Battlespace Preparation

Michael Mandel of the Progressive Policy Institute questions President Obama’s embrace of the Base Erosion and Profit Shifting Project, an OECD initiative:

As they are being developed, the BEPS rules — mainly written at the headquarters of the Organization for Economic Cooperation and Development, in Paris — will not be likely to generate more tax revenues for the United States. Instead, the BEPS rules, as written, will encourage American companies to quickly move high-paying jobs such as those of research scientists and software developers to Europe to take advantage of lower tax rates.

In other words, unless Congress acts quickly to reform the ossified American corporate tax system, the BEPS rules have the potential to turn into an enormous job-and-revenue grab by Europe, and an enormous loss of jobs and revenues by the United States.

How does this work? The BEPS rules would do two things. First, they would close the most egregious international tax loopholes. Most multinationals would end up paying more taxes to someone, somewhere. That’s good.

But the project also changes the international tax rules by forcing companies to pay corporate taxes according to the location of the economic activity and value creation generating their profits. At first blush, that would seem to benefit the United States, home to much of the world’s innovation and many innovative companies. Certainly the Obama administration seems to think so, because it continues to support the BEPS effort.

But the administration’s support is rooted in political anti-corporate rhetoric rather than cold hard analysis.

Note that the Progressive Policy Institute is an outgrowth of the now-defunct Democratic Leadership Council, the Bill Clinton-led “New Democratic” caucus within the Democratic Party.

That BEPS is not in the U. S. interest seems obvious but I’d be interested in seeing the counter-argument. My interpretation of this blue-on-blue attack is that it’s battlespace preparation and that if you think the Obama Administration was corporatist, you ain’t seen nothin’ yet.

There’s also an obvious strategy for mitigating any risks presented by BEPS: the U. S. should bring its corporate income tax into line with international standards. I don’t, however, see anything about that in Mr. Mandel’s op-ed.