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Int'l Tax Planning Assoc. Yearbook

August 31, 2000

Creating a Big Government Cartel: The OECD's
War on Financial Privacy and Low-Tax Nations

By Daniel J. Mitchell

     The US Congress has approved legislation to repeal the estate tax. Germany has announced sweeping tax rate reductions. Russia's new 13 percent flat tax goes into effect next January. Even the French look like they will consider tax cuts according to recent press reports.

     All this sounds like great news for taxpayers - and these reforms certainly are a step in the right direction, but taxpayers should not thank politicians. Instead, the real driving force that is causing these changes is tax competition. More specifically, nations have found that confiscatory tax policies are unsustainable is a world where it is increasingly easy for jobs, capital, and entrepreneurial talent to cross national borders in search of the most friendly environment. In effect, globalization is making it much more difficult to raise taxes and generating big rewards for nations that implement pro-growth tax cuts.

     Unfortunately, this silver cloud has a dark lining. Many politicians, particularly those from the industrialized world, despise tax competition because it forces reductions in the size of the state and limits their power to redistribute income and wealth to powerful interest groups. Using multi-national organizations they control, these lawmakers have launched a fierce campaign to eliminate tax competition.

     While several organizations have been dragooned into this effort (including the UN, the G7, the IMF, the FSF, the FATF, etc), the primary vehicle they are using to advance their aims is the Paris-based Organization for Economic Cooperation and Development  (OECD). This organization, which serves as a trade association for 29 wealthy nations, has launched a major attack against what it calls "harmful tax competition."

     The OECD's message is simple: "Globalization has... had the negative effect of opening up new ways by which companies and individuals can minimize and avoid taxes. . . . These actions induce potential distortions in the patterns of trade and investment and reduce global welfare." According to this bizarre view, it is bad if ambitious Canadians move to the United States to escape high taxes and it is wrong when French citizens invest money overseas to avoid high taxes. The OECD views this as "poaching."

     While the OECD has a simple - albeit dubious - message, their proposed solution is the part that deserves the most attention. Stripped of fanciful rhetoric, the OECD is pushing for a tax cartel. This cartel would be combined with worldwide taxing authority to ensure that individuals and businesses had no choice but to accept the higher tax burdens that this would imply (all of which explains why the elimination of financial privacy is an integral part of the OECD agenda).

     In their recent publication, Towards Global Tax Co-operation, the OECD outlined a two-tier strategy:

  • The first part of the strategy is to get member nations to eliminate tax practices that are viewed as "harmful." To a significant degree, the organization is taking the European Union's "tax harmonization" campaign and urging that it be replicated within the OECD. At this point in time, the harmonization campaign is focused on "tax base" issues, largely in an effort to have uniform taxation of savings and investment. If the EU is any guide, however, pressure to conform tax rates inevitably will follow.
  • The second - and more important - part of the OECD's strategy is to shut down low-tax regimes around the world. These nations and territories, which have been labeled "tax havens," have been put in the cross-hairs, and the OECD's mission is to ostracize, penalize and ultimately destroy them. Contrary to popular perception, the OECD does not necessarily want these countries to impose high tax rates. Instead, the key goal is to eliminate financial privacy so that OECD member nations can impose worldwide taxation on the incomes and assets of their citizens. 

     At first glance, it would seem that there are immense obstacles to the OECD. Why, for instance, would the OECD's low-tax (relatively speaking) member nations agree to eliminate so-called harmful tax practices? The United States is enjoying strong growth, after all, because America's more attractive economic climate is luring savings and entrepreneurial ability away from other parts of the world. 

     Nonetheless, the Clinton-Gore administration is willing to toss away this comparative advantage. Indeed, Treasury Secretary Larry Summers has openly embraced the OECD's efforts, commenting about "the need to address globally the problem of harmful tax competition." Mr. Summers even has referred to the ability of taxpayers to protect their money as the "dark side to international capital mobility." Likewise, the United Kingdom also appears willing to hamstring itself. The Blair government makes a big deal out of rejecting "tax harmonization" with the European Union, but the Chancellor of the Exchequer is an active proponent of the OECD tax cartel.

     In all likelihood, the actions of the U.S. and U.K. governments may be examples of ideology and/or politics trumping national interest. Both President Clinton and Prime Minister Blair are astute politicians, and they probably understand that the very existence of tax competition is a handicap to left-of-center parties. Whatever the reason, co-opting the U.S. and the U.K. was a major victory for the OECD. The remaining member nations with an incentive to resist the OECD's proposal (Ireland, Luxembourg, Switzerland being the most obvious examples) are now heavily outnumbered.

