INTERVIEW: Daniel Bunn

Since 2022, Daniel Bunn has served as president and CEO of the Tax Foundation, a nonpartisan tax policy non-profit organization based in Washington, D.C. Before becoming president, Bunn developed the organization's Center for Global Policy. Most recently, he opened the Tax Foundation's European branch in Brussels, considered the capital of the European Union. We spoke on March 5.

So why does Tax Foundation want to have a presence in Europe?

The European playing field for tax policy has been interesting to Tax Foundation, and specifically our board, for a while. One of the things that we've noticed, as an opportunity for us to scale the work that we're already doing, is the parallels between our federal and state programs on the US side. And in Europe, these opportunities for doing things in Brussels, which is kind of a hub for EU policymaking, while also paying attention to country level reforms, the translation is pretty clear. Now, things are opposite in the sense that in the States, Washington DC, is the hub for deciding major tax policy decisions that impact things across the country. And debates in state capitals are relatively less meaningful, if you think of the amount of revenue a state would raise, versus what is raised by the Internal Revenue Code. In Europe, it's the opposite. Brussels has a small but meaningful role in tax policy, whereas the member states, the debates that happen in Paris or Berlin, could be really significant for taxpayers. And there's also kind of this growing desire for various political actors in the Brussels arena to have more decisions, in Brussels, for the purpose of the EU tax policy. And we thought, particularly because of the debates going on at the [Organization for Economic Cooperation and Development], and some of the implications for European tax policy decisions for the US-EU trade relationships, that it would be valuable to establish a base of operations there.

And it's interesting, the fact that the EU is more decentralized and doesn't technically have jurisdiction over income taxation. That itself is a big issue.

The policy space for Brussels is, by design in the EU treaties, it's designed to be relatively narrow. The role of the commission is to protect the single market. And that in some cases is very narrow--if something is happening in Poland or the Czech Republic, that doesn't have any cross border implications, then Brussels is hands-off. But if there is a policy area that could contribute to either helping to build the single market or avoid various distortions between member states, then Brussels has a role.

However, in tax policy, there's two interesting features. One is that at the EU level, countries have to get to unanimous agreement to change EU-level tax policy. And that's because it's still what they call a national competence. Individual countries have the priority for determining tax policy, and therefore they need unanimity at the EU level for changing tax policy. The nature of that means that direct taxation, taxation of corporates or capital income or individual taxation, it's generally not a big space for Brussels to interact. But in cases of indirect tax, like the value-added tax, or taxes on trade--the EU is the trade negotiator, you don't have trade negotiators in the national capitals anymore. And, if the EU is going to put tariffs on a foreign government or respond to tariffs from a different government, it's the EU-level policy. And then value-added tax, this is very much a single market thing, where the EU wants to be able to weigh in and say, "Okay, we want to make sure that crossborder trade and the way value-added tax policies interacting with that does not distort things within the trading bloc."

So what do you see the role of a think tank like Tax Foundation, in both these issues, and just general this new international--to call it regime makes it sound too organized. With Pillar Two and so many things happening on the international level, what do you see the Tax Foundation's role as?

So in Brussels, specifically, partially because of the situation I just described, there aren't a lot of think tanks that are playing in the tax space in Brussels. Most of the European-level economic think tanks are aiming for broader macro issues--the fiscal imbalances between the larger or the smaller member states, the role of the euro, things that are more dedicated to trade. But we're the first tax-specific think tank in the Brussels market. And that's because we see this link between the member states and the EU, and the implications for long-term competitiveness of the European Union, where the meaningful tax policy decisions in Paris, Berlin, Warsaw, will also be impacted by decisions in Brussels. And this is specifically because of things like the global minimum tax. The global minimum tax has brought a new level of influence from Brussels on individual countries policies.

You mentioned the OECD—what’s your perspective on where the OECD pillars project is right now? And what you see on the horizon for it?

