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CFP Strategic Memo, February 18, 2002

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Center for Freedom and Prosperity Strategic Memorandum

Date: Monday, February 18, 2002
To: Low-Tax Jurisdictions
From: Daniel Mitchell, Heritage Foundation Senior Fellow
Re: The OECD February 28 Deadline
_________________________________________________________________

 Less than two years ago, the Organization for Economic Cooperation and Development was an immense threat to taxpayers in general and low-tax jurisdictions in particular. The Paris-based bureaucracy was aggressively moving forward with its so-called "harmful tax competition" initiative, and it was widely expected that blacklisted jurisdictions would surrender their fiscal sovereignty by the OECD's self-imposed deadline.

 Fortunately, the world has changed. Thanks to strong opposition in the United States and the election of a market-oriented President, the OECD was forced to substantially narrow its imperialist agenda. The "line-in-the-sand" deadline has been delayed two times. Perhaps most importantly, key OECD member governments clearly are much less committed to organization's assault on low-tax jurisdictions.

 But what happens now? The OECD's latest deadline is quickly approaching, and many jurisdictions have to make a choice. There are five powerful reasons why low-tax jurisdictions should not surrender:

These points are discussed in greater detail below. Individually, they are powerful arguments for fiscal sovereignty and resistance to the OECD's imperialist agenda. Combined, they strongly suggest that persecuted jurisdictions should hold firm. It would be a shame if governments that have defended the interests of their people for nearly two years were to lose their resolve at the last moment.

    1. The OECD is a paper tiger. The Paris-based bureaucracy has no power to impose financial protectionism or any other sanction against low-tax jurisdictions. As has been discussed in previous memoranda, the only real concern is whether the OECD's member nations might take such steps. And that is not a real threat unless the United States decides to act in concert with Europe's welfare states. Simply stated, it does not matter if irrelevant nations like France eliminate financial ties with low-tax jurisdictions. The key question is how the United States will respond, and the following two factors suggest that it is very unlikely that America will join any coordinated assault against taxpayer-friendly regimes:

    • The Bush Administration is not the Clinton Administration. While there are a handful of presidential appointees (and certainly many career bureaucrats) that do not appreciate tax competition, President Bush and his team generally understand that tax harmonization policies such as "information exchange" are contrary to America's economic interests. This is the Administration, after all, that forced the OECD to alter its agenda. This is the Administration that blocked the Clinton-era IRS regulation to help foreign governments tax the deposits in U.S. banks. And this is the Administration that is aggressively pursuing tax rate reductions to make America more competitive.
       
    • The new tax treaties between America and several low-tax jurisdictions eliminate any incentive for the U.S. to join forces with Europe's welfare states. In other words, now that the United States has greater ability to impose taxes on an extra-territorial basis, it is has no reason to impose protectionist policies. Such an approach, after all, would undermine the competitiveness of American financial institutions just so European nations can collect more tax revenue. Needless to say, the Bush Administration is not likely to pursue such a self-destructive policy. This is very important since low-tax jurisdictions easily can withstand sanctions from other nations so long as they can conduct business with American companies.

    2. The real deadline is 2003. Being on an OECD blacklist, in and of itself, has very little impact. As discussed above, the only real risk is that OECD member nations may choose to impose financial protectionism at some point. But that risk is not real until 2003 at the earliest. Even for those low-tax jurisdictions that have a pessimistic attitude, there is nothing to be gained by surrendering before the deadline for sanctions.

    3. Communicate with each other. At the signing of the American Declaration of Independence, one of the Founding Fathers, Benjamin Franklin, remarked, "We must indeed all hang together, or, most assuredly, we shall all hang separately." These powerful words succinctly explained why the colonies had to be united to overcome the British Empire. The same principle applies to low-tax jurisdictions. If persecuted jurisdictions unite, the OECD has very little chance of success. This is why it is so important for leaders in the targeted regimes to communicate especially since OECD representatives frequently attempt to mislead (a polite word for lie) low-tax jurisdictions by claiming that others governments are about to capitulate. Whether through the International Tax and Investment Organization (ITIO) or other mechanisms, targeted jurisdictions should compare notes, develop strategies, and present a united front. Remember, the bureaucrats in Paris do not want low-tax leaders to communicate. They suffered a serious setback early last year in Barbados largely because leaders finally had a chance to compare notes and grasp the full magnitude of OECD perfidy. All the more reason, then, for persecuted jurisdictions to cooperate.

    4. Insist that OECD nations comply with same standards. The OECD specializes in hypocrisy. It seeks to impose rules on small, relatively powerless jurisdictions, but does not subject its own members (or powerful non-members) to the same rules. It threatens low-tax jurisdictions with financial protectionism, even though such policies would violate international trade agreements that OECD nations piously invoke when seeking to reduce barriers to their exports (and then has the unmitigated audacity to call this protectionism "defensive" similar, one supposes, to Hitler's "defensive" attack on Poland). But every dark cloud has a silver lining, and the OECD's blatant hypocrisy creates a marvelous opportunity. Low-tax jurisdictions should say that they are willing to consider (not sign, just consider) the OECD's demands after all OECD nations have enacted (not promised, but actually enacted) the same policies. This point has been made quite effectively by several jurisdictions. And even governments that capitulate can do so in a meaningless fashion. The Isle of Man's decision to acquiesce to the OECD, for instance, is not effective until and unless every OECD member nation agrees to abide by the same rules. Needless to say, that is not very likely. Indeed, we are more likely to see the bureaucrats at the OECD volunteer to give up their tax-free salaries before member nations agree to abide by OECD rules. This strategy may not have much impact on French politicians, but it will be extremely effective for dealing with both the press and American lawmakers.

    5. Appeasement does not work. Last but not least, it is important to resist the OECD because of what will happen next. Politicians from high-tax nations believe in tax harmonization, and they will seek it implicitly (with information-sharing) and they will seek it explicitly (by setting minimum tax rate requirements). While it sounds difficult to believe, they actually believe that economic activity should be determined on the basis of pre-tax income rather than post-tax income. As such, they will continue their efforts until all differences in tax burdens are eliminated. Needless to say, this means that low tax burdens will be adjusted upward. For those who think this is an exaggerated fear, I invite you to save this memo and re-read it ten years from now.

As always, please keep us informed. The constant flow of information from persecuted nations as well as the inside information from moles at the OECD and friends in various Treasury Departments and Finance Ministries of OECD member nations has been very valuable. We are winning the battle that "could not be won." Let's not snatch defeat from the jaws of victory by making mistakes in the endgame.

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