Taxation by International Consent?

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Finance ministers from leading industrial states have been trying, this summer, to work out an agreement on a minimum rate for corporate taxes.  Does it matter that this agreement won’t be adopted by the constitutional procedure for making treaties?  Will it still matter, by itself, to U.S. tax law and tax enforcement?  Should we expect other nations to abide by an agreement of this kind?  Discussion with:

Michael Ramsey, San Diego Law School (author of “Evading the Treaty Power?” FIU L.Rev 2016)

Joshua Wu, former Deputy Assistant AG, Tax Division  

Stephen Krasner, Professor of International Relations, Stanford University (author of Power, The State and Sovereignty). 

Moderator: Jeremy Rabkin, Scalia Law School.

Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at



Evelyn Hildebrand:  Welcome to The Federalist Society’s virtual event. This afternoon, August 26, we discuss "Taxation by International Consent." My name is Evelyn Hildebrand, and I’m an associate director of practice groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today’s call.


Today, we are fortunate to have with us a very distinguished panel. I’m very pleased to welcome this group of scholars and experts to discuss this afternoon. I will introduce our moderator very briefly, Professor Jeremy Rabkin. Professor Rabkin is a professor of law at the Antonin Scalia Law School George Mason University and he’s also a member of The Federalist Society’s International and National Security Practice Group.


After our speakers give their opening remarks, we will have an opportunity for the audience to send in questions. The methods for asking questions -- you can either send in a question via the Q&A chat -- the Q&A feature, at the bottom of your screen. So it’s to the left of the chat box. It’s the Q&A box at the bottom of your screen. Or, if you would like to ask a question verbally, then you can press the raise hand button, also at the bottom of your screen, and you’ll have an opportunity to speak live. Either of those options are available to you. Although, you can enter Q&A questions anytime during the presentation.


With that, thank you very much to our panelists for being with us today. Professor Rabkin, the floor is yours.


Prof. Jeremy Rabkin:  Okay. I’m just going to start by reviewing who the panelists are in a, just, very quick, sketchy way because they’re all on Google and you can read all about their achievements and interesting things they’ve done if you want to pursue that. And then I’ll give a brief setup, and then we’ll have some discussion with Mike Ramsey and then with Josh Wu and then with Steve Krasner.


So just briefly, Michael Ramsey is professor at the University of San Diego Law School, where he is a specialist on constitutional issues involving foreign affairs. He’s written a lot about that. Josh Wu was Deputy Assistant Attorney General in the Justice Department of the previous administration in the tax division and is now a partner at Latham and Watkins in Washington. Steve Krasner is a professor of international relations at Stanford and has written a lot about sovereignty and difficulties with coordinating global policies.

So, let me start just by setting the background to all this. In the late 1990s, when we’ve had a decade of economic growth and development of markets in new areas, the Organization of Economic Co-operation and Developmentthe OECD, which is basically an organization representing more advanced developed economiesthey issued a warning against what they called harmful tax competition. Some countries were taxing too little, and that was really unfair because you would lose businesses which would go to the low tax jurisdiction, and something should be done about that. They started raising that cry in the late 1990s.


About a decade later, people looked up and said, “Woah, some countries are claiming to be based in a low tax jurisdiction where they actually have very little presence on the ground. They just claimed to be based there.” And people realized the internet has made it possible to situate yourself in a place where you’re not actually much on the ground. There was discussion about this starting in 2017. The OECD sponsored discussions about what they called digitalization, meaning companies that can do a lot of online business, and it’s sort of unclear who gets to tax this business because you can do business in a place where you’re not physically present.


Since 2017, the OECD has sponsored discussion on two tracks -- what they call two pillars -- to try to work up an international agreement to deal with these challenges. Pillar One, as they call it, is about trying to get common rules on where we should say particular corporate activities are based in the era of digitalization, and Pillar Two, global minimum tax. There are a lot of technical details here, which is why the discussions have gone on for quite a while and probably will continue for a while.


But the Biden Administration has expressed particular enthusiasm for Pillar Two, the global minimum tax, because it is advocating for an increase in the US corporate tax. The US corporate tax is now 21 percent and the Biden proposal is to raise it to 28 percent, so that’s a considerable jump. There are countries that are quite a bit lower. Ireland is at 12 percent. And then there are some countries, tax havens, like Barbados, 5 percent; the Cayman Islands, 0 percent.


So you can see different countries have different stake in this, but the OECD has gathered now 135 countries, I think, to participate in discussions. The majority are not members of the OECD, but they just want to be part of the discussions. And the expectation is there may be something which is called a treaty or a convention or an agreement. But if it were really a treaty, probably, we couldn't get two-thirds support for it in the United States Senate. So there’s been discussion that it could be called an agreement, and the United States would just implement it. We would have to pass legislation to raise our taxes and to assert tax jurisdiction in ways that have been proposed under this agreement.


I should just mention quickly -- one of the levers here is the global minimum tax idea under Pillar Two -- the general idea is if a country taxes corporate activities in its jurisdiction at less than 15 percent, the home country of a corporation doing business there can tax whatever is left over. So, if it’s Ireland at 12 percent, you could add 3 percent. If it’s the Cayman Islands, and we were the home country, we could add 15 percent to that. So it’s a discouragement to going to a low tax jurisdiction since you’re going to have to pay anyway. That kind of tax, let’s call it—some people already have called it—topping up, would still require Congress to enact the tax. No one’s saying this would be imposed just because President Biden signed an agreement.


