August 13, 2000
Should U.S. tax policy be made in Paris?
First of two parts
byDaniel J. Mitchell
In theory, the election this fall will determine tax policy for the next four years. A Bush victory, for
instance, should result in repeal of the death tax, marginal tax rate reductions, and other changes that move the code closer to a simple and fair flat tax.
Yet if a handful of unelected bureaucrats in Paris have their way, pro-growth tax policies could soon become a
thing of the past. Based at the Organization for Economic Cooperation and Development(OECD), these paper-pushers have launched a major attack against what they call "harmful tax competition."
According to this bizarre worldview, it is unfair for nations with low taxes to attract jobs, capital and entrepreneurial talent from countries with high
taxes. This may sound too ridiculous to be true, but consider these words from the OECD's 1998 report, "Harmful Tax Competition: An Emerging Global Issue": "Globalization has,
however, also 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."
In other words, the OECD thinks it is bad if ambitious Canadians move to the United States to escape high
taxes. The OECD thinks it is wrong when French citizens invest money overseas to avoid high taxes. Amazingly, the OECD even thinks the world economy suffers because workers and businesses are able to keep more of their income and wealth in the productive sector of the economy and out of the hands of greedy politicians.
Stripped of fanciful rhetoric, the OECD is pushing for a tax cartel. Politicians from high tax nations like France
resent having to compete with other countries. Rather than cut tax rates, they would prefer that all industrialized nations join together in an agreement to keep tax burdens high. Under such a system, taxpayers would have no choice but to stand idly by while governments confiscated ever-larger shares of their income.
The logical question to ask, of course, is why the United States would want to participate in such a preposterous
scheme? After all, by world standards, we are a low-tax nation. Our economy is outperforming the stagnant high-tax economies of Europe - in part because we are luring foreign savings and entrepreneurial ability to our shores.
The answer, unfortunately, is that the Clinton-Gore administration apparently thinks the U.S. is undertaxed and that we should be more like the French.
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."
What is particularly worrisome is that the anti-taxpayer forces understand a tax cartel is inherently unstable.
More specifically, they realize the whole system will collapse the moment one country decides to pursue a low-tax strategy. This is why they are so interested in undermining national sovereignty.
Following up on their 1998 report, the OECD recently released a new publication titled "Towards Global Tax
Cooperation." This document, which the Clinton-Gore administration has endorsed, demands that the United States repeal by 2003 the provision of our tax code dealing with Foreign Sales Corporations. Moreover, the report requires that the U.S. and other nations not adopt any new measures that "constitute harmful tax practices."
Does this mean we are not allowed to eliminate the death tax? Will we be forbidden from repealing the capital
gains tax? The OECD is quick to assert that countries would be allowed to adopt whatever tax policies they prefer, but this rings hollow considering their actions.
Another serious problem with the OECD's actions is the blatant disregard for financial privacy and constitutional freedoms. They may claim it is OK for the
U.S. to adopt pro-growth tax policies, but they then would
insist foreign tax collectors have the right to snoop through U.S. banks to make sure nobody from overseas is taking advantage of our "harmful" tax laws.
In its publication, "Improving Access to Bank Information for Tax Purposes," the OECD writes, "Ideally, all
member countries should permit tax authorities to have access to bank information, directly or indirectly, for all tax purposes." Needless to say, it is bad enough that the U.S. government often disregards our Fourth Amendment freedom to be free from having our effects searched without probable cause. Giving foreign bureaucrats permission to snoop through our financial records as well is an outrage.
Notwithstanding the feverish rantings of OECD bureaucrats, tax competition is a good thing. When Ronald Reagan cut tax rates in the 1980s, he not only
triggered the economic rebound we still enjoy, he also forced just
about every other industrialized nation to cut tax rates in an effort to stay competitive. Because the OECD is unlikely to continue its pernicious efforts without U.S. approval, the outcome of this fight could depend on what happens in the U.S. presidential election.
Next week: The OECD's shameful assault against powerless low-tax nations.
Daniel J. Mitchell is the McKenna senior fellow in political economy at the Heritage Foundation.