I'll start with Pillar One, because it's in numerical order. But, lots of conversations these days start with Pillar Two. Pillar One, I think the best way to describe it today, and who knows what happens in the next two or three weeks depending on ongoing negotiations, today I would call it stalled. And it stalled for a couple of reasons. One reason is that it does not seem that countries are as invested in making sure that it eliminates digital services taxes, and provides significant tax certainty, and eliminates double taxation. I think in order for Pillar One to not be stalled, you would need countries to shift their positions in order to change those three things. And I recognize that this is also a very U.S. perspective on what Pillar One should accomplish. But honestly, digital services taxes are a bad tax tool. Taxing on a gross basis is just harmful to investment. Even if you're trying to think about equity between different types of corporations, if you're hit with a with a whole gross-based tax, and you have a slim part profit margin, it's going to hurt you worse than a company with a much larger profit margin.

And then on the tax certainty angle, this is really complex stuff. And if we're actually going to have this multilateral system for rearranging where companies pay taxes, then you're going to have to have as much certainty in the system as possible. And that means that countries are going to have to really commit to high-level reviews of how they're approaching different audits, or different questions like, "Is this my tax base or your tax base," and then the elimination of double taxation. It was pretty clear in the reservations to the draft treaty in October, that there are some countries that are really interested in what I would call double dipping, where you get your gross-based withholding tax in the local jurisdiction, and you might get your Amount A allocation on top of that. So I would say it's stalled until some of the things break free on those particular issues.

On Pillar Two, it's here. And it's being adopted, or implemented, in more than two dozen jurisdictions. Primarily in Europe, but certainly across the Asia-Pacific region as well. I think we're in a, "It's here, plus wait-and-see" mode on Pillar Two. Because we'll see how the U.S. reacts to it, in potential legislation next year. We'll see how countries design tools to get around it or to utilize the credits route, to continue to provide subsidies. And then behind-the-scenes on both of them is whatever is going to come out on the UN. And I think that the UN process has more implications for what the future of Pillar One Amount A might be, than for Pillar Two.

But I think that's kind of where I'm seeing the two pillars at this point.

So you see the UN process as being something that could seriously impact the the OECD process?

So it's really hard to judge what success might look like at the UN. I think if the strongest supporters of the UN process also got their way at the UN, then you would see policies that would either duplicate or supplant potentially both pillars. And even stronger reallocation to market jurisdictions, particularly favoring developing countries, and potentially an even stronger minimum tax. However, I don't think that it’s going to be a quick process. And there's going to be a lot of trade-offs even at the UN, that's governed by a majority, than at the OECD, which is a consensus-based process. So what's possible is that there won't be these massive overhauls that are proposed, that would duplicate or stand on top of even what the OECD agreed, but you would have more, I guess, rubber-stamping of different regional or semi-unilateral approaches for definitions of significant economic presence or digital nexus, or different minimum tax approaches that some of the Latin American countries might go to. We've seen the African Tax Administrators be pretty upfront in saying, "Here's model legislation on a digital services tax or things of that nature." The UN may be a forum for advancing some of those proposals rather than a full rewrite of these things that have been negotiated over the last five or six years.

Switching to U.S. issues, we were both here for when the Tax Cuts and Jobs Act was passed. My memory was that Tax Foundation was part of a general push for a destination-based cash-flow tax. And something I’ve been thinking about is, even though that ultimately failed, have the principles of it lived on? Right now, Congress is looking to save immediate expensing, and you do hear a lot about destination based taxation. So I'm curious for your take on that.

So this is still something we bring up in various conversations, especially with a lot of members of Congress, especially on the House side, who were not here when that was debated, and were not part of the Tax Cuts and Jobs Act vote. So when we're talking to some of these newer staffers and helping them understand the tax code, we still bring that up and say, "Hey, this is one of the big picture reforms that was on the table for a little while, and this is what questions came up about it, this is how we thought through the changes."

