Tax Analysts Blog

Will Trump Blow Up Europe?

Posted on May 31, 2016

Asked for his views on the future of the U.S. relationship with Europe, Donald Trump, the presumptive Republican nominee for president, has said the U.S. should withdraw from NATO. He argues (rightly or wrongly) that our European partners don't pay their fair share of the cost for maintaining the 67-year-old common defense pact. While our European allies are justifiably concerned – especially given the rise of Russian hegemony under President Vladimir Putin – the prospect of a U.S. exit from NATO seems remote.

But the next president will have a simpler option for attacking Europe than exiting NATO. That option would target trade, while posing no ostensible risk to U.S. national security (though the potential risk to U.S. economic security is another thing altogether).

I refer to the obscure U.S. tax law, section 891. That law requires the United States to double the tax rate on individuals and businesses of another country if the president finds that the other country has imposed discriminatory taxes on U.S. taxpayers. And that law is more relevant to the future of U.S.-European relations in a possible Trump administration than most might think.

For the last two years, the European Commission has been investigating whether some EU countries provided illegal state aid to multinational companies – many of them based in the U.S. – by issuing favorable tax rulings. Prompted by an article written by Georgetown University tax law professor Itai Grinberg that was published in Tax Notes InternationaI earlier this year, administration officials and members of Congress have engaged in discussions with the European officials conducting the investigation. Their aim? To determine whether the state aid investigation will lead to Europe imposing discriminatory taxes against U.S. businesses, and if so, to craft an appropriate U.S. response, which could include invoking section 891.

Many tax experts acknowledge that it is unlikely the evidence will show that the state aid rulings will result in tax discrimination against U.S. taxpayers. Others are concerned that should the U.S. invoke section 891 and double the taxes of European businesses on their U.S. income – an economic “nuclear option” – the resulting tax and trade war would devastate the world’s economy.

Which brings us to Trump. His campaign has resonated with voters agitated at foreign trade agreements that he claims have been bad for the U.S. and resulted in losses of millions of American jobs to foreign competitors. Given his message, it would make sense for him to consider invoking section 891, punishing Europe’s economy by doubling the U.S. tax rate imposed on businesses and individual taxpayers in the 28 countries that make up the European Union.

And if elected, a President Trump could do that all by himself, without the need for legislation or approval from others. Most U.S. tax laws are implemented under authority of the Treasury secretary “or his delegate.” Section 891 is the rare exception, in that it expressly empowers the U.S. to double tax rates on the sole authority of the president.

Given the economic and political stakes, here is one question that Americans should want him to answer: If elected, will Trump exercise the nuclear option and blow up Europe?

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