But it’s still a very interesting constitutional question. Should the agreement have any effect at all on the way we look at this legislation? And since Michael Ramsey has written a lot about this, I want to start with him. You published a piece a few years ago saying there’s not really a constitutional problem with the Paris Climate Accords because they’re not binding. And there’s not really a problem with the Joint Comprehensive Program of Action, the so-called nuclear deal with Iran because it’s not really binding. And I want to just start by asking you, now, do you still have that opinion that, yes, those were okay constitutionally because they were just handshakes?


Michael Ramsey:  Yeah. Well, thank you very much. And thanks to The Federalist Society for having me on this. And thank you for asking a question that doesn’t involve tax because, I should say at the outset, I don’t know anything about tax. But I do know, at least a little bit, about treaties and nonbinding agreements because I have written a little bit about that. So, in answer to your question, yes, I think that is still my view. And I think it’s -- I’m pretty confident of that. Just some quick constitutional background -- as we know, the Constitution provides for treaties through Article II, Section 2. The president negotiates and then will make a treaty with the advice and consent of the Senate.


But an essential attribute of a treaty is there is a binding commitment in international law. That’s the way treaties were understood at the founding. If you look at the great international writers of the eighteenth century, like Vattel, it’s very clear that that was the -- the essential attribute of a treaty is that it is binding. And so when you have an agreement that is not binding, one that’s just, sort of, aspirational, expresses goal, but it doesn’t purport to invoke international law as its -- making it a commitment in the formal sense, then it doesn’t become a treaty.


Prof. Jeremy Rabkin:  Yes.


Michael Ramsey:  And because it doesn’t become a treaty, it doesn’t implicate the treaty clause. Sorry, go ahead.


Prof. Jeremy Rabkin:  Yeah. I just want to push you a little on this. I understand that it may be hard to draw sharp lines, bright lines, and I certainly understand that there’s a realm of diplomatic discourse in which the president is photographed with the other members of the G7 or the G20 and they all say in their final statement, “We all agree to do more in dealing with climate change,” or to do more against poverty or to do more against medical threats, and they’re just saying it, and it doesn’t have much meaning as any kind of obligation.


But, like, the Paris Climate Accord’s very detailed. And people said -- when Trump withdrew on the grounds that, “Ah, it wasn’t binding, so it doesn’t matter. I can just leave,” --and people said, “Oh, this is terrible. The world thinks we’re terrible. This has really undermined our international standing.” And other countries did say, “You let us down. How could you?” So maybe it was -- you’re saying it’s, technically, not binding, but maybe that’s being too technical and really that was a kind of diplomatic commitment that made it difficult to withdraw. And I wonder if you have a way of explaining to us when that should be understood as, more or less, the equivalent of binding.


Michael Ramsey:  Sure. And I think a couple of thoughts. One is that you may regard it as technical or formalistic, but I think there is a distinction between something that is a legal commitment and something that is, not a legal commitment, but nonetheless is potentially something that, if you go back on it, people will be unhappy with you about itdiplomatic commitment, as it were. The second aspect of that is probably a question that’s better addressed to Professor Krasner than to me because I’m a lawyer not an international relations person. I think when you bring international relations into it, there is a sense in which, sure -- that when the president says something on behalf of the United States, even when it’s not even in the sense of an agreement, but it just says we’re going to do this, and then turns out he doesn’t, then that can have implications for our international relations for our standing in the world and so forth. But none of those are legal consequences. And so I would distinguish between the legal commitment and one that’s not.


Let me just say real quickly though, I do think that you are right in saying that, sometimes, it’s not an obvious distinction. And in particular, with respect to both the nuclear agreement with Iran and the Paris Accord -- and I said this in the article, but I wrote about those two -- is that there were concerns because it was not made as clear as I would have liked to see it madethat the US president understood those agreements as nonbinding. And indeed, there was some confusion with our agreement partners as to whether it was really intended as a binding agreement or not.


And I thought there was some concern that the United States was trying to have it two waysthat is saying for domestic purposes, “Oh, this is nonbinding, so we don’t have to worry about the treaty clause,” but for international purposes, “Oh, we are making this commitment to you,” with this sort of overtone that, at least, in implication that it was an international law commitment. I think we need to be very careful about that because I think the president does risk overstepping constitutional bounds if he’s not clear when something is binding and when something is not binding.


Prof. Jeremy Rabkin:  Yes. I just remind you and the listeners -- you probably don’t need to be reminded, but when the International Court of Justice said, “Oh, you cannot execute this Mexican national who was convicted in Texas on murder charges,” we ended up saying -- the Supreme Court of the United States ended up saying, “Yeah, well, we promise to undertake to comply with decisions of the International Court of Justice, but that didn't mean we’re legally bound to do it, so we’re not doing it.” I’ve oversimplified the case a little bit. But you are talking as if, once it’s “legal”—and I think it’s extremely ambiguous what it means to call it “legal”—and it might be something that court might take into account in interpreting the meaning of subsequent congressional legislation. Right? It’s part of the legislative history, that the president promised this to the G20 leaders and the OECD partners.


