Comments and Discussion (Symposium on Trade Protection)

macroeconomics, trade protection, trade policy

Another Shot at Protection by Stealth: Using the Tax Law to Penalize Foreign Insurance Companies

Together, US federal and state governments impose almost the highest corporate tax rate found among advanced countries, 39 percent. Only Japan is fractionally higher. The high US rate has adverse consequences—lost investment, lost jobs, and less innovation—and goes a long way to explain slipping US competitiveness in the world economy. Some US-based companies that face competition from foreign-based companies think they have found the answer: by one means or another, persuade Congress to impose US taxation on the foreign companies. Instead of attacking the root problem—exceptionally high US corporate taxes—this "solution" seeks to handicap foreign competitors with the same burdensome tax system that handicaps US-based firms when they do business at home and abroad. If Congress embraces this piece of tax discrimination, US consumers who live in disaster-prone areas could suffer as well. Reinsurance written by foreign affiliates pays a major portion of claims in these regions. This portion of the insurance market will either shut down or premiums will rise to cover the new tax burden. There is no reason for the US Congress to go down the path of tax discrimination, harming relations with foreign partners and imposing additional costs on American consumers who live in high-risk areas. Instead, the US Congress should focus on corporate tax reform that puts US companies on the same competitive playing field as their foreign rivals.

Protection by Stealth: Using the Tax Law to Discriminate against Foreign Insurance Companies

The severe economic damage done by the global crisis of 2007-09 has reenergized calls to protect domestic products and producers in the United States. One example is a proposal to discriminate against foreign-owned insurance companies, using the tax code. The Neal bill (HR 3424), named after Congressman Richard Neal (D-MA), proposes to tax foreign-owned insurance companies doing business in the United States more heavily than US-owned insurance companies doing exactly the same business in the United States. If this bill or something like it is enacted, cautions Hufbauer, European countries are almost certain to bring a case against the United States in the World Trade Organization (WTO) and seek redress under US income tax treaties. Some European countries might consider tit-for-tat retaliatory legislation that would hurt US-owned insurance companies. While legal and retaliatory battles are waged, some foreign-owned insurance companies might reconsider their presence in the US insurance market--a role that has greatly benefited the US households and firms that suffered catastrophic losses in the wake of 9/11 and Hurricane Katrina. Equally important, it is a bad idea to deny US nonfinancial companies the benefit of competition between US-owned and foreign-owned firms in an industry that collects hundreds of billions of dollars of premiums annually. Tax abuse in the insurance market, if it exists, can be addressed without discriminating against foreign-owned companies.

The Foreign Sales Corporation: Reaching the Last Act?

Some trade disputes--like long Russian novels--never seem to end. The United States, Europe, and other trading nations have disputed the taxation of export earnings since the 1970s. To understand why the Foreign Sales Corporation (FSC) dispute is so hard to resolve, we must start with a historical tour.

The Alien Tort Statute of 1789: Time for a Fresh Look

In April 2009, the Federal District Court for the Southern District of New York allowed a lawsuit to proceed against US companies that had done business with apartheid South Africa for abetting human-rights violations. In a previous ruling, the Second Circuit Court of Appeals held that firms could be found liable under the Alien Tort Statue (ATS) of 1789 if they were aware that their business activities may have substantially assisted the government's abusive practices, even if the firms did not intend to facilitate this abuse. The ATS allows alien plaintiffs to bring lawsuits against individuals or companies that are subject to US jurisdiction for violations of "the law of nations" or US treaties. While treaties constitute a defined body of law, the law of nations does not, and plaintiffs and human-rights groups in recent years have sought to elastically expand the definition of "the law of nations" from its meaning when the statue was enacted to include a broader range of abuses. In 2004, the US Supreme Court adopted a relatively restricted interpretation of the law of nations, but it failed to enunciate clear guidelines for lower courts on what constitutes an actionable violation under the ATS. Thus US and foreign firms remain at risk for ATS suits, such as the current apartheid suit. Gary Clyde Hufbauer briefly surveys the history of the Alien Tort Statute and considers the potential consequences of extensive ATS litigation. He finds that US and foreign firms that do business with countries accounting for half the world's economy, including China, India, Russia, and Brazil, are at risk under the ATS. Widespread litigation has the potential to disrupt tens of thousands of US jobs related to exports and foreign direct investment. Further, ATS litigation would interfere with US foreign policy and harm relations with foreign states. Hufbauer finds little reason to believe that ATS suits will result in serious improvement in human-rights conditions abroad. In order to avert a wave of ATS litigation, he recommends that multinational corporations devise a code of conduct to protect themselves from ATS suits. Finally, he urges Congress to enumerate violations of the law of nations that create causes of action under the ATS, thus clarifying the law, and to confer exclusive jurisdiction for ATS suits on the DC District Court and the US Federal Circuit, enabling clear and consistent policy in this sensitive area.

