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Executive Summary on Taxes

September 18, 2000

September 18, 2000 | Executive Summary on Taxes

Executive Summary: An OECD Proposal To Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy

The Organisation for Economic Co-operation and Development (OECD), a Paris-based institution with 29 member nations from the industrialized world, has launched a project seeking the elimination of "harmful tax competition."

In a report titled "Towards Global Tax Co-operation," the OECD calls on member nations to eliminate "harmful tax practices"--low-tax policies that attract foreign investment. Moreover, it is pressuring 41 low-tax nations and territories (called "tax havens") to dismantle their "harmful tax regimes" and repeal their financial privacy laws. If they do not, the report recommends that OECD members exercise financial protectionism against them.

The OECD proposal is misguided. Globalization is making it harder for governments to overtax, because it is increasingly easy for taxpayers to shift their productive activities to lower tax environments. This is what is known as tax competition. Unfortunately, not everyone favors this development.

Tax competition should be celebrated, not persecuted. It forces politicians to be more responsible, pushing tax rates down and allowing people to enjoy more of the money they earn. Tax competition is a particularly good thing for the United States, drawing savings, investment, and skilled labor into the economy.

It should not come as a surprise that government officials do not like tax competition. They are like the owner of a town's only gas station, who suddenly has to deal with a bunch of competitors after years of being able to charge high prices while offering poor service. The residents of the town are like the world's taxpayers. Competition between governments makes their lives better.

Tax competition should be preserved. It is good for taxpayers and good for the global economy. The policies being advocated in the OECD report, by contrast, represent:

  • An Attack on Taxpayers. The OECD report argues that it is detrimental when low-tax countries lure economic activity away from high-tax countries. To stop this process, the OECD study seeks to have low-tax countries raise their taxes. In effect, they want to create a cartel of high-tax nations. Supporters of this policy have even stated their desire for a global authority that would have the power to veto tax cuts and block tax reforms.

  • An Affront to Free Trade and Global Commerce. The OECD report asks member nations to subject low-tax regimes to severe and discriminatory financial protectionism. This heavy-handed attack would impose crippling restrictions on international capital flows. In effect, the conditions and restrictions envisioned by the industrialized world would impose a financial blockade against targeted nations.

  • An Attack on Sovereignty. The proposed recommendations would interfere with the right of sovereign nations to determine their own tax policies. High-tax nations should not be allowed to bully "tax havens" into raising their tax rates and eliminating financial privacy. Most OECD nations made the jump from poor, agriculture-dependent economies to industrial powers during the 1800s when they did not impose income taxes of any kind. Today, poorer nations are being told they cannot adopt similar polices.

  • An Attack on Privacy. The OECD proposal seeks to give governments unlimited access to personal financial information in order to make it easier to tax economic activity in other countries. Proponents of this approach would expand the controversial "know-your-customer" regulations so that other professional service providers would have to join banks in spying on their customers.

Supporters of the approach recommended in the OECD report suffer from several misconceptions. Specifically they do not understand that:

  • A tax cartel is the wrong way to fight tax evasion. There is a right way and a wrong way to fight tax evasion. The wrong way is to suspend civil liberties and destroy financial privacy in an effort to force greater compliance. The right approach is to cut tax rates and reform the tax system. The lower the tax rate, the lower the incentive to use either legal or illegal means to avoid taxes or even to hide money.

  • A system that taxes "worldwide" income and assets is the wrong way for a country to tax. In large part, the OECD proposal seeks to eliminate financial privacy and reduce sovereignty in order to make it easier for some member nations to tax the "worldwide" income and assets of its citizens. A territorial system that seeks only to tax economic activity inside a nation's borders is a much better approach since it is simple to administer and avoids any conflict between nations.

  • Destroying financial privacy is the wrong way to address money laundering. Most criminal profits are laundered in OECD nations, not tax havens. To the extent that some tax havens are a problem, the OECD's proposal would undermine incentives for them to cooperate, since many poorer regimes would be forced to seek a new source of funds to replace legitimate investments driven out by the OECD project.

U.S. policymakers should reject the OECD initiative. It is a threat to America's national interests. More important, it will be bad for U.S. taxpayers, weaken national sovereignty, destroy financial privacy, hinder technological innovation, lead to protectionism, and undermine the rule of law.

Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy