TAX LAW AS FOREIGN POLICY.

• Author: Deeks, Ashley

INTRODUCTION 277 I. TOOLS OF ECONOMIC STATECRAFT 281 A. Embargoes and Economic Sanctions 282 1. Embargoes 283 a. History 283 b. Statutory Authorities and Implementation 284 c. Critiques 286 2. Economic Sanctions 286 a. History 287 b. Statutory Authorities and Implementation 287 c. Critiques 289 B. National Security-Driven Tariffs 290 1. History 291 2. Statutory Authorities and Implementation 292 3. Critiques 294 C. Export Controls 295 1. History 295 2. Statutory Authorities and Implementation 297 3. Critiques 298 D. Recent Trends 299 II. TAX AND FOREIGN POLICY: PAST AND PRESENT 301 A. The Effects of Taxes 301 B. History 304 C. Current Rules 307 1. Information Reporting 307 a. Section 999 307 b. FATCA 309 2. Tax Sanctions 310 a. Taxable Persons 311 b. Tax-Exempt Entities 314 c. Unintended Effects of TCJA 315 III. THE CASE FOR TAX SANCTIONS 316 A. Outbound and Inbound Sanctions 316 B. The General Case for Tax Sanctions 319 1. More Targets, More Enforcers 320 2. Same Targets, Different Interests 322 3. Flexibility 325 C. The Case for Tax Sanctions Today 326 D. Other Advantages 328 IV. OBJECTIONS AND REPLIES 329 A. Tax Norms 330 B. Political Economy Concerns 332 C. Institutional Competence 334 D. Dynamism 337 E. Unilateralism and International Law 338 CONCLUSION 340 INTRODUCTION

Less than two weeks after his inauguration, citing national security interests, President Biden reinstated a ten percent tariff on aluminum imports from the United Arab Emirates that President Trump initially imposed in 2018. (1) Whatever their other differences, Democratic and Republican administrations have had the same growing appetite for using economic tools to pursue foreign policy and national security goals. From raising tariffs to freezing assets to imposing trade restrictions, the federal government has left few stones unturned in trying to gain financial leverage over foreign states, companies, and individuals. (2) And yet, because of overuse and increased competition from alternative currencies and payment systems, we may be approaching the limits of these tools' effectiveness. (3) According to former Treasury Secretary Jacob Lew, "[t]he outlook for U.S. economic statecraft, if it continues on its present trajectory, is bleak." (4) But perhaps we can change this trajectory. There is an economic tool for advancing foreign policy interests that Congress and the Executive have barely touched in recent years: the federal income tax. The time has come to reconsider what tax law can offer.

Any person within the long reach of U.S. income tax jurisdiction can be influenced to make choices that advance U.S. foreign policy. (5) The leverage of the income tax comes from the United States' appeal as a destination for foreign capital, its enormous consumer base, and the size and economic power of U.S. multinational corporations. (6) Foreigners are eager to invest their wealth in U.S. assets, sell to U.S. consumers, and organize their businesses in the United States. But despite its potential as a source of foreign policy leverage, one finds only the residue of outdated foreign policy objectives in today's income tax law.

This is not because Congress is shy about using the income tax for purposes other than revenue collection. Congress has enthusiastically used the income tax to pursue social and economic policies, such as poverty reduction, (7) the environment, (8) and health care. (9) It is also not because there is no precedent for using the income tax to implement foreign policy. Tax law was used periodically in the twentieth century to favor certain foreign states, (10) and the United States has more than sixty bilateral income tax treaties that advance cooperative relationships with foreign states." But today's Internal Revenue Code (the Code) incorporates foreign policy goals in only a few limited ways. And Congress made sweeping changes to the Code in 2017 (12) that undermined the effectiveness of these foreign policy provisions inadvertently and without any discussion in the legislative record.

Whatever the historical reasons for sidelining the income tax as a tool of foreign policy, recent technological innovation in the global financial system and the evolution of the United States' role in the international political and economic order should compel policymakers to reconsider tax as a tool of economic statecraft. We want to provoke that reconsideration. We show that compared with sanctions, tariffs, and other coercive economic instruments, tax law is an underappreciated foreign policy tool, particularly at the present moment.