Michael Ramsey:  Sure. I think it could be taken into account in that way. But I think, just to complete the very big pictureconstitutional picturethe way that treaties become binding in the US domestic system, of course, is through a supremacy clause, which says that the Constitution statutes and treaties are the supreme law of the land and that that does not mention other kinds of international agreements. And in particular, it doesn’t mention nonbinding agreements. So, the tradeoff that a president faces in thinking about what sort of an instrument to use here—or at least where one tradeoff, the constitutional tradeoff, in my view—is that if the president wants to get an agreement that has legal forceand in particular if he wants an agreement that has legal force within the United States, within the United States domestic systemhe has to go through the treaty power, which means he has to get two-thirds of the Senate. If he doesn’t want to do that, he can make one of these nonbinding commitments, but then it’s nothing but a nonbinding commitment. It’s not an aspect of domestic law.


And on this point, I absolutely agree with President Trump, that President Trump could withdraw from the Paris commitment to the extent that the Paris commitment was nonbinding. That means it’s not binding on subsequent presidents. In fact, I think it’s not even binding on the current president. The current president can change his mind and say, “Well, I said I was going to do that, but now I’ve thought it over, and I’ve decided I won’t,” because it’s all in the realm of diplomacy rather than in the realm of law. And I think that’s the crucial distinction here. And as long as that crucial distinction is made, I don’t have a problem with the president saying, “I want to achieve these kinds of goals.”


But if the president wants to achieve those kinds of goals as a legal matter within the US system, he’s either got to do it through the treaty power, meaning two-thirds of the Senate, or he’s got to do it through the law-making power, meaning a majority of both houses of Congress. That’s the way the Constitution’s structured. And it makes perfect sense that if you’re going to have something that has the force of law, you need substantial participation of the legislative branch. If you’re going to have something that’s just a diplomatic instrument, then the head of diplomacy is the president and it’s fine for him to do that.


Prof. Jeremy Rabkin:  Yeah. He, of course, will want to say that it’s both.


Michael Ramsey:  Yes. Of course. That’s, I think, the key point. And again, that’s the respect in which I found the two agreements we were talking about to be somewhat problematic, even though I think -- in respect, particularly, to the Iran deal, but Paris deal’s a little closer question -- if you really examine them, they really were nonbinding commitments. And so that’s why I ultimately, in my article about them, concluded they were constitutional, but I think there is a potential problem, as I said of -- And I think that’s -- to tie it to the current situation, I think that’s what we want to have an eye to, is to what extent is the president -- if the president proceeds with agreements on these tax matters, is the president trying to have it both ways? Is he trying to fudge this distinction between binding and nonbinding? I think, absolutely, that distinction cannot be fudged—or should not be fudged—because it is, in fact, an essential constitutional distinction.


Prof. Jeremy Rabkin:  Yes. Alright. Let me ask some questions to Joshua, who has a lot of -- knows a lot about tax. So the first thing I want to ask you, which is maybe not directly in your experience, but you must be aware of this -- seems to me when we enact tax bills, it’s very hard to get Congress to stick to proposals from the Treasury because Congress enjoys refining and improving and elaborating and complicating the tax code. When the president negotiates a trade agreement, we have, in past decades, gotten Congress to commit itself to an upper bound vote on what we used to call fast track. And the idea behind that was nobody will negotiate with us if Congress takes a trade agreement and then starts pulling it apart and taking things out and adding other things that weren’t in the agreement. How hard do you think it will be to get Congress to enact legislation that stays within the parameters of an OECD agreement, assuming the world gets to that in the next year or two?


Joshua Wu:  It’s a great question. I think the bottom-line answer is it will be difficult. I mean, tax legislation, because tax impacts so much of the economy and there’s so many competing interests in different regions and different states and depending on what industries, particular legislatures may be interested in, tax bills tend to have a lot of back and forth and additions and removals. And it’s not just about the rates. It’s about the exclusions and the industries that get exempted, and it’s about the thresholds. And so, because of that, it’s hard to imagine that the US could simply push through something through the Senate and the House, based on an OECD model, without significate negotiation back and forth.


I will say that the way that the G7/G20 have sort of positioned this proposal, specifically with respect to Pillar Two, global minimum tax, is to allow some flexibility. I think they realize that they need the US to play along. They need the US to be part of this. I mean, this really stalled until the US got back in the game. And so they built in the acknowledgment that, “Look, you’re going to have to implement this as a framework, and then the specifics are up to you, each country, as in knowing that it’s not going to be 100 percent alive, especially on Pillar Two.” I think they have less room to recognize that fact, that the US can’t simply pass this through as-is.


Prof. Jeremy Rabkin:  If it does actually -- there is this agreement and it is implemented by the US Congress, what do you think would be the greatest challenge in enforcing it? Say there are countries that say, “Okay, 15 percent, that’s what we’re doing15 percent.” But of course, we have our own definition of what is income, and we have our own deductions, but since the rate is going to be 15 percent, how would we certify or determine for ourselves what they’re doing in some other country?


Joshua Wu:   Right. And that’s the big question, right? From a tax practitioner’s standpoint, that’s, I think, the big concern for both -- should be the concern for both the tax administrative agencies, like the DOJ and the IRS, but also for taxpayers that need certainty when they’re structuring their operationswhen they’re figuring out where to place their IP. They need to know how the rules are going to work and how foreign countries are going to treat different things. And so that’s been the story over the last decade, really, starting in 2010, is how does the US gain insight into what other countries are doing? How do we characterize their law? Because, like you said, they can have a 15 percent tax rate on paper, but there’s all kinds of ways that other countries can effectively reduce that rate if they want to incentivize companies to move there, as they’ve done in the past. Right?


Prof. Jeremy Rabkin:  Yes.


Joshua Wu:  And so through rebates and credits and other types of incentives, they can effectively reduce that 15 percent rate.


It falls, then, on the US and what I expect will be litigation, depending on how this is structured, to look at those exemptions, credits, rebates and say, “What is this? Under a US law perspective, what does this mean?” And there have been, over the last decades, numerous cases where you’ve seen experts coming into to testify on foreign law and the parties and briefs disputing what a particular tax or credit or exemption means under foreign law and how that impacts the US tax system. So, I do think the administrability will be challenging. And there’s no doubt that countries will try to play games to cooperate but also incentivize US companies to move operations to their shores. So, it’s certainly something that we’re going to have to deal with.


Prof. Jeremy Rabkin:  Yeah. If this comes to pass, it’s presumably in the context of we’re going to increase domestic taxes, but we’re going to try to block the exits. We’re going to make it more difficult for you to avoid paying the US tax because we’re going to make sure that you can’t get to a foreign country where it’s less. And maybe if we’re talking about a sizeable increasewhatever that is, 30 percent increase or somaybe that’s enough incentive to start exploring murky depths of opaque foreign tax law, right?


Joshua Wu:  It might. It certainly enough. It’s enough to try. And I think I understand the administration’s idea here. And both administrations, the last two administrations, have been concerned with shifting income to low tax jurisdictions. And both have tried different proposals to prevent things like inversions of corporate structures to stop companies from moving assets abroad. Right? And so this will help that effort by raising the worldwide global tax rate. There’s less incentive to move abroad.


As we’ve talked about before, I mean, you can wonder why other countries might be interested in this. Right? I mean, thinking, “Gee, we can’t lower our tax rate anymore and attract investment and attract US companies to come over here and move their operations.” But that’s where Pillar One really comes in is shifting the allocation so that those other countries where the US is selling goods and services into those countries can get a share of that tax, where under existing tax treaties, generally, they don’t get a share of that if the US company doesn’t have what’s called a permanent establishment or a nexus or a physical presence to that country.


So, I view this as -- there’s a US-positive portion for Pillar Two, the global minimum tax, but it probably only works globally if the world gets Pillar One, which allows some other countries to get some of that money from US corporations. So there’s an interesting relationship here. It’s not just about the administrability of Pillar Two and the global minimum tax. It’s, “How do we administer Pillar One,” which is far more complex.


Prof. Jeremy Rabkin:  Yes. So, you mentioned the tax treaties. Mike Ramsey might have an opinion about this also, but let me start with you. So, we have these treaties. My understanding is that they are self-executing. They actually are law of the land. We have a lot of them, like 60 of them, with major trading partners, major western countries. Although, interestingly, when I looked, we actually have them with countries you wouldn't think it was urgent for us to come to an agreement with, like Belarus. Americans’ earning profits in Belarus should be, I think, sent to the FBI or some intelligence agency, forget about the IRS.


Anyway, we have these 60 agreements out there. What would be the relation between subsequent legislation implementing this agreement and the tax treaties? Does it mean that the tax treaties can just be disregarded because we have a later law? Or how will these things come together, particularly if you’re a judge in litigation that involves both a treaty and the new legislation under this new international agreement?


Joshua Wu:  Well, I’ll take a stab at this, but I will defer any constitutional issues to Professor Ramsey because that is not my area of expertise. I do think, looking at this -- and this will result in litigation because it’s hard to imagine a way that Congress can enact this by statute that will not impact the existing network of tax treaties. I mean, that’s simply not possible in my view. And so then the question becomes -- usually you would say, “Well, they both have the force of law. The one that’s later enacted, of course, controls. But the conflict I see is, usually tax legislation -- again, there’s a lot of different moving parts to it, but I’ve never seen one before that’s going to have to address the numerous treaties we have.


In other words, every treaty, although we do have a US model treaty -- but everyone is slightly differentslightly different definitions, slightly different rules, slightly different things about what constitutes residence or what constitutes a permanent establishment in a foreign country. So, if Congress passes a statute enacting Pillar One and/or Pillar Two, the question is, does that override specific portions of the treaties or does certain portions of the treaty remain intact? And I think most courts are going to be reluctant to simply write over a treaty that’s been negotiated, has been in place, and relied upon for years without trying to deconflict it with the later-in-time statute.


That is where the rug is going to be in the litigation and where you can see a lot of future conflict between various treaties and then the legislation. And it can’t be resolved in one case because there are so many treaties, as you pointed out, with all different kinds of countries that themselves have different tax systems. So like I said, as a tax practitioner, it’s interesting and it could be fun for litigation, but as a tax policy matter, it presents some challenges, for sure.


Prof. Jeremy Rabkin:  Yes. I noticed in doing a little homework for this that there is an international convention defining taxable assets, but we’re not a party to it. We don’t like to standardize. We do these things one by one in our bilateral relations. Mike Ramsey, do you –


Michael Ramsey:  Yeah. If I --.


