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09/09/2021

Taxation by International Consent?
Michael Ramsey

Recently I participated in a Federalist Society webinar titled Taxation by International Consent?, along with tax attorney Joshua Wu (Latham & Watkins) and political scientist Stephen Krasner (Stanford), moderated by Jeremy Rabkin (George Mason/Scalia).  Here is the description:

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?

As I don't know anything about tax, my role was to talk about the constitutional and international law aspects of international agreements.  In short, my view of the global minimum corporate tax agreement is that it will be done as nonbinding agreement, which I think is within the President's executive power.  It would not infringe the treaty power because a treaty is necessarily a binding agreement under the international law definition of the founding era.  As I put it in Evading the Treaty Power

The word “treaty” in the Constitution indicates a binding agreement under international law. Vattel, the leading international law writer of the eighteenth century, wrote: “He who violates his treaties, violates at the same time the law of nations; for, he disregards the faith of treaties,—that faith which the law of nations declares sacred.” Americans of the founding era were concerned that treaty violations would impugn the nation’s honor (an important consideration at the time) and more practically would give cause for war at a time when the United States was a weak nation militarily. In discussing the importance of treaties, members of the founding generation consistently referred to treaties’ binding nature. For constitutional purposes, therefore, an essential element of a treaty is that it is binding as a matter of international law.

Nonbinding agreements are necessarily not treaties, because (by definition) they lack the essential characteristic of bindingness and therefore lack the corresponding implications for preserving honor and not giving offense. A nonbinding agreement is in effect a statement of policy (or rather multiple parallel statements of policy) which the relevant parties understand can be changed unilaterally in any party’s discretion. Because a nonbinding agreement is not a treaty and does not implicate the concerns of a binding commitment, the treaty-making clause is not relevant to its constitutional status. Put precisely, the treaty-making clause does not preclude the President from making nonbinding agreements.

Of course, the President must point to an affirmative source of the power to make nonbinding agreements, and since the Constitution does not mention them expressly, that must be found in some other source of power. ... [T]he theory of executive foreign affairs power holds that the vesting of “executive Power” with the President in Article II, Section 1,includes foreign affairs powers not specifically granted to other entities by the Constitution. Under this approach, diplomacy and the management of foreign affairs are powers of the President, and those powers would likely include a general constitutional power to make nonbinding agreements.

But (as I say on the webinar), the consequence of proceeding via a nonbinding agreement is that the agreement is not part of international law or U.S. domestic law.  It isn't part of "supreme Law of the Land" under the supremacy clause; it doesn't impose any obligation on Congress to enact it; it can be rejected or ignored by a subsequent President, or even by the current President if he changes his mind.  It's really just a joint statement of policy (and thus belongs more in Professor Kranser's domain than mine).

An interesting question (but an entirely academic one given the composition of the Senate) is whether a global minimum tax constitutionally could be adopted by treaty.  The argument against it would be that Article I, Section 7 says that "[A]ll Bills for raising Revenue shall originate in the House of Representatives."  A treaty isn't a "Bill," of course, but perhaps the origination clause implies that the House has an exclusive power to initiate tax-raising measures.  There are, however, many tax treaties in existence, principally aimed at avoiding double taxation; it's not clear if they are distinguishable.

Another possibility we discuss is adopting a global minimum tax by congressional-executive agreement.  In theory, the President could work through the Organisation for Economic Co-operation and Development (OECD), where the discussions have been ongoing, to develop a model agreement, and then present the agreement to Congress for approval by simple majorities in both Houses.  I think congressional-executive agreements are probably unconstitutional under the Constitution's original meaning (because unlike nonbinding agreements they do infringe the treaty power), but they are well established in modern practice in some areas (but not tax).  Our assessment is that in any event Congress isn't likely to cede control of the development of the minimum tax rules (which likely will need to be quite complex) to the President, and so a congressional-executive agreement in the nature of ones used in the international trade area is unlikely for tax.