamental problem remains: America’s broken business tax system. The Apple decision, and the bipartisan reaction to it, may present a new opportunity to make reform a reality. That opportunity should not be lost.

This is simply awful. The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.

Its solution is to force those companies that wisely structured their operations to benefit from low-tax jurisdictions to declare more income in high-tax nations. In other words, they want to harmonize rules and ensure that corporations pay the same regardless of where they choose to locate their business activities. The expected outcome of BEPS is a higher overall tax burden on economic producers.

The OECD, and the Obama administration, insists the project is necessary because nations aren’t collecting what they need under the current competitive tax system, yet its own reports acknowledge that corporate-tax collection hasn’t declined as a percentage of its members’ gross domestic products over the long run.

In addition, the OECD is rolling out information-collection systems that will require companies to hand over far more information than they currently release, including proprietary data related to their competitive positions. As any current or former federal employee can attest, there’s almost no chance this information can be kept confidential and out of the hands of competitors or hackers.

So Mr. Secretary, thanks but no thanks. 

Here is an idea for the Obama administration, the EU, and the OECD, instead of coming up with clever schemes to stop tax competition around the world, how about you reform your tax systems to become economically competitive. And for the EU and the OECD, how about promoting the idea of reducing the size of bloated governments? That would be novel and productive for a change.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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