Are Tax Treaties Unconstitutional?

Rebecca Kysar, On the Constitutionality of Tax Treaties, 38 Yale J. Int'l L. (forthcoming 2012) available at SSRN.

In a forthcoming article entitled On the Constitutionality of Tax Treaties, Rebecca Kysar argues that current tax treaties are unconstitutional under the Origination Clause because they alter the tax law without the involvement of the House of Representatives.

Kysar builds her argument though careful historical and doctrinal analysis.  She shows that the Origination Clause was an important concession to the large states that acted as a counterbalance to some of the prerogatives of the Senate, including the treaty power.  She shows that although the text of the Origination Clause requires only that “bills for raising revenue” originate in the House, the Supreme Court has interpreted the clause to refer to legislation that increases or decreases revenue.  Thus, Kysar argues that, even if the net effect of tax treaties were to reduce tax revenues, the Origination Clause should still apply to them because their “primary purpose” is a revenue purpose, and it is the law’s “primary purpose” that matters for the Origination Clause.  Among many other court cases, Kysar discusses at length two relevant Supreme Court precedents.  First is Missouri v. Holland, in which the Supreme Court upheld against a Tenth Amendment challenge a properly ratified treaty that sought to accomplish a goal outside the enumerated powers of Congress.  In Holland, the Court further held that the Necessary and Proper Clause permitted Congress to pass legislation to accomplish treaty goals that Congress could not accomplish by regulation alone (the treaty involved the regulation of hunting of migratory birds).   The other relevant precedent was Reid v. Covert, in which a plurality of the Court held that a treaty could not override individual rights guaranteed by the Sixth Amendment.  Kysar makes the argument that tax treaties should be analyzed more like the individual rights in the Sixth Amendment, and less like the reservation of powers in the Tenth Amendment since the Origination Clause represents an exclusive grant of power.   Furthermore, where appropriations, another exclusive prerogative of the House, is concerned, it has long been policy to seek implementing legislation for treaties.  Kysar traces procedure to the Jay Treaty, in which the House asserted its right to enact implementing legislation, and she convincingly argues that the failure of the House to similarly assert its constitutional prerogative under the Origination Clause with respect to tax treaties could not cure any constitutional infirmity in such treaties.

If we accept Kysar’s argument that the treaty power is subject to the Origination Clause, can tax treaties be saved? One argument might be that revenue is not the “primary purpose” of tax treaties.  Instead, the primary purpose of tax treaties is to assign tax jurisdiction; that is, tax treaties are jurisdictional—they say which of the two treaty partners can tax cross border income, and under what circumstances.  The actual tax is assessed (or not) under domestic law properly enacted.   Another argument might be that the purpose of tax treaties is, as the title of such treaties reports, to reduce double taxation and prevent fiscal evasion.  It remains to be seen whether such arguments (or similar ones) would be accepted by the Supreme Court, but Kysar rejects similar arguments as overly formalistic.

If tax treaties as currently formulated violate the Origination Clause, what solution does Kysar offer?  She argues that tax treaties cannot be self-executing.  Instead, they require implementing legislation, which would have to originate in the House.  Considering that most tax treaties are uncontroversial, I assume most treaties would have little trouble securing such implementing legislation, which leads to another question: What’s the policy pay-off for involving the House, especially in an era in which direct election of the Senate has dampened the democratic concern that motivated the adoption of the Origination Clause in the first place?

Kysar argues that the “first-mover” advantage that the Origination Clause confers on the House is still important, because the House, with its shorter-termed and proportional membership, is still more democratic than is the Senate.  This is an area of the paper where I hope Kysar will develop her analysis further.  She provides an example of how the Senate and the President might take the House’s concerns into account when negotiating tax treaties under as procedure that required implementing legislation.  In it, she supposes that the Senate and President would like a treaty with a withholding rate of 15%, whereas the House would like a treaty with a rate of 0%, and she concludes that the negotiated rate would likely end up somewhere between 0% and 15%.  This seems certainly seems plausible in the abstract, however, since the starting point for the Treasury Department in negotiating tax treaties in the real world is the U.S. Model Tax Treaty, which contains specific withholding rates (not ranges), it would be helpful to have an express discussion of how the requirement to involve the House in tax treaties would impact the Model.

In other words, whereas in domestic tax legislation, the House has the first mover advantage, for practical purposes in the tax treaty context, that advantage is held by the executive for two reasons.  First, the executive decides with whom to negotiate treaties, and secondly, the Treasury Department drafts the U.S. Model Tax Treaty.  Of course, these actions are informed by the preferences of the other branches (and maybe, under the current practice the executive shows undue consideration to the Senate’s preferences while neglecting those of the House).  It would be helpful for Kysar to provide an explanation of how bicameral legislative implementation of tax treaties might affect the U.S. Model, as would a discussion of the OECD Model, since that model dominates global treaty negotiations, and it, too, contains fixed withholding tax rates and substantive provisions that very rarely change.  The U.S. Model is nearly identical to the OECD Model, and most of our treaty partners rely on the OECD Model.  In short, I would like to know which provisions of modern tax treaties Kysar thinks are up for grabs (i.e., which ones are really subject to negotiation, and which are more or less fixed), and how participation by the House might affect those provisions.

Kysar’s readers will undoubtedly press her on the broader implications of her analysis of the Origination Clause (she acknowledges, for example, that trade treaties may suffer the same constitutional infirmity as tax treaties), but in the current article Kysar limits her analysis to tax treaties.  Although she leaves some questions unanswered, Kysar’s analysis of the constitutionality of tax treaties is an illuminating and much-needed contribution to the literature.