The Tax Fight Goes Global

From THE WALL STREET JOURNAL Europe, 04/23/2001

While the attention of U.S. taxpayers has been consumed by the dreaded tax-filing deadline of April 15 and the debate over the Bush tax plan, an international bureaucracy has been actively threatening the freedom and prosperity of the United States and others around the world. This time it’s the Organization for Economic Cooperation and Development that’s hard at work trying to make sure no country’s taxes are too low.

The OECD — which has no governing authority, being merely a voluntary “club” of developed nations — wants to create a global tax regime that eliminates “harmful tax competition” and “tax havens.” While the immediate targets (and victims) of the OECD initiative are smaller nations with little bargaining power, like Barbados, the OECD’s war on tax competition has dire implications for the United States. The U.S. is, after all, a “tax haven” in the best sense of the term. People from around the world bring their money to U.S. shores seeking the highest possible after-tax return on their investments. President George W. Bush should act now to stop this nonsense, sending out a clear statement that he will not participate in the OECD scheme.

In effect, the high-tax nations in the OECD want to collude to create an international tax cartel to protect their governments (and their politicians) from tax competition. Using the vague standards of nondiscrimination in taxation, “transparency,” and broad access to financial information on companies and individuals investing in these so-called tax havens, the OECD would in effect create an open-ended regulatory structure to pry into the affairs of targeted low-tax countries.

Let’s not forget that the U.S. is the most powerful member of the OECD, and participated enthusiastically in this anticompetitive venture under the Clinton administration. But now the new Treasury Secretary, Paul O’Neill, has a perfect opportunity to disengage the United States from this ill-conceived power grab, and he should do so immediately.

If businessmen tried to “harmonize” their pricing and marketing policies this way, they would be accused of conspiracy and hit with an antitrust complaint in the U.S. In Europe, Competition Commissioner Mario Monti wouldn’t let it stand. But the OECD nations seeking this seem to have a free hand. Its international bureaucracy wants to impose severe penalties on so-called “outlaw” countries that threaten the high-tax cartel.

In democratic systems, people hold their local and regional politicians accountable not only at the ballot box but also by voting with their feet and moving to different locales. That freedom of exit, that mobility, is vitally important in restraining governments that would just as soon trample on our liberties, whether through taxation or regulatory overreach.

According to the OECD, too many people are saving and investing in countries that engage in “harmful tax competition,” thus escaping taxes on capital in their home countries. Folks, it’s called freedom — people moving assets to the location that gives them the best return on their investment. For three years the OECD has methodically gathered up a list of nations that do just that, using the criteria of low taxation, the presence of businesses that (in the OECD’s eyes) lack “substantial” business presence in the low-tax jurisdiction, “discriminatory” tax treatment, and “excessive” guarantees of financial privacy (such as withholding information from foreign tax collectors).

Without ever identifying a bright-line set of policies that could remove a country from its target list, the OECD is “blacklisting” those nations if they don’t cooperate with its anticompetitive notions of tax policy. Right now countries on the blacklist merely face public castigation, but if that threat doesn’t work, OECD member nations would seek to impose economic and financial sanctions on the “offenders” effective July 31, this year.

We have complained for years about the International Monetary Fund’s attempts to use its financial clout to force nations to raise their tax rates. Earlier this year a furor erupted when the European Commission threatened retaliation against Ireland if the Emerald Isle refused to modify its spectacularly successful low-tax policies. And now we have the spectacle of the OECD, in the guise of eliminating competition, trying to shame, intimidate and then punish nations that maintain their low-tax regimes.

The OECD policy is thoroughly reprehensible. Punishing low-tax countries just because they are attracting investment is bad economics and morally suspect. A better way for high-tax countries to compete is to lower their own tax burdens. Allowing wealthy nations to engage in gunboat diplomacy against developing countries simply because they fear competition is deeply troubling, and the U.S. should defend the sovereign rights of other nations, especially its Caribbean neighbors, to adopt market-friendly tax systems. Low-tax nations should be emulated, not eliminated. If pro-growth policies didn’t work, the OECD would have nothing to complain about.

Not only that, but Mark Warner, a former OECD legal adviser, contends that the proposed blacklist of low-tax nations could constitute improper discrimination under international trade agreements. That’s not surprising, since the trade laws are supposed to foster open competition, not tax cartels.

The last time we checked, the OECD had an obligation to promote economic growth and expansion of trade. Traditionally, OECD officials have warned against the harmful economic impacts of cartels. The OECD nations have also recommended that poorer countries develop competitive tax systems and promote the financial services industry to help diversify their economies, and provide insurance against fluctuating prices of the natural resources and commodities on which many less developed nations depend.

Now, the OECD turns around and nonchalantly states that “tax competition may hamper the application of progressive tax rates and the achievement of redistributive goals.” Clearly something has gone wrong in the OECD. They now advocate policies that would stymie competition, and in the name of eradicating “tax havens,” foster economic warfare between OECD nations and developing nations, hardly a recipe for economic growth or the expansion of trade.

Tax competition forces governments to cater to the needs of taxpayers in the global economy. The Reagan tax-rate reductions are a perfect example of productive tax competition. After the U.S. cut tax rates in the 1980s, nations around the world lowered tax rates in order to compete with the U.S. tax-rate reductions, and the global economy experienced an unprecedented boom.

The OECD needs to return to first principles: fostering economic freedom, and open exchange of goods, services, and information. That lesson may take a while to sink in: Just last week the OECD announced a new environmental initiative that would, among other things, drive its member nations to boost energy taxes and tax chemicals, showing they have an uncontrollable urge to boost taxes and grow government. Before this goes any further, it is incumbent on the Bush administration to pull the plug on the OECD’s high-tax bullying.

President Bush often speaks of the need to eliminate “subtle racism,” the kind a senior OECD official displayed when he argued that one reason to target “tax havens” was to “close down the islands in the sun.” It’s no surprise that members of the Congressional Black Caucus, including ranking Ways and Means Committee Democrat Charlie Rangel, have written to Treasury Secretary O’Neill urging the administration to withdraw support for the OECD assault on tax competition. Everyone who embraces the aspirations of all peoples of the world to achieve economic success should send the same message to his own government.