Reforming the US Corporate Tax

The mainstay of federal business taxation, the US corporate income tax, is riddled with distortions and inequities. As a means of taxing the richest Americans--a popular goal--the corporate income tax is a hopeless failure. Many companies pay no corporate tax, and among those that do, the burden is highly uneven. Meanwhile, the richest Americans command income from numerous sources besides corporate dividends. The distortions and inequities are amazing. Under pressure from business lobbies, Congress legislates deductions and exemptions that twist the corporate tax base far from any plausible financial definition; then Congress enacts "targeted" tax credits to carry out ersatz industrial policies. Faced with a tax terrain of mountains and ravines, corporations employ armies of lawyers and accountants to devise avoidance strategies. This book proposes to replace the corporate income tax with a tax that has a much broader base at a much lower rate. Two alternatives are explored: the National Retail Sales Tax (NRST) and the Corporate Activity Tax (CAT). To address the issue of regressivity, both alternatives are coupled with measures to preserve the real spending power of households at the lowest income levels.

Support the Ex-Im Bank: It Has Work to Do!

The US Export-Import (Ex-Im) Bank is again at the center of controversy, as Congress debates the terms for its charter renewal. This policy brief critiques provisions of the House and Senate versions of the reauthorization bill and summarizes three justifications for Congress giving adequate support to the Ex-Im Bank. Box 1 provides a capsule description of the Ex-Im Bank's operations.

China Bashing 2004

On April 26, 2004, Senator John Kerry released his six-point trade program, "Trade Enforcement: Asleep at the Wheel," and conspicuously targeted China for violating worker rights, dumping, and supporting "illegal currency manipulation" (Kerry 2004). Five days earlier, senior Bush administration officials met with Chinese Vice Premier Wu Yi to settle a few trade disputes (e.g., WiFi) but did not resolve the most contentious ones (exchange rates, semiconductors, and labor rights).

Rules Against Earnings Stripping: Wrong Answer to Corporate Inversions

The tax-driven expatriation of US corporations is a troubling phenomenon. In a "corporate inversion," a new foreign corporation, typically located in a low-tax or no-tax country, replaces the existing US parent corporation of a multinational enterprise (MNE). The US corporation then becomes a subsidiary of the new foreign parent. Since the US tax treatment of an MNE operating in the United States is sig-nificantly less favorable when the top-tier parent corporation is a domestic rather than a foreign corporation, the inversion transaction averts a substantial amount of US tax. Inversions have attracted adverse attention from tax specialists, media, the US Treasury Department, and Congress. In the wake of September 11, it seemed downright unpatriotic for US firms to invert as a way of skimping on their tax payments.

After the Flop in Copenhagen

Despite high drama, the United Nations Framework Convention on Climate Change (UNFCCC) conference in Copenhagen ended as a flop. During chaotic negotiations and fundamental disagreements surrounding the formation of a post-Kyoto deal, five heads of state got together on the last day of negotiations in an attempt to salvage the conference with a document that would later be called the Copenhagen Accord. The United States, Brazil, South Africa, India, and China led a group of 20 supporting countries to craft the Copenhagen Accord, which was criticized because it was crafted behind closed doors and it did not commit major emitting countries to much in terms of emission reductions, finance, or technology transfer. The members of the UNFCCC agreed to "take note of" the Accord: Some leaders characterized this as a meaningful first step toward a future climate treaty, but many observers characterized the Accord as a failure because it is nonbinding and vague. The meeting in Copenhagen made it clear that nothing will be accomplished in a system that requires consensus among 192 member nations. Some have stated that future climate cooperation should be driven by coalitions that are best suited to the task, such as a narrower group like the G-20. This approach would work best, according to Hufbauer and Kim, if several points are addressed: (1) financial responsibility to developing countries must be divided among the developed members; (2) there must be a commitment to provide public funds if private funds are not forthcoming; (3) a template of conditionality for developing countries must exist; and (4) emission control targets must be frequently reviewed in light of the 2 degrees Celsius cap.