The Case for International Tax Competition:
A Caribbean Perspective
One voice is missing in the tax competition/tax harmonization debate. That is the voice of the persecuted jurisdictions, especially the ones targeted by the Organization for Economic
Cooperation and Development's proposal to eliminate so-called Harmful Tax Competition.1 This paper gives voice to the views of those jurisdictions negatively affected by the OECD's fiscal imperialism and discusses the moral, economic, and development implications of tax harmonization proposals such as "information exchange."
By Carlyle Rogers*
The Organization for Economic Cooperation and Development (OECD) believes that differences in tax burdens should not be allowed to impact the decisions of workers, investors, and entrepreneurs. As a
result, they want to harmonize the world's tax systems by imposing mandatory "information exchange" on all jurisdictions.2 Persecuted low-tax jurisdictions would lose their sovereign right to determine how income is taxed within their borders. Instead, they would be forced to emasculate financial privacy laws so that high-tax nations can impose their oppressive tax burdens on income earned in low-tax economies. The high-tax nations are so anxious to prop up their welfare states that they are threatening to impose financial protectionism against so-called tax havens.
The 40 low-tax jurisdictions targeted by the OECD have certain basic features in common. These include the fact that they are:
- Small independent or non-independent countries or territories, many in the developing world.
- Using financial services as a means to diversify their economic base.
- Predominantly former or current colonies or territories of OECD member countries.
- Not members of the OECD.
The Paris-based bureaucracy has targeted these jurisdictions in a misguided attempt to imprison an increasingly mobile tax base in order to maintain the inefficient and unproductive welfare states of
OECD member nations. The OECD seeks to do this at the expense of poorer developing countries seeking to gain a foothold on the ladder of economic progress. In a globally liberalized world where trade barriers
are falling, tax competition is a legitimate strategy for economic development.
Not only do sovereign states have a right to use their tax systems to lure foreign investment; they owe a duty to their citizens to use all and every legitimate mean to generate economic activity and growth.
Tax Competition and Economic Development
Former colonial powers (most of which are OECD member countries) established economic support systems through initiatives funded through the British Commonwealth and America's Caribbean Basin
OECD member countries funded development and technical assistance programs through agencies such as USAID (United States Agency for International Development), CIDA (Canadian International Development Agency) and the British DFID (Department for International Development). These economic support systems and funding arrangements had two things in common:
- They shielded poor, weak, and small economies from the vagaries of global economic trends.
- They created a dependency, self-defeating mentality in the body politic of these countries.
This resulted in the creation of the "begging bowl" syndrome. The sight of Caribbean leaders traveling to the capitals of Western Europe and the United States with a funding
"wish-list" in hand was commonplace. With the end of the Cold World and liberalization of world trade, these economic support systems became archaic, economically unsustainable and legally suspect, as
demonstrated by Chiquita Food's successful efforts to end the preferential treatment accorded to bananas from the Eastern Caribbean. Developing countries faced a bleak future because:
- It became obvious that price supports prevented the efficient use of resources.
- The funding of development assistance was reduced.
- Tourism, though a source of income, was not enough to support young, increasingly educated populations.
- Many jurisdictions were geographically isolated.
- Economies of scale made manufacturing an untenable option.
Economic diversification, promoted by attractive tax laws, was the only reasonable alternative. Developing countries merely needed to modernize their laws and create effective regulatory structures.
With free-market policies in place, private sector expansion and job creation soon followed.
Tax competition existed long before Caribbean jurisdictions entered the market. The Asian Tiger economies of Hong Kong, Singapore and Malaysia exist today partially because of tax competition.
Foreign investment was lured to develop these economies because governments created an economic environment consisting of competitive labor, deregulation, and low tax on the profits of foreign corporations.
This strategy spurred economic growth that today has catapulted these countries into the developed world. But tax competition is not limited to Asia. Switzerland and Luxembourg are to tax competition what McDonalds and Burger King are to fast food. Yet, if you read the establishment Western press, you would think that Anguilla, Barbados and the other jurisdictions have somehow started something novel and at the same time pernicious; threatening to themselves and the outside world.
It may be a stretch to argue that through tax competition alone, developing economies like Anguilla, Barbados and the Turks and Caicos can achieve the same levels of economic development as Singapore
and Malaysia. However, the economies of Bermuda, the British Virgin Islands, and Cayman Islands is testament to what can be achieved economically through low tax burdens and financial services.
