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National Review Online

 April 2, 2001

O'Neill's Choice: Will he side with the
government of France or with taxpayers?

By NR's John J. Miller & Ramesh Ponnuru 

     As international institutions go, the Organization for Economic Co-operation and Development (OECD) has been pretty harmless, and even today it has very little power. But it seems bent on confirming O'Sullivan's Law that all groups that are not explicitly right-wing become left-wing over time. It is using what power it has to create an embryonic global tax regime that threatens free trade, privacy, and sovereignty. Will Treasury secretary Paul O'Neill put a stop to it? 

     The OECD is ostensibly campaigning against "tax havens"-countries with low taxes and strong privacy laws. Critics say that it is really picking on weak countries: By the OECD's standards, Ireland, Switzerland, Austria, and Singapore are tax havens. As is the United States. (True, it may not feel that way this month.) Yet the OECD's list of 41 havens is made up mostly of small, poor states in the Caribbean. The OECD is itself made up of the industrialized countries; it is a rich man's club.

     What concerns the OECD as it explained in two reports with ominous titles, Harmful Tax Competition and Towards Global Tax Cooperation is that people are using these countries to evade high taxes on capital in their home countries. If the havens do not reform their laws so as to prevent this tax evasion, the OECD wants the rich countries to impose trade and financial sanctions on them.

     The dispute is analogous to the one over Internet taxes. In both cases, many governments have written tax laws they cannot entirely enforce. America's state governments often cannot collect sales taxes when residents make purchases from faraway vendors over the phone, through catalogs, or on the Internet. National governments have trouble taxing overseas investments. In both cases, a purely territorial tax system with states able to tax sales made by companies inside their borders, and nations able to tax investments made in theirs would constrain taxes in ways governments find irksome: If they raise taxes, the companies or the investments will just move.

     So in both cases, the frustrated governments want to have the ability to reach beyond their borders to make it impossible for taxpayers ever to escape their grip. The National Governors Association wants the states to form a sort of sales-tax cartel that would, taken to its logical conclusion, mean that wherever you go, your purchases would have to include your home state's sales tax. The OECD, led by Britain and France, wants an international tax cartel.

     In one respect, however, the OECD proposal is worse, because the taxation it seeks to preserve is the taxation of capital (which is to say, double taxation).

     While the United States is not explicitly a target of the OECD effort, it will come as no surprise that some officials here are doing their part to move "towards global tax cooperation." Other governments want information on their citizens' investments here, and the IRS has issued some regulations to help those governments. This is nuts. If it follows through, America would be discouraging people from investing here, and not even getting any revenue in return.

     A young, small, but surprisingly effective group has arisen in Washington to block the OECD's plan: the Center for Freedom and Prosperity, run by Andrew Quinlan and Daniel Mitchell (who by day works as an economist at the Heritage Foundation). The center has organized an anti-OECD coalition including not only conservatives such as Dick Armey and Don Nickles, but also 26 of the 38 members of the congressional black caucus. The latter are primarily concerned about the effect of the OECD's campaign on the Carribbean countries.

     Almost everyone in President Bush's economic team opposes the OECD proposal. But the career officials at Treasury whose job is to enforce tax law support it because they see the chance to nab a few American tax evaders. Which side wins will spell the fate of the entire enterprise: an international sanctions regime against the tax havens will not succeed will not even be formed without American participation.

     So the decision comes down to Treasury secretary Paul O'Neill. He's been supportive of the right of countries to set their own tax rates without outside interference, but also of what he vaguely calls "effective tax information exchange." He can still weigh in against the OECD. It ought to be an easy call.


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