I recently testified before the House Ways and Means Tax Subcommittee on the Organisation for Economic Cooperation and Development’s (OECD) Two Pillar proposal to increase corporate tax rates on multinational businesses.

You can read my full written testimony here and watch my opening statement here.

In my remarks, I explain how the OECD has lost its way in advocating for higher and more complicated taxes and detail the economic costs of its proposals. I conclude with thoughts on how U.S. policy should respond.

Two topics that came up in the hearing deserve additional attention. It was regularly asserted by Democrats and implied by some Republicans that the only path forward is continued engagement in the OECD process so that U.S. interests are fully represented. This strategy makes two poor assumptions. First, if the OECD’s inclusive framework successfully redistributes taxing rights, it will likely embolden future destabilizing unilateral actions. Second, the underlying motivation of the project—to increase global taxes—is at odds with U.S. interests and pro-growth policy.

New Forms of Instability

The administration’s witness, Michael Plowgian, claimed that the Two Pillar solution is necessary to ensure stability in the international tax system. In response to a question from Representative Randy Feenstra, Professor Mindy Herzfeld and I explained why the OECD project is instead likely to further destabilize the international tax system.

The Two Pillar framework gained steam when in the spring of 2019, the OECD released a work program outlining an accelerated rewrite of the international tax rules to address growing concerns over the taxation of the digital economy and unilateral digital services taxes (DSTs). France and a handful of other countries implemented or threatened to implement these taxes that were not so subtly designed to hit U.S. technology firms. The French DST is a 3 percent levy on revenue from sales of user data, digital advertisements, and online platforms run by companies with more than €750 million in global revenues.

President Trump threatened tariffs on French exports, and the DST-implementing countries used the resulting threat of escalating retaliatory tax and trade measures to move the OECD international tax rewrite forward. The success of using unilateral DSTs as a cudgel to force action at the OECD creates an unfortunate precedent that will likely encourage future destabilizing unilateral actions. Pillar One is intended to replace many DSTs, although the enforcement mechanism for such as agreement is uncertain.

The OECD’s proposal redistributes the global tax base so that some countries will end up with more revenue and others with less. Without the protection of physical presence and the arms-length standard—which both pillars undermine—there is no logical end to how best to divvy up corporate income among the 140 inclusive framework signatories. Now every country has a greater incentive and proven strategy to agitate for a larger share of the global tax base.

A Seat at the Table

Throughout the hearing, it was asserted that withdrawing from the two-pillar process would be a mistake because we would lose a seat at the table. The seat at the table is only valuable if policymakers think it is worthwhile to support the goals of the OECD project as pursued by the Biden administration’s negotiators.

If Congress is skeptical of the premise of the project—which I argue they should be—then the only possible role the U.S. can have as an active participant is 1) to give the process additional legitimacy, ensuring the project moves forward, and 2) to plead with the OECD to make their tax increases slightly less bad for American companies.

Treasury Secretary Janet Yellen has been clear that the administration’s goal is to advance to the OECD process as far as possible before 2025, when other U.S. tax expirations create a forcing mechanism for congressional adoption. The recent transition rule for UTPR facilitates this strategy. Treasury’s strategy at the OECD, to force their policy agenda forward without consulting Congress, gives members of Congress intent on setting their own policy only one choice: rescind U.S. participation in the OECD, removing Treasury’s authority to pursue their international tax deal.

As I noted at the hearing, the successive pleading of the Ways and Means members with Mr. Plowgian to protect the U.S. R&D credit through OECD guidance illustrates the broader structural problem of the OECD process, which cuts Congress out of the policymaking process.

Without U.S. participation, it is more likely that the project does not move forward. This may lead to some additional unliteral actions by other countries, but as described above, the OECD project is not likely to end these actions either.

If other countries decide to move forward without the U.S., they will primarily hurt their domestic economies by increasing the costs of locating in their country. Congress can increase the relative attractiveness of the U.S. by lowering our corporate tax rate and moving to a full territorial system that disregards income earned and taxes paid overseas. If necessary, Treasury can address violations of existing tax treaties if other countries attempt to tax the active U.S. income of U.S.-based multinationals.

As I’ve written before, the problem with the OECD proposals is more than just that GILTI was not grandfathered in or that UTPR will erode the U.S. tax base (although these are both legitimate problems). Simply fixing these oversights should not be Congress’ only goal.

The underlying problem is the last two decades of OECD tax work to end international competition on tax rates. Pillar Two is just the most recent iteration. The OECD’s tax work no longer primarily coordinates tax systems to eliminate double taxation. Instead, it proposes ever more complicated tax increases and reporting requirements to raise taxes at the expense of international investment.

Working with other countries through the OECD to lower tax and trade barriers is worthwhile and welfare-enhancing for all parties involved. When the goal is to collude with other countries in a scheme to increase taxes and reduce global investment, a seat at the table will only make the U.S. complicit in a destructive policy process.

My written testimony also addresses other key issues at the hearing, including how Pillar Two will shift tax competition from tax rates to subsidies and the myth of the “race to the bottom.”

In addition to raising effective tax rates, increasing compliance burdens, and reducing U.S. revenues, the OECD framework is likely to further destabilize the international tax system. Keeping our seat at the table only ensures the OECD project will continue full steam ahead. Instead, Congress should focus on improving our domestic laws to support investment and economic growth. We should encourage other countries to do the same.