October 7, 2006

October 7, 2006 | Commentary on

Paris-Based Bureaucracy Threatens U.S. Pro-Growth Tax Reforms

Few Americans know much about the Organization for Economic Cooperation and Development (OECD), a Paris-based bureaucracy best known for its dry studies, reams of economic statistics, and world-class wine cellar. But they should know more. After all, it receives about $400 million annually from 30 western democracies, including $85 million from American taxpayers, which covers much of its annual budget.

What few know is that the OECD poses one of the greatest threats to the enactment of pro-growth tax reforms in the United States and across the world. Remarkably, the U.S. contribution has underwritten mountains of studies full of Orwellian language that accord the highest moral standing to those countries that impose the highest tax burdens on its citizens and demonize those that don't. It focuses on so-called "problems" such as "the role of tax intermediaries (e.g., law and accounting firms, other tax advisors and financial institutions) in relation to … the promotion of unacceptable tax minimization arrangements."

My colleague Dan Mitchell translates this gibberish as: "a handful of bureaucrats in Paris … want to insulate governments from the discipline of market forces." Bureaucrats, I might add, who (ironically) pay no taxes on their salaries.

What could be more natural than for individuals and businesses in nations with suffocating tax regimes to seek out more rewarding investment climates elsewhere and move jobs and capital to nations with tax and regulatory policies that reward risk-taking and encourage growth? Mitchell and other free-market economists laud these "sanctuaries for flight capital," where "people from around the world can invest their money in places like London, New York, Zurich or Luxembourg and protect themselves from ... ethnic persecution, crime, political instability, religious discrimination, corruption, expropriation and fiscal oppression." Because tax competition induces nations "to lower tax rates and reduce the discriminatory tax treatment of income that is saved and invested," it amounts to the international version of Adam Smith's benign "invisible hand" and is to be cherished.

Remarkably, OECD bureaucrats characterize behavior that is natural, instinctive and economically beneficial as "harmful" tax avoidance to be eliminated.

The OECD's ultimate goal, Mitchell believes, is to "undermine tax competition in order to prop up the destructive policies of high-tax welfare states." Indeed, previous OECD studies have criticized tax competition because it "hampers the … achievement of redistributionist [i.e., socialist] goals." Low-tax policies, the OECD believes, "unfairly erode the tax bases of other countries and distort the location of capital and services."

Distraught that our tax dollars are being used to further these inane theories that threaten our sovereignty, Sen. Mitch McConnell (R.-Ky.) inserted a provision in this year's State Department spending bill that would bar the OECD from using the U.S. taxpayer contribution for "activities or projects … designed to hinder the flow of capital and jobs from high-tax jurisdictions to low-tax jurisdictions or to infringe on the sovereign right of jurisdictions to determine their own domestic policies." In short: Don't use taxpayer dollars to advance economically dumb policies.

On cue, the all-hands-on-deck alarms sounded within the OECD bureaucracy and the campaign to delete McConnell's language commenced. Sandra Wilson, who heads OECD's Washington office, struck first. She notified key Senate staff that McConnell's language would undermine OECD's efforts "to crack down on tax cheats." Senate Foreign Relations Committee Chairman Richard Lugar (R.-Ind.) followed, informing McConnell that his provision threatens future tax agreements between the U.S. and our trading partners that include "comprehensive exchange of information provisions." This is code for the OECD's ongoing effort to compel financial institutions in market-oriented nations to share our most confidential financial information with tax authorities in the high-tax regimes.

McConnell's House appropriations counterpart, retiring Rep. Jim Kolbe (R.-Ariz.), who chairs the Appropriations Subcommittee on Foreign Operations, has opposed previous efforts to limit the OECD's work in this area, so there is a real risk the OECD's efforts may bear fruit.

But, hope springs eternal, even in the current turbulent atmosphere on Capitol Hill. If all who resent the way international institutions like the United Nations and the OECD use their hard-earned tax dollars to propagate harmful economic theories alerted their own elected officials to McConnell's commonsense firewall against the OECD's high-tax campaign, the odds of a quiet back room deal to delete the McConnell Amendment would be slim indeed.

Michael Franc who has held a number of positions on Capitol Hill, is vice president of Government Relations.

About the Author

Michael Franc Distinguished Fellow
Government Studies

First appeared in Human Events