There’s one international system that President Trump should withdraw from

Richard Teather // 04.01.2017

Following Donald Trump’s victory in the US presidential election, the European press has been presenting him as an isolationist. Under President Trump, they claim, the USA will look after itself alone and retreat from the rest of the world. Economically, international trade is finished, they allege, whilst militarily, NATO will be abandoned.

 

It is true that significant American isolationism would be a retrograde step; a withdrawal from international trade would damage the world economy, and an abandonment of NATO’s collective defence policy would leave some eastern European countries dangerously isolated.  But the fears of future American policy do seem to be rather exaggerated.

 

Yes, the US-EU trade deal, TTIP (the “Transatlantic Trade and Investment Partnership”) is probably dead, but it was anyway. Protectionism did indeed kill it off, but protectionism by the EU rather than the USA. And Trump does not seem to be opposed to all international trade agreements; he was quick to offer the UK one after the Brexit referendum.

 

As for military alliances, demanding that some of our European allies pay their fair share is hardly a new idea; jokes about the lack of military effectiveness of some EU member armies have been circulating for decades (I remember a Yes Minister joke in the 1980s that if the Russians attacked, we hoped they would do so on a Tuesday because several NATO armies didn’t work on weekends). And there is plenty of middle ground between full isolationism and the approach of the last couple of administrations, who seemed to favour bombing anywhere they disliked without much thought for the consequences.

 

So no, I’m not terrified; I don’t expect international trade to end or the Baltic countries to be abandoned.

 

But if President Trump is looking for international systems to withdraw from, I have a good suggestion; the OECD’s tax-grabbing “BEPS” project.

 

The Organisation for Economic Co-operation and Development was founded in 1948 (initially as the Organisation for European Economic Co-operation) as part of the effort to restore the battered world economy after the Second World War. For a long time it did a lot of good; for example its model tax treaty helped grow the post-war economy by reducing double taxation on international business. But, like many organisations, over the decades the OECD has lost its original purpose and is now acting as a tool of the high-tax, high-spending European governments who are seeking to gouge more money out of businesses.

 

This started in the 1990s with the OECD’s “harmful tax competition” initiative. Tax competition is the process by which governments improve their tax systems in order to encourage and attract more business; this beneficial action promotes economic growth and boosts jobs.

 

But some countries persisted with their inefficient, uncompetitive old tax systems, and found themselves losing out to those who had made improvements, and so they started to label tax competition as “harmful”. Instead of improving their own tax systems to encourage business and investment, they tried to force other countries to adopt their failed example.

 

Sadly the OECD, to some extent, went along with this and attempted to force low-tax countries to change their tax systems to make them less attractive.

 

This resulted in the OECD’s “harmful tax competition” initiative, which turned out to be well named because it was itself harmful, restricting innovation in tax policy design and trying to impose a single, failed model on the world.  Tax competition is hugely beneficial, and trying to limit it as the OECD did causes a huge loss in investment, opportunities and jobs.

 

Unfortunately worse was to come, as many European governments failed to control spending and seemed to be heading for financial meltdown. Looking for a scapegoat, rather than putting their own financial affairs in order they blamed business for “not paying its fair share”.

 

And again the OECD is helping with this European-led tax grab, manipulating the global tax system to allow governments to squeeze more cash out of successful businesses, through its current initiative known as “BEPS”.

 

BEPS stands for “Base Erosion and Profit Shifting”, reflecting the OECD’s claim that companies, primarily multinationals, are “shifting” their profits away from high-tax countries and are thereby reducing their taxable profits, known as their “tax base”.

 

This is aimed primarily at successful multinationals, particularly American-owned ones; Google, Apple, Starbucks, Amazon have all been pilloried, in the media and by governments, for not paying as much tax as governments want. The OECD’s BEPS project is aimed squarely at allowing European governments to extract more tax from businesses such as those.

 

To add insult to injury, those OECD bureaucrats pushing for businesses to pay more tax enjoy tax-free salaries themselves, thanks to the French government granting diplomatic status to the Parisian palace that is the OECD’s headquarters.

 

The OECD’s plan, enthusiastically supported by the high-tax European governments, is to change the international tax system so that tax authorities will be able to ignore certain legitimate business costs for tax purposes.

 

If a company has sales of £100 million and costs of £80 million, it has profits of £20 million and pays tax on that. But if the tax authority ignores or “disallows” £10 million of those costs, suddenly the taxable profit is treated as being £30 million and the company’s tax bill becomes one and a half times what it was.

 

Worse, the OECD’s primary targets are vital features of the new knowledge economy.  The main costs that they are seeking to disallow are royalties or other payments for intellectual property, and interest or other financing costs.

 

Innovation has been the vital driver of Western economies, and payments for the use of intellectual property, for the right to exploit inventions and new ideas, are what underpins that growth. But the OECD and European governments do not seem to be worried about the damaging effect their proposals will have on job creation or improving living standards for their citizens; instead their sole worry is that when companies pay royalties for the right to use an invention, that means less profit for them to tax.

 

Over-taxing intellectual property is like eating the seed potatoes; it may help this year, but it causes far more problems next year.  As we all know (and have known for centuries), if you tax something you get less of it, and the more you tax it the less of it you will get. But somehow the governments who enthusiastically make that argument about smoking seem surprised when it also has the same effect on innovation.

 

The OECD’s BEPS project is a retrograde, harmful process that is trying to shore up inefficient European governments and their uncompetitive tax systems, and is doing so by attacking business innovation. This is one international system that the USA should withdraw from, for the sake of its own businesses and to save the rest of the world from European governments’ folly.

 

Richard Teather is a Senior Lecturer in Taxation at Bournemouth University, and a chartered accountant.

 

Originally this article was published on IEA’s blog.

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