But one of the things that I'm noticing, and this may be what you're referring to as well, there's a bias in policymakers' minds towards taxing in the location of the customer. And that comes up in gross-based withholding taxes, that comes up in the digital services tax debate. We see this baked into Pillar One, we see this baked into the UN [Model Tax Convention Article] 12B. We see a lot of this same kind of bias towards taxing in the location of the customer. And that bias is there because there's a political rationale to doing it. It's easier to explain to your constituents, that this company is selling products here and therefore is paying tax on its profits here. Now, there's this whole philosophical debate about where the value is created. Is the value created when you bottle the wine? Or is it created when you drink the wine, and where those locations are? But at the end of the day, this is a give and take of who gets the taxing rights.

Regardless of what philosophical argument you can make about where value was created, generally speaking, a lot of tax principles up until recently were based around the value creation concept and thinking of where employees, assets, research, all of those things are happening and saying, "it's on the supply side, where the value is created." But the destination-based cash flow tax, and these other movements towards taxing in the location, in the market, are recognizing a couple of things. Number one, the factors of production are more mobile than the factor of consumption. If you have a strong market, and people are just buying a lot of stuff, whether that's high-tech stuff, low-tech stuff, everything in between, that market is probably going to be more a more stable point of taxation, than saying "Hey, we're going to tax you based on where your headquarters is, or we're going to tax you based on where your distribution facility is." These things that are, in some cases they're sticky, but they're not sticky over the real long term. So there's a recognition of those factors.

And then from our perspective, if policymakers are responding to this incentive, to tax slightly less like a corporate income tax in a slightly less mobile way, then we should do it as efficiently as possible. And that's where the cash flow tax comes in. That's where the value of expensing comes in. That's where when we're talking about the destination-based cash flow tax, we're saying this is essentially a value-added tax with an additional deduction for labor. And it really supports domestic investment that's paired with significant exports, because of the border adjustment. And there's some macro pieces to it that I think are still up for debate. But one of the big things that was part of the debate in 2016, 2017, around this proposal was whether this would be a massive tax hike on importers, depending on how foreign exchange markets adjusted or not. We can get into that if you'd like. But I think the move to taxing in the market is happening. That's pretty clear. The question is whether it becomes this massive sand in the gears approach with gross-based taxation, or if countries and governments are willing to think through more efficient ways to do that, and that's where the destination-based cash flow tax is kind of waiting in the wings.

You came up specifically through the international field. I'm curious how that affects your perspective now that you're CEO of the whole organization?

I joined Tax Foundation in the summer of 2018, because our board had decided to build a global program. The first thing I wrote for Tax Foundation, that was of any of any length, was an evaluation of the EU's Digital Services Tax directive. This has been core to my work since day one. I worked in the Senate during the Tax Cuts and Jobs Act, so I have a pretty decent understanding of the federal level of the tax debate. I was in the Senate for about six and a half years. And so balancing my international experience and my federal experience, the real area for learning, for me, in the CEO role has been understanding the debate at the state level. And it's really been quite interesting, because there are so many interactions that I didn't quite understand before, between the federal tax code and state tax codes. And even on the international side, there are some states that are interested in utilizing worldwide combined reporting for taxing corporate income. And that's not too dissimilar from some of the debates and proposals that we see at the international level--states having to decide whether or not to tax [global intangible low-taxed income], states that are deciding to conform to the federal code on expensing or de-link themselves on that by providing immediate full expensing even as the federal level-policy phases out. And then states are dealing with some of the same kind of interesting things on the mobility of capital, the mobility of workers, that we see more broadly. But I think the pieces of my career--working in the Senate and then starting the global program here--really allowed me, from day one, to really know what's next, from the CEO suite. To not necessarily have to start from scratch learning about, "What are we trying to do here," but to already have a decent understanding of what the goal was across the different policy verticals.

Contact the author at amparkerdc@gmail.com.