August 24, 2000

Investors Beware: Report Reveals an
OECD Hungry for Higher Taxes

by Daniel J. Mitchell

     The Organization for Economic Cooperation, comprised of 29 industrialized nations, recently issued a report that  says low-tax countries are bad for the world economy.

     Titled "Towards Global Tax Cooperation," the document asserts that these nations are guilty of "harmful tax competition" because they lure investment away from OECD member nations.

     The report specifically identifies 35 "tax havens" and recommends that the industrialized world impose the  equivalent of a financial blockade against them.

     The OECD is demanding that targeted countries, which include nations as diverse as Panama, Liberia and  Bahrain, as well as offshore financial centers in the Caribbean and Pacific, commit to ending their "harmful tax  practices." This would mean higher taxes and an end to financial privacy (so foreign tax authorities will have an easier time collecting revenue).

     Those that do not capitulate will be labeled "uncooperative" and could - if member nations enact the OECD's suggested sanctions - be subject to a wide range of taxes, fees, penalties, regulations, and other forms of financial  protectionism.

     This OECD campaign is not in America's interest. We are a low-tax nation compared to most other  industrialized nations, and we have used our taxpayer-friendly status to lure jobs, capital and entrepreneurial talent  away from Europe's costly welfare states.

     But the Clinton-Gore administration has endorsed the OECD effort, and Treasury Secretary Larry Summers has spoken about "the need to address globally the problem of harmful tax competition."

     Before allowing the attack on low-tax nations to continue, lawmakers in the industrialized world should seek answers to three simple questions.

     First, is tax competition bad? According to the OECD report, countries with low taxes "unfairly erode the tax bases of other countries and distort the location of capital and services." True, businesses and investors will flee  high-tax jurisdictions for low-tax jurisdictions, but this is the natural intersection of economics and democracy.

     Vermont voters have chosen, for instance, to pay for a bigger, more expensive government than their neighbors  in New Hampshire. The French love affair with high taxes continues, while the socialist German government next door is seeking to implement dramatic tax rate reductions, and former communists in Russia have just enacted a 13  percent flat tax.

     This tax burden diversity clearly does influence investment, but it hardly should be said to "distort" capital  markets. Indeed, the OECD has even acknowledged that globalization is "the driving force behind tax reforms which have focused on base broadening and rate reductions, thereby minimizing tax induced distortions."

     Second question: Are industrialized nations being harmed by low-tax competitors? According to the OECD's definition of harm (reduced tax collections), the answer is no. Taxes in member countries consume 37.2 percent of the OECD's aggregate GDP, a level the organization admits is "the highest figure recorded since revenue data  began being collected by the OECD." If anyone is being harmed, it is taxpayers, not governments.

     Defenders of the OECD deflect these facts with a class argument, lamenting that some taxpayers benefit from low-tax regimes while others don't. Indeed, they even argue that ordinary citizens are hit with tax increases to offset the revenue losses caused by tax avoidance and evasion, thus compounding the injustice.

     This leads to the final question: Will ordinary people benefit if "tax havens" are abolished? No, given the OECD nations' huge tax burdens. Were it not for the combination of globalization and low-tax countries, the  burdens would increase.

     A successful attack on "tax havens" might make it easier to collect more revenue from upper-income  taxpayers. But without tax competition, politicians will race to raise the overall tax burden.

     To collect more money from the rich and undermine low-tax jurisdictions, lawmakers should reform their tax codes and reduce marginal tax rates. This approach, not the OECD's heavy-handed attack on sovereignty, is the  way to promote justice and prosperity.

     Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation.

Return Home