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Richard W. Rahn

May 1, 2001

The Washington Post
1150 15th Street, N.W.
Washington, DC 20071

Subject: Response to the David Ignatius' article "Tax Cheats' Best Friends"  of April 29, 2001

Taking Exception

 Here I thought I was fighting for liberty, but then I read in David Ignatius' column (The Tax Cheats' Friends, April 29, 2001) that I am a friend of "tax cheats."  According to Ignatius, many economists, civil libertarians on both the left and right, and other columnists, are friends of "tax cheats" because they oppose the OECD's (Organization for Economic Cooperation and Development) "unfair tax competition" and information sharing initiative.  However, I expect that if Mr. Ignatius had spent as much time learning about the issue as those of us in the many public policy organizations who think the OECD initiative is a very bad idea, he might have come to a different conclusion. 

Most economists, unlike the OECD bureaucrats, consider tax competition desirable.  It promotes cost effective government and lessens the ability of governments to engage in abusive conduct.  Monopolies and cartels are harmful whether they are used to gouge oil consumers or taxpayers.  Many of us find repugnant the efforts of a cartel of large, mostly white European nations to tell small sovereign nations with mostly non-European populations what their tax rates ought to be.

Contrary to Mr. Ignatius' statements, the OECD documents are clear and specific in their demands that the targeted countries report financial activities of OECD citizens that are not illegal in the targeted countries.  Many countries have laws that we consider to be abhorrent, such as censorship and restrictions on political activity. For example, the Chinese communist government does not allow their citizens to attend churches that are not approved by the Chinese government.  The US, of course, would never consider enforcing this Chinese law against a Chinese national who was attending a non-approved church in the US, nor reporting the church attendance to the Chinese government.  Governments have traditionally enforced only their own laws on their own sovereign territories, against foreign nationals.  If a government is required to enforce another country's tax law no matter how unjust or confiscatory why not other laws?  The logical end of this process is the loss of all national sovereignty and individual liberty. 

The OECD is demanding that the 41 targeted "low tax" countries routinely disclose confidential tax and financial information to the OECD countries.  If they fail to comply, economic sanctions would be imposed. What if the low tax countries demanded that the high tax countries reduce their tax rates because they diminish economic growth and liberty, thereby harming low-income people?  The fact is if the large OECD countries did not have the overwhelming economic and political power to bully the small countries, the "harmful tax competition" initiative would be immediately dismissed as a sick joke.

 Ignatius claims that there is now a "successful" campaign against money laundering and tax evasion. However, the government's own statistics show that only a tiny fraction of one percent of the money they claim is laundered is ever confiscated.  Again, the fact is, the anti-money laundering campaign does not even come close to minimal standards for cost-effectiveness.  Like the Prohibition of the 1920's, the anti-money laundering war has had almost no deterrent effect, has resulted in gross violations of civil liberties, and has actually created a new criminal industry and increased violent crime.

 Many trade lawyers, including former OECD lawyers, believe the recommended sanctions against the 41 targeted countries violate the World Trade Organization agreements to which the US and the other OECD nations are a party. Other respected constitutional scholars believe the information sharing provisions violate the 4th and 5th Amendments of the US Constitution.  It is worth remembering that under "information sharing," fundamental privacy rights might well be violated for individuals who have neither been charged with nor convicted of any crime.

 Information sharing sounds benign until one realizes that not all governments and all individuals within governments can be trusted not to use the information to damage innocent individuals.  Some OECD countries have engaged in significant human rights abuses and some have communist party members within their governments. How can we be assured that shared information will not be used to persecute innocent individuals or used against the best interests of the United States?

 Yes, a few more "tax cheats" might not get caught without the OECD information sharing proposals. But this is a small price to pay to preserve respect for civil liberties.  The American republic was in part founded on the belief that the civil liberties of the people were more important than the conviction of every last wrongdoer.  In the digital age, it is possible for money to be transferred over the Internet to any point on the globe at almost the speed of light, and encrypted in such a manner that it is almost impossible for governments to detect.  As a result, we are faced with a choice.  We can redesign our tax systems so that they are compatible with both the new digital technologies and our right to have financial privacy, or stick with the existing and failing tax system that will necessitate a never-ending erosion of our civil liberties and national sovereignty.

Richard W. Rahn
Senior Fellow
The Discovery Institute

 

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