A Declaration of Independence From International Taxation

By rejecting even a ceasefire on the OECD’s Global Tax Code, the U.S. reaffirms its commitment to self-governance and the Constitution.

Among the sweeping executive actions of his first day in office, President Trump delivered a rightful blow to international attempts, stoked by the Biden Administration, to encroach on United States tax sovereignty. With a stroke of his pen, Trump made clear that any Biden Administration commitments to the scheme of the Organization for Economic Cooperation and Development (OECD) to institute a global tax regime are without legal effect.

Those commitments had been significant. At the heart of this matter is a Global Tax Code developed by the OECD that it claims received sign-off from 147 countries. Apparently, the Biden Administration forgot that only Congress may enact America’s laws as specified under our Constitution.

America’s Founding Fathers rebelled against taxation without representation. From this vantage point, acceding to the global tax initiative—cloaked in the guise of a “fair” minimum tax—was itself an egregious overreach. Today’s fight against the OECD is now a rejection of imperialism by foreign powers and unaccountable international bureaucrats, whom the Biden Administration aided and abetted.

The actions of the OECD aim to redistribute U.S. tax revenues to foreign countries. They limit national sovereignty. They would penalize American innovation and even dictate U.S. domestic policy.

The Global Tax Code’s “Pillar One,” which is still being negotiated, would redistribute taxing rights over profits to be based on the location of sales. OECD, threatens that this is the only way the United States can avoid aggressive “digital service taxes” (DSTs) imposed by other OECD countries, which themselves violate our tax and trade agreements. DSTs disproportionately target American companies while benefiting China.

The Code’s “Pillar Two”, imposes a minimum corporate tax rate of 15% (although it would likely increase substantially in the future) on multinational profits in every country of operation.

Pillar Two is a direct attack on American sovereignty because it effectively grants foreign entities power over U.S. tax law. Under Pillar Two’s Undertaxed Profits Rule (UTPR), if the United States undertaxes American companies here at home under the OECD’s rules, other countries can seize assets from foreign affiliates of the companies in order to recover that tax revenue on the grounds that the United States has violated some new binding international law on domestic tax rates. The UTPR applies to all countries, including the United States, regardless of whether the country has agreed.

The Biden Administration saw this outrageous power grab as a feature, not a bug. Former Treasury Secretary Yellen boasted that Republicans would have no choice but to go along and adopt the OECD pillars, because otherwise other countries would raid the U.S. fisc and American companies.¹

In essence, the Biden Administration used the OECD as an end run around the protections of the Constitution, inviting international leverage that would force Congress to increase taxes. As any student of constitutional law knows, the Constitution prohibits such unilateral actions by the President. Article I protects Americans’ liberty by allowing only Congress to raise taxes. It requires that revenue measures originate in the House of Representatives, the body most accountable to the American people because Members must stand for election every two years.

For their part, France, Germany and the European Commission bureaucracy are using the OECD to circumvent their failure to convince European Union member countries to cede ever more of their sovereignty over tax issues to the EU. These actors are leveraging the OECD Global Tax Code to partially override their failure to convince EU member countries to adopt an EU common consolidated corporate tax base, and in the hopes of smoothing the path towards adoption of a new iteration, called “Business in Europe: Framework for Income Taxation.”

The Biden Administration actively supported the OECD’s scheme, encouraging foreign countries to tax U.S. companies and offering American tax revenue as a bargaining chip to convince them to raise their own tax rates. All told, this capitulation will cost the U.S. Treasury $120 billion over a decade, as calculated by the Joint Committee on Taxation, unless the Trump Administration is able to force other countries to reverse course. And the cost would go up even more if the OECD were to raise the minimum rate. This huge cost to the United States in particular is very unlikely to be a mere coincidence. Pillar Two appears to be designed specifically to soak up taxes companies would otherwise pay to the U.S.

When it comes to progressive policies, the OECD’s rules permit and in fact incentivize refundable tax credits against the minimum tax burden, while prohibiting nonrefundable credits. Companies receive refundable credits as cash payments if they have no tax liability, whereas nonrefundable credits only reduce the tax liability of profitable companies. The OECD code penalizes certain U.S. tax credits, such as those for research and development (R&D), which were not favored by the Biden Administration and are not so progressive as to be refundable. On the other hand, the Biden Administration protected progressive tax priorities, including the so-called Inflation Reduction Act’s refundable green tax credits. The Global Tax Code specifies a minimum tax rate while allowing all manner of progressive subsidies against that rate – but only subsidies that receive the blessing of an international bureaucracy.

In addition to withdrawing Biden’s commitments to the OECD, Trump’s action also directs federal agencies to give him options to safeguard U.S. taxpayers from discriminatory foreign taxes that violate U.S. tax treaties, as the OECD’s measures would certainly do. To effectively counter the OECD’s agenda and implement the order, the U.S. must pursue a multi-faceted strategy.

