The speakers in the morning session were mainly academics who had worked on OECD-BEPS during government or NGO stints, and they were mainly upbeat about its prospects (at least, Pillar 2) and merits (at least, compared to prior law).

The speakers in the afternoon session were considerably more negative. While I was one of the afternoon speakers, I was not one of the more negative ones. My remarks were more on the positive than the normative side, discussing how one might think about the underlying international tax politics that may affect the Pillars’ acceptance or rejection around the world.

But I will mention two of the negative comments that were made during the afternoon session that I briefly rebutted during my remarks. I won’t name the speakers (although you can find it on the video, if it’s accessible), because, as they’re friends, I feel I’d owe them a bit more context and description of their side of the debate before expressing my disagreement publicly.

The first of these two negative comments, pertaining to Pillar 1, went something like this. Suppose we are considering some situation such as the UK’s desire to tax Facebook / Meta’s profits from ads sold to reach UK users. The UK currently does this through a digital services tax, but Pillar 1 is designed to replace this. Why should the UK be able to reach these profits, the speaker asked? Its claim that “value creation” occurred in the UK is ludicrously false [a point with which I agree], as it really happened in the US, where people who live and work there created and are tending to the IP.

Here my next move would be to say: So what if there was no value creation in the UK? There is a kind of bilateral monopoly situation here, involving the profits Meta can earn in the UK that is non-rival to its simultaneously earning profits elsewhere too. It’s silly to moralize about who is “entitled” to what share of bilateral monopoly profits, so why should we presume that the US should be the only party able to tax it. Rather, let us hope that the two parties find a way to work it out amicably, keeping in mind both that Meta has generally been greatly undertaxed on the quasi-rents that it earns around the world, but could potentially be over-taxed if every nation starts grabbing as much as they can of the quasi-rents based on presuming that they are actually rents.

My panel colleague, who is an economist, instead argued that, since value creation occurred in the US, as a matter of proper political incentives only the US should be allowed to tax the profits. It has an incentive not to overtax them but to do things “right,” whereas source or market countries such as the UK have every reason to overtax.

The mistake my good friend makes here is practicing political science without a license. He seems to think that we have individuals from a rational behavior model acting based on self-interest. But suppose the UK faces political constraints (Meta political clout & money, fear of the US response) that push against its overtaxing the profits. And suppose the US is inclined to undertax them due to interest group politics, which may empower our multinationals. In short, it is an uncertain empirical claim that assigning the tax rights exclusively to the US will lead to better outcomes. Not to mention, if the UK wants to tax these profits (an unsurprising state of affairs, especially when it observes the US not doing so), so what if we have a political economy argument telling them to back off. What if they don’t want to? Then we have a problem we need to solve, hopefully reasonably amicably and not too inefficiently, in any event.

Another panel colleague expressed extreme skepticism that moderating tax competition between countries via Pillar 2 would slow down their economic competition. Countries can simply substitute subsidies, such as via direct spending, for lower taxes. (An observation that actually underlay the European Court of Justice’s battle against state aid.) So there’s no point to the whole thing and it won’t get us anywhere that’s helpful.

Now, this observation might actually prove to be correct. We will see. But it does invite the retort: If non-tax subsidies are such a great substitute for tax subsidies, why don’t we see more of them already? The rationale for seeking to moderate economic competition for MNC investment (and nominal profit allocation) by moderating tax competition is that the latter is an especially fruitful (i.e., low-perceived cost) way to do it politically. This in turn brings us to the longstanding debate regarding whether tax expenditures are used, not just out of random convenience, but because they are optically less “costly” than their direct-spending substitutes. Here I tend to believe that the answer is often to a degree somewhat Yes. Hence, it is not impossible or even implausible (although I wouldn’t claim much more than that) that Pillar 2 might ease overall economic competition regarding multinationals’ locational choices.