Prof. Jeremy Rabkin:  -- have [Crosstalk 30:51]?


Michael Ramsey:   Yeah. I thought I’d just jump in real quick. Although, I don’t have much to add. I think what we heard is absolutely right. Again, I’m not saying you have it in terms of tax treaties. I’m thinking of it in terms of big picturelaw of treaties. So, there are two basic principles in considering the relationship between statutes and treaties within the US domestic system. The first is that, as you’ve just heard, the later-in-time governs, they’re considered to have equal status, statutes, and treaties. So, the later-in-time governs. So, if there’s a later statute that overrules an earlier treaty, then too bad for the treaty. Statute prevails.


But there’s a countervailing interpretive convention which says that a statute will not be construed to overrule a treaty unless it’s clear. The problem is that those two things point in opposite directions. So, unless Congress is extremely careful and clear about what it’s doing -- and far be it for me to say Congress wouldn't do that, but if they were not careful and clear, then there’s going to be, as you heard, substantial opportunities for litigation because, basically, one side can argue the later-in-time rule and the other side can argue the clear-statement rule, and you can take your pick.


The one other thing I’d add about this that’s relevant is that, while it is true in US domestic law that statutes and treaties have equal status and therefore the later-in-time governs, this is not true in international law. In international law, the treaty remains a binding obligation, and it is not a defense to say that you have overridden it by statute within your domestic legal system. So, the other party to the tax treaty might well have grounds to complain unless we work it out with them in advance as to how this is supposed to work.


Prof. Jeremy Rabkin:  Do either of you happen to know whether there are arbitration clauses in these tax treaties?


Michael Ramsey:  I know nothing about tax treaties.


Prof. Jeremy Rabkin:  Well, like that the other party can say, “We insist on submitting this to arbitration because you’ve now violated the terms of this tax treaty.”


Michael Ramsey:  I defer to the tax expert.


Joshua Wu:  Yeah. To be honest, I don’t know. That’s never come up just in practice. Usually, the issue we see is a challenge between the two countries about who gets to tax what. So there is a process, and the treaties resolve that, where you have both countries saying, “We want to grab this manufacturing, so we have to negotiate a resolution.” But if one party blatantly violates the treaty, I don’t know. I’ve not seen that in practice.


Prof. Jeremy Rabkin:  Well, okay. So this can all be complicated. Let me throw some questions to Steve Krasner. Just a small thing to start with. I was struck that this starts off as an OECD undertaking. So, the OECD now has 38 members. And then they said, “Oh, well, whoever is interested can be part of this negotiating a new framework.” And that is, I think, 138. I mean, it’s a big group of countries. And if you look at the countries that are participating, it’s tax havens. The Cayman Islands, “Well, yeah, we want to be involved in negotiating.” Bermuda, Bahamas, they all want to be part of this negotiation. Is that surprising to you? Or would you say, “Oh, yes, that’s what an IR scholar would expect?”


Stephen Krasner:  I think the OECD is an organization that’s always looking for something to do.


Prof. Jeremy Rabkin:  Yes.


Stephen Krasner:  It was established after the second world war. It was originally set up to reconstruct Europe. It’s basically been an organization that’s tried to find something to do. Tax havens look like something to do. I’m not a lawyer. I’m not an expert on taxation. But am I surprised by the OECD doing this? No, not really, --


Prof. Jeremy Rabkin:  No.


Stephen Krasner:  -- because I think that probably -- [crosstalk 35:04].


Prof. Jeremy Rabkin:  That I get totally. My question is, why do tax haven states that are not OECD members say, “Oh, thank you. We want to participate in this negotiation?”


Stephen Krasner:  So, I think -- if I could step back for a second, we have this sovereign state system. It’s developed and endured for over several hundred years. It’s really kind of odd when you think about it. Why does China and Vanuatu have the same number of votes in the UN General Assembly? It’s kind of strange. And there have been other ways in which the international system was organized. If we look at China, traditionally China was the center. Everybody else was a tributary state. It actually makes, in some ways, much more sense.


So, I think if you’re looking at -- I tried to do a little research on tax havens. So look, if you’re going to put a large amount of money someplace, you want to make sure that place has some kind of system that’s relatively stable. So basically, I think if you look at the sovereign states -- it’s kind of safe to do things which they wouldn't do otherwise in only two ways. One is you have a hegemon providing collective goods. It’s simply not clear that the United States can play that role anymore. The second thing is that you’ve been able to pressure other states to act in ways in which they would not otherwise act. Now, you might do that by suing their banks rather than by suing them.


Now, I think that having the OECD do this and set it as target makes -- may make some sense, but it will require a whole bunch of national legislation. And the problem will be, to get national legislation, which is mutually compatible and which every country would see as being acceptable. I can’t see the US trying this hegemonic [inaudible 37:08] role, and I can’t see the US bringing enough pressure to actually make change possible.


Prof. Jeremy Rabkin:  Yeah. I mean, this was my impression.


Stephen Krasner:  So, I think it will be hard.