We begin by describing the most common economic tools in use today: financial sanctions, import tariffs, and export controls. Each of these tools of economic coercion has been criticized. For example, scholars have argued that the United States often is unclear about the goals of its sanctions and that it rarely repeals sanctions, even if the targets adjust their behavior. (13) Some criticize trade tariffs for being ineffective and for burdening U.S. consumers more than foreign targets, (14) while others argue that these tariffs violate U.S. international legal obligations. (15) Scholars, companies, and U.S. allies alike criticize the export control system for being "too restrictive, insufficiently restrictive, cumbersome, obsolete, inefficient, or any combinations of these descriptions." (16) In short, while the United States needs economic foreign policy tools, the tools it has traditionally deployed have gaps in coverage and deficiencies in implementation.

Imperfect though they may be, the government uses these tools more than ever before. As the primary alternative to military force, the appeal of economic coercion is obvious. But the United States' increased reliance on economic leverage raises a concern of its own: that overuse may cause foreign actors to divest from the U.S. currency, financial system, and import market. We do not argue that tax law should be the sole instrument of economic statecraft. But adding tax law to the economic toolkit makes it possible to reduce financial sanctions, tariffs, and export controls, thus reducing the risk of divestment from the U.S. financial sector and dollar as a reserve currency and thereby preserving the vitality of these other tools. More generally, each economic tool involves tradeoffs between foreign policy objectives and other goals, such as economic growth. Introducing tax law as another tool takes the pressure off the other tools and facilitates more advantageous tradeoffs.

In addition to relieving pressure on overused tools, tax law fills gaps in the existing regime. Trade sanctions affect only imports and exports of specified goods and services. Financial sanctions are often limited to specific industries and can only reach foreign targets who hold U.S.-situs assets or who use the U.S. banking system. The Committee on Foreign Investment in the United States (discussed below) covers inflows of capital into strategically important industries. (17) And the Foreign Corrupt Practices Act requires compliance with U.S. anti-bribery laws to access U.S. capital markets. (18) This patchwork of laws is extensive but incomplete. Tax law reaches all income earned by U.S. persons and all income arising in the United States, which increases the coverage of economic statecraft both by enlarging the set of jurisdictional contacts with foreign persons and enlarging the set of industries and economic activities that can be reached. Finally, tax law also allows for a finer calibration of economic deterrence because tax incentives can be adjusted in degrees, allowing an appropriate level of economic activity to continue rather than foreclosing that activity entirely by prohibition, as embargoes and some sanctions regimes do.

Having made the case for tax law as a tool of foreign policy, we consider crucial questions about institutional competence and administration. Because Congress makes tax laws, it is important to ensure that foreign policy enacted through tax law incorporates the expertise of the Executive and that tax laws can respond to rapidly changing conditions. We examine the existing foreign policy-related tax rules and show that Congress has already demonstrated an ability to provide the Executive with the discretion and agility it requires. Two of the most significant objections to our proposal are the additional rent seeking that it could facilitate and whether it would fall afoul of international legal obligations through the World Trade Organization. These concerns are important but not insurmountable, and we argue that the risks are worth the rewards.

In Part I, we survey economic statecraft, focusing on how coercive economic tools disrupt the normal functioning of foreign states and other foreign actors. Part II describes the history and current state of U.S. federal income tax law as a foreign policy tool. In Part III, we argue that the time is right to use tax law more aggressively to advance U.S. foreign policy goals, and we identify three areas that hold the greatest promise for doing so. In Part IV, we respond to objections to our argument and consider some important choices that must be made to ensure the most effective implementation of our proposals.

1. TOOLS OF ECONOMIC STATECRAFT

   For much of its history, the United States has used economic levers of power to advance its foreign policy goals. (19) Part of what constitutes "economic statecraft" reflects U.S. efforts to encourage economic development at home and abroad. (20) These positive tools include bilateral investment treaties; multilateral trade arrangements and free trade zones; the use of the Export-Import Bank to encourage U.S. companies to export goods and services overseas; the creation of the Development Finance Corporation to promote investments by U.S. businesses in less developed countries; the provision of loan guarantees; U.S. support for international...