Deeks & Hayashi: Tax Law As Foreign Policy

Ashley Deeks (Virginia; Google Scholar) & Andrew T. Hayashi (Virginia; Google Scholar), Tax Law as Foreign Policy:

The use of economic statecraft is at a high-water mark. The United States uses sanctions, tariffs, and import and export controls more than ever before. But these tools have problems. They impose financial costs on domestic interests. They can induce retaliation by target states. And overuse of these tools could drive the United States from its central position in the global financial and economic system, undermining the effectiveness of U.S. economic statecraft in the long run. But there is a different and underappreciated tool that could perform valuable foreign policy work: tax law. We argue that tax law holds promise to advance U.S. foreign policy interests and that it is especially important to deploy tax tools now. Tax law has distinctive features that make it both a partial substitute and a partial complement to other tools of economic coercion, which means that it can extend the influence of U.S. economic power while reducing the risk of overusing other economic tools.

Conclusion
The use of economic sanctions is at a high-water mark in the United States, but there is reason to be concerned about overreach and signs of rebellion by foreign allies and adversaries against the overuse of these sanctions. There are limits to how much the United States can exploit the primacy of the dollar and the centrality of the U.S. financial system to coerce foreign actors before they seek alternatives that do not leave them exposed to U.S. foreign policy imperatives. We need to find alternative points of economic leverage to ensure that our existing levers do not break under the strain. Tax law is a partial answer.