A VIRTUE OF NECESSITY

What an opportunity the World Trade Organization handed Congress in agreeing with the European Union to whack the United States for $4 billion in trade sanctions. Just as Washington was in need of more revenue and looking for a way to hold corporations more responsible, the WTO shows them the way.

At issue was a part of the tax code called “Foreign Sales Corporations,” which allows U.S. companies with offices in other countries exempt between 15 percent and 30 percent of the export income from U.S. taxes. That, complained the EU, gave these companies an unfair advantage, with the United States having only a limited defense because that is what the program was supposed to do when it was thought up some 30 years ago. It was seen as a way to counter foreign government support of the competition. The WTO decided the case in the EU’s favor last year, but debated the level of sanction – the United States said it should be penalized only $1 billion; the EU favored $4 billion, roughly equal to the annual value of the program but 20 times the highest sanction the WTO has determined to date.

Washington’s deficit problems from the combination of the war on terrorism, the economic slowdown and the federal tax break, are well known, so a requirement to fully reinstate the taxes on these exports will help the budget as long as the new taxes are not immediately offset by breaks elsewhere. And however forthright the original intention of the tax exemption – it no doubt made sense when it was begun – it now stands as an unintended example of corporations avoiding taxation. Not a good thing in a time of corporate leaders being caught acting unleaderlike.

The United States made motions toward taking care of the problem when in 2000 it passed the FSC Repeal and Extraterritorial Income Exclusion Act. The WTO reviewed this law at length, noticed that within the repeal is a further tax subsidy for exporters and concluded that it did not conform to the required standards, showing how little it cares about congressional decisions that do not follow the letter of international law. A new bill, in the House Ways and Means Committee, is said to take care of the remaining subsidies.

Congress can make a virtue of necessity by finally removing the subsidy, demonstrating that U.S. corporations are not above the law and that all those free-trade bills it supports actually mean fairer trade, too.