For the World Trade Organization (WTO), the United States just can't get it right when taxing foreign earnings of U.S. corporations.
In July, the WTO upheld Europe's complaint against transition relief for U.S. companies relying on Foreign Sales Corporation (FSC) tax breaks. As the Congressional Research Service noted in a November 2004 report, "E.U. officials have argued that the 'grandfather' provisions favor producers of large capital goods that have long delivery times and would favor large U.S. exporters such as Boeing Co., Microsoft Corp., Intel Corp., Motorola Inc. and Caterpillar Inc."
Although the U.S. Congress has made a concerted effort to "fix" the FSC problem for good, this latest European assault focuses not on substance but process -- on the law's provisions easing the transition to new rules for companies that relied heavily on the old ones.
In short, this latest WTO ruling constitutes Euro-driven micromanagement of how the United States implements its tax laws, and indeed of the U.S. political process itself.
As global trade increasingly dominates the U.S. economy, this WTO bias against U.S. tax policy grows in importance. Pressure for the United States to shift to a VAT-type tax (value added is taxed at each stage of the production process, but is not visible to the taxpayer in the final price paid) largely comes from U.S. businesses seeking a level playing field.
But it should not be the business of the WTO, or of Europe, to pressure the United States to "harmonize" its tax system with theirs, especially when Europe lags far behind the United States on most measures of economic success.
The American business community would welcome a radical revision of the way it pays taxes, to reduce compliance costs and end the tax code's wild, and unpredictable, misallocation of capital investment. But both businesses and individuals need reasonable assurance that the tax "rules of the road" will be clear, consistent and predictable.
We have a great opportunity to reform U.S. taxes, but not if we have to go to Brussels and Geneva first to ask if it’s all right.