Prof. Jeremy Rabkin:  I think it really --. [Crosstalk 37:17]


Stephen Krasner:  I think it will be hard. I think what they’ve done makes sense. It’s sort of setting a goal. It’s non-binding. But actually making anything like this work will require legislation from many different countries. And there -- it’s not as -- it will have to be in their self-interest to do it. I mean, Ireland or Apple might do this because -- for one reason or another, but Ireland because other members of the European Union might threaten them; Apple because, if they get a reputation for being tax sergeants—that’s not a great thing—for selling $1,000 iPhones. But it will not be easy.


Prof. Jeremy Rabkin:  Yeah. I wonder if you were even right, that it’s bad to have a reputation as a tax haven. I think many countries would love to have that reputation.


Stephen Krasner:   Well, I think the problem is -- [crosstalk 38:21]. If you --.


Prof. Jeremy Rabkin:  [Inaudible 38:22] -- as a tax haven.


Stephen Krasner:  No, I think being a tax haven isn’t bad. And the question is whether the country that’s really in charge is going to impose restrictions or not. And that will depend on domestic politics and domestic politics in a lot of different countries.


Prof. Jeremy Rabkin:  Yes. And I wonder whether the United States is prepared to make this a priority. I mean, one of the countries that’s actively participating in this is China. And I’m kind of skeptical that this will be high -- if we do not have another Trump Administration -- I do not say this at all in praise of the previous administration, but I just think subsequent administrations won’t be so focused on, “Wait, were there American companies that were doing business in China that was not as heavily taxed as it otherwise might have been under this agreement?”


Stephen Krasner:  No. I think that’s absolutely right. I think the problem -- [crosstalk 39:21]. And what I’ve been thinking about it lately is, on the one hand, we have this sovereign state system. On the other hand, we have a disconnect between underlying capabilities and the ability to do harm. That’s a much bigger problem. If you think about it, Iran or North Korea -- 500 years ago, it wouldn't have been much of a threat. I mean, now, they are gigantic threats. So, they’re bigger. The question [crosstalk 39:52] --


Prof. Jeremy Rabkin:  They are probably not a threat to become tax havens.


Stephen Krasner:  No. They might not become tax havens. But I mean, if you look at North Korea as some fracture of one percent of the GNP of Japan or Russia or China or the United States -- but if you killed millions of people -- if you go back 500 years or 1,000 years, that was not going to happen. Basically, you won wars by having more people or a larger GNP. It’s no longer the case, so I think there are maybe big, big parts of [inaudible 40:27] very problematic.




Prof. Jeremy Rabkin:  Yes. I see that. Do you think there’s any chance that, let’s say, 25 years from now, we’ll look back on this agreement and say, “That was the beginning of a new era in international cooperation?”


Stephen Krasner:  Okay. I think unlikely. As I said, I think we’ve gotten international cooperation in two ways, either by being a hegemon, which United States is not at this point -- and even if it were, it’s not clear to me how it would act -- or by putting pressure on other states. I don’t think it’s going to be in the interests of countries to do that. So, no, I don’t think we’ll get a new era. I think they started the only way they could possibly start, which is by having aspirational objectives and targets rather than legislation. And I don’t think we’d fail to have a treaty because not only would be hard to get a treaty enacted in the United States, but a treaty is unlikely to work. So, I think the best you could ever have is aspirational targets. And here -- I mean, the answer to your question is it depends. It depends on what. It depends on the domestic politics, which I actually don’t know well enough to know whether if -- will Britain really find it to be in its interested crackdown on Curaçao or Bermuda or some place. I just don’t know.


Prof. Jeremy Rabkin:  Yeah. It just strikes me that there’s been a certain amount of political -- let’s call it political rage that China, or earlier Japan, is producing things that’s forced the closure of a factory in Wisconsin. And they can say, “We used to make motorcycles, and now we can’t make motorcycles, and it’s because of Japan underselling us,” or, “We’re angry at Japan.” It’s hard to believe that people will have that -- perceive that kind of direct link between some bad thing happening in America and investment that leaks into other countries or lesser tax fault.


Stephen Krasner:  All right. First of all, tax [inaudible 42:50] doesn’t necessarily mean that you’re going to be producing things in other countries -- just have some entity which is [crosstalk 42:59] --


Prof. Jeremy Rabkin:  Yeah. Yeah. That’s why it’s hard to --.


Stephen Krasner:  And anything new -- you know this -- anything that requires more than two or three sentences to explain is too much.


Prof. Jeremy Rabkin:  Yes.


Stephen Krasner:  So I think constituents will be too complicated. They have, sort of, a modest degree of saliency. And it will be difficult to see them getting a high degree of saliency.


Prof. Jeremy Rabkin:  Yes.


Stephen Krasner:  So I agree with you. I think it’s going to be -- we have problems with China. I think they’re real, but taxes is not going to be at the top of the list.


Prof. Jeremy Rabkin:  Yeah. That’s my impression too. So, we certainly have time if any of people in our audience want to raise a question, you can put it in the Q&A function or you can raise your little blue hand and be called on. Okay. While we’re waiting for them, do any of you want to correct anything that was previously said.


Michael Ramsey:  I actually have a question because this is something -- this is a constitutional treaty question specifically about tax. And so I’m going to ask Josh Wu and just see if he knows. And I don’t mean to suggest that you should know, but my question is, if they wanted -- if the OECD wanted to do this as a treaty, as a self-executing -- what the US would call a self-executing treaty, that is, it’s negotiated by  —I mean, it would be developed in the OECD, then the United States would sign on if the Senate would ratify it -- if the Senate would give advice to consent and then the president ratifies it – so, a traditional treaty process, then it’s treated as self-executing, becomes part of domestic law automatically. Seems to me that that would be the easiest way to do this because then you don’t get into this problem with the interaction between the statute and the treaty. I understand the political problems of doing it this way.