Thirty years ago, for instance, the Cayman Islands was little known in the arena of financial services. Today, it is a world class financial services jurisdiction with a per capita income per
annum that exceeds many Western European countries. The reasons for engaging in tax competition are therefore obvious.
Not only is economic growth a possibility, more importantly, the human resources of these developing countries are developed and utilized in a manner that tourism and manufacturing can never achieve. The developing world integrates with the international financial community as a consequence.
If trade liberalization and globalization are designed to integrate economies and peoples, tax competition is the best way for many developing countries to participate in the world economy. Dependency
used to characterize the relationship between the developed and developing world, but tax competition is a means of breaking that cycle.
It provides for the establishment of a level playing field; countries compete on the basis of tax, regulation and human capital.
Why the OECD in not only wrong but hypocritical
Many learned experts, including Nobel Laureates Milton Friedman, James Buchanan, and Gary Becker, along with Dr. Daniel Mitchell of the Heritage Foundation, Dr. Veronique de Rugy of the Cato Institute
and Dr. Richard Rahn of the Discovery Institute, have written extensively about the benefits of tax competition. Indeed, they even have highlighted the negative effects the OECD's proposal will have not only on the
developing countries but also the United States, which is the world's largest tax haven.3
This raises an interesting question: Why does the OECD's tax haven list not include the United States? And where is Switzerland? The United Kingdom? Luxembourg? How about Hong Kong? Or Singapore?
According to the OECD's own criteria, these nations should be branded as tax havens, yet they are conspicuous by their absence. This raises several questions:
- Is the OECD a gang of bullies, only willing to pick on small, relatively powerless jurisdictions?
- Is the OECD racist, believing that jurisdictions controlled by people of color somehow are undeserving of competitive tax systems?
- Is the OECD a protectionist cartel, seeking to prop up Europe's inefficient and expensive welfare states?
- Is the OECD a bunch of hypocrites, seeking to impose one set of rules on non-member nations but allowing member nations to preserve their sovereignty?
The answer is that all of these factors may help explain the OECD's discriminatory approach. It also is worth noting that the OECD is only against competition when they are on the losing side. For
instance, many OECD countries benefit from the massive brain drain from the developing world to the developed world. It is very common for "the best and the brightest" in developing nations to migrate to
places like the United States that offer limitless opportunity.
For instance, the Triennial Comprehensive Report on Immigration published by the U.S. Immigration and Naturalization Service in May 1999 noted that between 1988 and 1994, 758,434 legal immigrants were
admitted into the United States from the Caribbean. This figure does not include the non-documented aliens.
This massive brain drain clearly is not good for the economies of these developing countries. It is understandable that educated persons from developing nations would want to immigrate to the US. What is not understandable, though, is for OECD member countries to inhibit competition for capital while benefiting from competition for labor.
Another example of OECD hypocrisy is the attack on economic citizenship programs in developing nations. According to the Paris-based bureaucrats, it is somehow sinister when low-tax nations roll out
the red carpet in an effort to attract people capable of injecting capital into the local economy. Yet numerous OECD nations, including the United States, Canada, Australia, and New Zealand, also have immigration
programs specifically designed to lure wealthy people to their shores. Again, it appears that there is a huge double standard.
The OECD policy appears to be one which, put crudely, says: "Economic development is the sole prerogative of the developed world. If the citizens from the developing world want to share in
it, they must migrate to the developed world." In other words, wealth must be hoarded and the purpose of small states is to conduct their economic affairs in such a manner that they don't break the
economic hegemony of Western Europe and the United States. Readers of history will immediately recognize in this approach, some element of the discredited economic policy of "Mercantilism" practiced
by Western European states between the 15th and 18th centuries. It would be ironic if the United States, a nation whose founding fathers saw the perverse consequences of economic imperialism in the 18th
century, participated in the creation of a similar situation in the 21st century.
The Moral Issue
The OECD seeks to create a tax cartel designed to imprison the tax base of member nations while supporting expensive welfare states.
The poor farmer practicing subsistence farming in say Grenada can never dream that his son or daughter will someday have a better life in his homeland. But the OECD sees fit to think that not only should its citizens benefit from taxpayer-financed health care and education, but that others should not enjoy these benefits. In a shocking display of perverse moral logic, that only the morally elastic members of a Western elite can summon to their minds, these same nations claim to be concerned about the world's poor.
The world's poor need neither handouts from the G-7 nor platitudinous statements by guilt-ridden statists in Brussels and Paris.