Protecting U.S. companies from illegal treatment under tax treaties will likely require the imposition of economic sanctions, reciprocal taxes and other tough measures on countries that adopt the OECD rules, and those who charge digital services taxes against U.S. companies. More fundamentally, the U.S. must protect its sovereignty and Constitution.

Playing along with the goal of a compromise might achieve more favorable treatment of U.S. tax rules, such as the R&D credit, and delay implementation. But such horse-trading squanders an integral part of the heritage bequeathed by the Founding Fathers.

In 1775, the Continental Congress was not appeased by the British Parliament’s attempt to compromise by passing the Conciliatory Resolution, and it insisted on no taxation without representation. Britain refused and the colonists issued the Declaration of Independence. 250 years later, America should similarly refuse to renege on the principle of self-governance.

For example, some have suggested a deal that grandfathers America’s current rules. But this would effectively prohibit Congress from improving our tax code in a manner not to OECD’s liking, such as reducing tax rates while broadening the tax base. And if an OECD global tax system is firmly established, the grandfather clause could (and likely would) eventually be revoked. Furthermore, a global minimum tax rate that starts at 15% is likely to climb much higher in the future. Like the Founding Fathers, the U.S. today should demand “a renunciation of the pretended right to tax us.”

While the U.S. was initially not alone in opposing the OECD’s overreach, and many countries expressed reservations, no other country has revoked its support. Perhaps the opportunity that the OECD was handing them, with the co-operation of the Biden Administration, to open America’s prosperous tax base to other countries was appealing enough to overcome the concerns they had on principle. But America can now persuade some of these countries to reverse course. Importantly, some countries only went along with the OECD pillars because of pressure from President Biden – such as when they observed his termination of America’s tax treaty with Hungary to punish President Orban’s opposition – and his offer of American tax revenue.

The U.S. can lead the way by building a coalition of nations that oppose any Global Tax Code. We can advocate for policies that respect sovereignty and promote global economic growth while strengthening bilateral tax agreements with allies within this coalition. The U.S. still lays claim to being the world’s most important economy. With active leadership, we can chart a different course and bring our key trading partners along with us. The U.S. should not engage in a utopian attempt to outlaw tax competition, which the OECD would channel into progressive subsidies, and should continue to strongly oppose global cartels.

The U.S. should force the OECD back to its original mission, promoting economic growth, instead of rule by experts purporting to know better than elected officials. The Trump Administration’s statement is a critical first step in preventing the OECD from becoming a de facto global legislature that undermines democratic governance. The stakes are even higher, as OECD’s ambitions extend beyond corporate taxation. Next, the OECD intends to impose global taxes on carbon emissions and individual wealth.

The OECD tax actions are part of a wider trend towards global governance by unelected bureaucrats and away from the sovereignty of nations. Cooperation between countries across a range of areas on a bilateral and multilateral basis is often helpful. But such cooperation must never lose sight of the primacy of the sovereignty of each country. There are many considerations that go into developing policy and every country, including the United States, must maintain the right to adopt its own policies taking into account its own unique values, traditions and customs. To varying degrees, public policy involves questions of expertise, but these decisions are also about values and traditions. There is no utopian one-size fits-all tax policy that can be designed and implemented by bureaucrats in Paris, no matter their level of expertise.

Allowing global bureaucrats to create new fake international law dictating domestic tax policy that is binding on all countries would be a serious blow against representative government and individual liberty. A Global Tax Code would lead to the perpetual need for ever more rules and regulations, including concerning any grandfather the U.S. might negotiate, which would have to be issued and enforced by the OECD. This would further undermine the sovereignty of nations. In the United States, Congress would find its role in enacting tax law under the Constitution being constantly eroded, grandfather or not.

The House of Representatives has rightly resisted the OECD’s coercive tactics. Chairman Jason Smith and the Ways and Means Committee have championed legislation to counteract foreign tax measures that violate America’s Constitution and target our fisc and companies. These initiatives were blocked by Democrats in the Senate and the White House during the last two years. Republicans now have the opportunity to enact such legislation, as Americans voted this November in favor of America’s common sense tradition, and to reject rule-by-experts, such as the OECD. And President Trump has a wide array of other political and economic tools to deploy.

President Trump’s action marks a pivotal moment in the battle for America’s sovereignty. By rejecting the OECD’s Global Tax Code, the U.S. reaffirms its commitment to self-governance and the Constitution.

1. “To the extent that the Republican side is going to be looking to business and trying to protect business interests, my guess is that businesses are going to be saying to members of Congress, ‘Please approve this,’ ” Ms. Yellen said.