     This does not mean, to be sure, that the OECD will ultimately prevail in getting its member nations to join a cartel. The effort almost certainly will flounder, for instance, if the U.S. does not participate. As such, much depends on whether Republicans capture the White House later this year. Moreover, even if the Democrats retain the White House, it is very unlikely that a Republican Congress would approve the legislation that will be needed for the OECD project to have long-term success.

     The second part of the OECD strategy also faces some roadblocks. The nations on the tax-haven blacklist, after all, have nothing to gain by agreeing to serve as tax collectors for the OECD. These regimes have boosted their economies by creating an attractive investment climate, and it is hard to imagine that they would willing acquiesce to a plan that will return them to third-world status.

     Yet if the OECD has its way, the low-tax countries will have no choice. In a display of imperialism not seen since the collapse of the Soviet Empire, the OECD wants its member nations to subject "non-cooperative" low-tax regimes to financial protectionism. In effect, those that do not surrender will be subject to an economic blockade.

     This sounds hard to believe, given the OECD's stated support for "non-discriminatory liberalization of capital movements" and the "removal of restrictions on cross-border capital flows." Yet one need only peruse page 25 of Towards Global Tax Co-operation, to see the special fees, taxes, penalties and regulations that the organization would like to see imposed. In a truly Orwellian touch, the OECD even has the gall to refer to these threatened actions as "defensive measures" -sort of like Hitler's defensive attack on Poland. 

     It is important to remember, though, that the OECD has no legislative power. It can recommend sanctions, but it is not clear that member nations will follow through - particularly given the draconian and unprecedented nature of what the OECD has suggested. Indeed, it is very likely that the OECD's game from the beginning has been to frighten low-tax nations into submission (a strategy that has met with some success since six jurisdictions, including Bermuda and the Cayman Islands, have unfurled white flags).

     The vast majority of "tax havens," however, have so far resisted the OECD's bluff. And with each passing day, it appears that opposition is building. In the United States, for instance, the organization is receiving some unwelcome press attention. Moreover, there is a growing coalition of free-market groups, privacy advocates, sovereignty supporters, and high-tech representatives who strongly oppose what the OECD is trying to do.

     This coalition should be strong enough to convince US lawmakers to pull the plug on the OECD - particularly if two issues can be handled adroitly. First, supporters of tax competition must successfully divorce money laundering from the debate. In a clever display of demagoguery, the OECD's defenders are trying to paint their effort as a campaign against dirty money. This tactic can be defeated by explaining that money laundering and tax avoidance are the opposite of each other (money launderers want to take illegally obtained funds and bring them into the taxable economy, whereas taxpayers want to take legally obtained funds and invest them where they will be protected from excess taxation). In addition, it should be pointed out that the OECD campaign will make money laundering easier since persecuted regimes will lose any incentive to cooperate with law enforcement officials.

     The other issue is tax fairness. More specifically, the OECD mandarins argue that low-tax jurisdictions allow certain people and certain types of income to escape taxation. In response, proponents of tax competition need to explain that one government has never had the right to compel another government to help it collect taxes on income earned in the second government's territory. This "territorial" view of taxation is sound tax policy and sound international law. 

     Moreover, this does not necessarily allow income to escape taxation. If a financial institution in a low-tax nation is holding assets for account-holders, those assets probably represent stocks and bonds from OECD nations. And if OECD nations tax capital income at the source (by making dividend and interest payments non-deductible), then any payments to the financial institution are after-tax. In other words, this income either already is taxed or easily can be taxed if OECD nations really think they do not have enough tax revenue.

     Offshore investments, however, do prevent governments from double-taxing these income flows. Needless to say, it also becomes very difficult for governments to impose wealth and asset taxes. This is a good thing, and advocates of pro-growth tax policy should not be bashful about saying so.

     Notwithstanding the unhappy complaints of OECD politicians, tax competition is a good thing. When Ronald Reagan cut tax rates in the 1980s, he not only triggered the economic rebound America is still enjoying, he also forced just about every other industrialized nation to cut tax rates in an effort to stay competitive. Politicians are now trying to reverse this process by creating a tax cartel. Fortunately for taxpayers, this should be a very difficult undertaking.

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