- The Washington Times - Friday, August 31, 2001

The World Trade Organization (WTO) blew its whistle on a U.S. tax law in a recent ruling, finding that the legislation, which was revised by Congress last year, continues to subsidize exports. In so doing, the WTO waded so deeply into U.S. tax legislation that it has irreversibly established itself as an international referee on tax matters. This move has prompted some experts and policymakers, who in the past have supported the WTO, to regard this powerful global organization with heightened skepticism.

Is this skepticism warranted? Perhaps, but the United States well knew that, in joining the WTO, it would be giving the international body jurisdiction to identify violations of trade rules and issue appropriate sanctions. In this particular case, the WTO allows the European Union, which initiated the complaint, to level a whopping $4 billion in retaliatory sanctions on U.S. exports.

The WTO was in fact correct in finding that the United States' Foreign Sales Corp. Act (FISC) creates an export subsidy by giving exporting U.S. companies tax benefits that are not available to other U.S. corporations. Since many Europeans have long subsidized many of their exporting industries with direct or tax subsidies, the United States responded by developing FISC.

Now, any tax system that is preferential is necessarily discriminatory. There is no reason exporting companies should enjoy tax advantages that non-exporting companies don't. President Bush stressed during his presidential campaign that the government shouldn't be in the business of deciding who is and who isn't entitled to tax breaks. Indeed, tax reductions should be made across the board, and tax systems should be as straightforward as possible.

The FISC was created long before Mr. Bush assumed power, and repealing it will now cause companies to incur costs. But it remains anachronistic and creates an unlevel playing field. The White House should therefore back repealing FISC for good. The WTO has consistently ruled against FISC, and if the United States fails to shelve the law, it will surely continue to rack up WTO-sanctioned duties on U.S. exports.

Rather than complain, the U.S. government could use the ruling to its own advantage to improve its tax code and to battle against widespread European subsidies. Europe should keep in mind what lurks in the depths of its own byzantine tax laws, when deciding if it will level those $4 billion in retaliatory sanctions against U.S. exports. After all, the WTO has established wide-ranging powers to referee tax legislation, which should, all things considered, make Europe extremely nervous.

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