But my question is, if you know, is there any constitutional issue with that? Because, on the one hand, people might say that a tax treaty that’s self-executing interferes with Congress’s ability to raise revenue on all revenue built after originating the House. But on the other hand, we have all these tax treaties. So obviously, you can do tax things by treaty. So, is the understanding that the Senate’s treaty power with respect to taxes is plenary and not limited by Congress?


Joshua Wu:  That’s a great question that I think is -- I mean, I don’t know if there is an answer to that. I know that there is some scholarship in the tax academia with respect to that. Right? What’s the interaction between the House’s power and the Senate’s power to treaty? It seems like, to a large extent, with these bilateral treaties, that has never -- that’s been overlooked or it hasn’t really been addressed. And I think -- just my suspicion, my personal view is the reason that is, is because the tax treaties – it’s with one treaty partner. It doesn’t really impact the revenue overall in the US to a great extent. Right? This would be fundamentally different assuming, like you said, that they were to go with a multilateral agreement. I mean, this would be a much more fundamental shift by treaty in the overall tax base than the revenue raised by the US.


Now, the counterargument to that would be, “Look, the corporate tax rate of the corporate tax system is a relatively small percentage of the revenue the Treasury brings in.” So, most revenue is from employment taxes, from general income taxes, and so the corporate tax base is not a gigantic portion of what we collect. And so having this bilateral or this multilateral treaty, does that really impinge on the role of the House in generating revenue? And you can make out a proportionality argument there and say, “No more than the marginal changes that the treaties make when they give exemptions or give a special allowance for dividends or royalties or other kind of income.” So, I think that would be the counter.


But I do think it’s something that has not really been explored in the tax world because it’s never been on this scope. I mean, we don’t do these kinds of treaties. We do one-offs. We do tax information exchange agreements, bilateral treaties. The closest thing, when you were just talking about who’s going to get on board with this -- the closest thing I can think of in recent times to something like what the OECD is trying to do is FATCA, the Foreign Account Tax Compliance Act, where the US enacted a law and got all of these countries to do intergovernmental agreements with us based on our domestic law. And the way we did it was we said, “If you don’t get on board, we’re going to withhold payments out of the US,” and that’s like the stick, right?


But that was a US unilateral action that then prompted international action. We had the domestic will after the Swiss bank scandals and all of the other publicity to do that. We were just talking -- I don’t know if that exists now -- that political and that sort of momentum is the same as it was back in 2010.


Michael Ramsey:  Yeah. Thanks. I’m guessing this is kind of moot point because there wouldn't be the votes in the Senate to put this through as a treaty. But it struck me that would be the best way to do if you could do it that way.


Prof. Jeremy Rabkin:  I’m just going to indulge the law professor temptation of complicating this. I have seen people making the argument the other way, which is you can’t exclude the House because this is, in effect, a revenue bill. And so, therefore, we shouldn't do it as a treaty, we should do it as a congressional-executive agreement because that would respect the special role of the House. But of course, the people who were saying that are also saying, “This is a great thing. Let’s do it and let’s have a workaround of Republican opposition in the Senate.”


Michael Ramsey:  Well, I suppose, at least under current law, you probably could do it that way. I, myself, have some reservations about congressional-executive agreements under the original understanding of the Constitution. But in modern practice, we have lots of congressional-executive agreements in the trade area, for example.


Prof. Jeremy Rabkin:  Why NAFTA is sort of unconstitutional, to coin a phrase.


Michael Ramsey:  Yeah. So, I think you could do it that way if you did it as -- that the OECD would have the model treaty, and then the president would sign on, and then -- this is the way it would come about I think, is that then it would -- the president could present it to Congress to both houses of Congress rather than presenting it to the Senate and say, “I’m presenting this as a congressional-executive agreement, like NAFTA, like WTO, like the bilateral trade agreements.” And there would be, I think, some people saying this is an extension of the congressional-executive agreements beyond what we’ve already done, and therefore it shouldn't be allowed because they’re constitutionality is suspect. And I might even be one of those people, but I think that will be a minority. I think most people would say, “No, it’s a congressional-executive agreement. You could do it that way.”


So, that’s a good point, that maybe we should not be so quick to assume that we couldn't do it as a binding international agreement because it is true that there are situations where you could use a congressional-executive agreement to, in effect, bypass the treaty-making power. It’s still, though, requires an involvement of the lawmakers, and I’m not sure that even the House would be willing to go along with something the OECD came up with without making its own tweaks.


Prof. Jeremy Rabkin:  Let me ask this very, very particular question to Josh Wu. You may not know the answer. In Mike Ramsey’s book, The Constitution’s Text in Foreign Affairs, he has a chapter with that name -- why NAFTA is unconstitutional. And he says at the end, “Well, it’s sort of unconstitutional, but anyway we can get out of it easily, so let’s not make a fuss about it. It’s not really that binding. We just exit on six-month notice.” Of course, we don’t yet have a treaty text for this OECD project, but is this the kind of thing that would provide for quick exit to reassure people like Professor Ramsey? Is that common in tax treaties to give you a quick exit provision?


Joshua Wu:  No. I mean, if you look at the tax treaties, you’ll see a lot of these treaties have been around for 30 plus years. There’s a reason they don’t change, right?


Prof. Jeremy Rabkin:  Yeah.


Joshua Wu:  It’s not [crosstalk 51:59] what --.


Prof. Jeremy Rabkin:  People have to do long-term planning.


Joshua Wu:  Exactly. Exactly. What do businesses need? They need long-term consistency.


Prof. Jeremy Rabkin:  Yeah.


Joshua Wu:  And the worst thing is to give them an inconsistent tax position where they don’t know what’s coming next year.


Prof. Jeremy Rabkin:  So, Professor Ramsey should not be so cavalier about this as he was about NAFTA?


Joshua Wu:   [Laughter] Well, I don’t know about that. But I will just say, in my view, tax is -- there’s so much power in the ability of tax and so much ability to destroy or help a modern economy. So, I just don’t think -- it’s not the kind of thing you can just change overnight. So, I think it would be dangerous to say, “Let’s do this, but we can back out,” because some of the changes that the OECD is proposing, especially on Pillar Two -- I’m sorry, Pillar One. I think Pillar Two might be easier to undo.


Prof. Jeremy Rabkin:  Yes.


Joshua Wu:  Pillar one would not be easy to undo. I mean, there is so many players that would be involved in allocating profits to different jurisdictions that you couldn't pull the plug on that overnight.


Prof. Jeremy Rabkin:  You’re basically saying how these different jurisdictions will interlock when it comes to treating income as taxable in their jurisdiction. Yes.


Joshua Wu:  Exactly. It’s very much like -- the analogy is the US state and local system. Right? Every state has its own taxing authority. It only works and we only have consistency between the states, to some extent -- and there’s plenty of litigation to say we don’t have full consistency, but we have an overarching federal government and a constitution that gives us that unity. There’s no such thing on the international context. And as you mentioned before, the US has not been a part of a lot of these multinational understandings.


Prof. Jeremy Rabkin:  So, let me pose to you the question that I posed earlier to Steve Krasner. If this thing does come off with the understanding that, “Oh, of course, you can adapt it to your local priorities, and it’s just a framework, but it does come off,” and we have 135 countries signing up for it and accommodating the main elements of it, it seems to me what you were just saying is we should expect it to have a fair amount of staying power, at least the framework of how we consider income being earned in different jurisdictions. And so maybe we would look back on this 25 years from now as, “Wow, the world became more standardized in the way revenue is raised.”


Joshua Wu:  That would not shock me. What would be shocking is if we had a multinational treaty, but it wouldn't be shocking if this did -- so, because there is a wave that’s already been moving as I mentioned since FATKA, since the information exchange increases, since the automatic exchange of tax transparency that’s been, sort of, pushed originally by the US and has sort of latched on in other places, it wouldn't surprise me if there’s more agreement and consensus on what is income, where is income allocated.


Prof. Jeremy Rabkin:  Yes. So, we will have a nuclear Iran, thanks to that agreement, which is okay because it’s not really binding. And then we will have revived jihadi attacks around the world and a global tax cartel. And it will be really hard to figure out how they interact, but probably the jihadi jurisdictions won’t become tax havens, so they’ll be out of it. Do you want to say, “No, come on, cut it out; those things are not really alarming,” except for the nuclear Iran?


Joshua Wu:  I’ll just say I’m not sure about the other one. They all sound pretty alarming to me. And I think there’s the issue, ultimately, of -- giving up sovereignty of taxing authority is giving up a lot. That is giving up a lot. And I don’t think this will get that far, but it is something that would be concerning because defining income is a pretty fundamental portion of the entire tax system. So, that would be a very big concern. I don’t think the US is going to do that. Historically, we have not been willing to give up our ability to define what is income, and we’re one of the few countries that still has a worldwide tax system. And we’ve never been fully willing to part with that.


Prof. Jeremy Rabkin:  Yes. So, let me just say in conclusion, unlike some other things, this is not going to happen this year or even next year, right? But it could happen in President Biden’s first term if he serves until the end of it, right? So, we’re talking about three years’ horizon. We’re not talking 10-year horizon.


Joshua Wu:  I think it would be hard, but I think it’d be possible, in my opinion. I don’t know what the others think.


Jeremy Rabkin:  Yeah. Well, I guess it may also depend on who’s running Congress next year or the year afterpeople who are not paying attention to Afghanistan or people who are really still reacting to it, I mean, we don’t know. Okay. Does anyone else want to make a comment because our FedSoc host wants to make a comment? Okay. Evelyn, you wanted to say something.


Evelyn Hildebrand:  Yes. I just wanted to thank our panelists since we’re coming to the end of our program this afternoon -- to thank our panelists and our moderator for your excellent discussion, and to let our audience know if you have any questions or feedback, comments, we welcome those comments at And if you’ve all had the opportunity, or if you’d like to make any closing statements, you’re welcome to. Otherwise, we will wrap up as it’s getting to be the end of the hour. Alright. I think we’ll call that a day. In any case, tune in at 4:00 P.M. for our next webinar. And in the interim, we are adjourned. Thanks very much.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at