Instead, the world's poor need the capacity to compete on a fair basis using its choice of service on the global stage. Tax competition as the service being provided by these countries should be the concern neither of the OECD nor within its jurisdiction to control or influence. The OECD should not have the power to dictate the tax systems of others. Those of us in the affected jurisdictions should not stand idly by while bureaucrats in air-conditioned offices try in the 21st century to recreate a discredited economic system which subjugate the Caribbean for centuries, yet again.
It is self-evident that the proposals of the OECD are morally suspect, legally dubious, smack of imperialism more reminiscent of the 19th century rather than the 21st century, and at a rudimentary
level are an affront to the dignity and self-respect of Caribbean people. Yet, where is the outrage? Why the silence?
The OECD has been successful in demonizing the so-called tax havens by raising the false specter of money laundering while marginalizing its political leaders through diplomatic double-speak and
Some listed countries such as the British Overseas Territories may have little choice but to capitulate to the OECD as a result of their colonial status. Does that mean, however, that the fight should not be waged? This paper gives voice to some of the unexpressed sentiments that are held by Caribbean leaders and others in the affected jurisdictions. It is clear that the OECD's moves are far-reaching and dangerous. This initiative is but the first of what I assume are many more attempts to trap the increasingly mobile tax base of member states while trampling on international law and the rights of sovereign states.
Fortunately, the OECD's campaign so far has not been very successful, largely because of the courageous efforts of free market organizations in the United States. But the fight for fiscal and tax
sovereignty has only started.
This will be a long struggle to determine whether free states have the right to structure tax systems as they please; or whether a cartel can force these states to structure their systems to benefit high tax, inefficient states.
Mr. Carlyle Rogers is a native of the Eastern Caribbean island of Anguilla and a post-graduate external research student at the University of London pursuing
a master's degree in Corporate and Commercial Law. He is also qualifying as a Solicitor in England and Wales at London's College of Law.
The Center for Freedom and Prosperity Foundation is a public policy, research, and educational organization operating under Section 501(C)(3). It is privately supported, and receives no funds from
any government at any level, nor does it perform any government or other contract work. Nothing written here is to be construed as necessarily reflecting the views of the Center for Freedom and Prosperity Foundation
or as an attempt to aid or hinder the passage of any bill before Congress.
Center for Freedom and Prosperity Foundation, the research and educational affiliate of the Center for Freedom and Prosperity (CFP), can be reached by calling 202-285-0244 or visiting our web site
1 The OECD is a grouping of 30 Western European States along with a handful of nations in North America and the Pacific rim. It is based in Paris and its original report in 1998 entitled Harmful Tax Practices: An Emerging Global Issue outlined its definition of what constitutes harmful tax practices. Interested readers may read the entire report on the OECD site www.oecd.org.
2 There are two forms of tax harmonization. Explicit harmonization occurs when tax rates in different nations are set at similar levels. The European Union's requirement that nations have a value-added tax of at least 15 percent is a good example of this form of harmonization. Implicit harmonization occurs when nations are able to impose their tax rates on income earned in other jurisdictions. This means taxpayers face the same tax burden (the tax rates of their country of residence) regardless of where they work, save, and/or invest. Both forms of harmonization have the same adverse impact on international commerce. An overburdened French taxpayer will have little reason to shift economic activity to another jurisdiction if any resulting income is going to be taxed at French tax rates (either because the other country has explicitly harmonized or because "information exchange" allows the French Government to tax that income).
3 November 2001, Prosperitas, Vol. I, Issue IV. "The Adverse Impact of Tax Harmonization and Information on the US Economy," by Daniel J. Mitchell. Web page link below. http://www.freedomandprosperity.org/Papers
Additional Issues of Prosperitas:
January 2002, Prosperitas Vol. II, Issue I, U.S. Government Agencies Confirm That Low-Tax Jurisdictions Are Not Money Laundering Havens, by Daniel J. Mitchell. Web page link below:
November 2001, Properitas, Vol. I, Issue IV, The Adverse Impact of Tax Harmonization and Information Exchange on the U.S. Economy, by Daniel J. Mitchell. Web page link below:
October 2001, Properitas, Vol. I, Issue III, Money Laundering Legislation Would Discourage International Cooperation in the Fight Against Crime, by Andrew F. Quinlan. Web page link below:
August 2001, Properitas, Vol. I, Issue II, United Nations Seeks Global Tax Authority, by Daniel J. Mitchell. Web page link below:
August 2001, Properitas, Vol. I, Issue I, Oxfam's Shoddy Attack on Low-Tax Jurisdictions, by Daniel J. Mitchell. Web page link below: