The OECD's perpetual tax grab

First of two parts

Given his narcissistic and petulant refusal to concede the election, most voters would probably agree that stubborn is a word that can be used to describe Al Gore. For sheer obstinacy and inflexibility, however, the vice president is an amateur compared to the bureaucrats at the Organization for Economic Cooperation and Development (OECD). Acting at the behest of high-tax European nations that dominate its membership, the OECD has come up with yet another tactic in its campaign to destroy the fiscal sovereignty of low-tax nations.

Readers of this column will recall that the OECD launched its campaign in 1998 when it published "Harmful Tax Competition: An Emerging Global Issue." This report argued it was unfair for investors and entrepreneurs to move their activities from high-tax countries to low-tax countries (for those who think this cannot be true, that it is too preposterous, the unpleasant details can be found at www.oecd.org). The real reason for the report, of course, is that politicians in nations like France feel they have an inalienable right to tax revenues and they get angry when a taxpayer flees to a jurisdiction that does not impose such a heavy burden on private sector wealth creation.

Most observers ignored this report, dismissing it as a futile attempt by Paris-based bureaucrats to turn back the clock and return to the days of fiscal profligacy. This led the OECD's mandarins to change their approach. Earlier this year, in a new study titled "Towards Global Tax Cooperation," the OECD identified 41 low-tax nations that engaged in so-called harmful tax practices (i.e., low tax rates, financial privacy, legal protections).

Perhaps most shockingly, the OECD threatened these countries with sweeping financial protectionism if they did not change their laws to make it easier for Europe's welfare states to collect more tax revenue. This effort to bully low-tax nations flopped. Only six of the 41 "tax havens" capitulated. And since voters in the Cayman Islands just ousted the lawmakers who surrendered to the OECD (largely as the result of pressure from Tony Blair's British government), it may be more accurate to say that the Paris bureaucrats only can claim five scalps.

Let's briefly review just in case any Palm Beach voters are trying to follow this article. The OECD put out a report stating that low tax rates are unfair - and that failed to convince low-tax countries to cede their sovereignty. Then the OECD threatened to impose a financial blockade against low-tax countries - and that effort largely flopped.

This brings us to the present. The OECD has now announced a third strategy. It is going to have regional conferences, the first of which will take place early next year in Barbados. At these conferences, the OECD hopes to hot-box officials from low-tax nations, twisting their arms and browbeating them until they acquiesce.

Interestingly, the OECD also is inviting representatives from the United Nations, the World Bank, the World Trade Organization, the International Monetary Fund, and other international organizations to attend the Barbados conference. This is the diplomatic equivalent of the neighborhood bully asking his big brothers to gang up on an intended victim. The OECD bureaucrats clearly hope that these other institutions will help pressure low-tax nations to submit.

More specifically, it is very likely these international agencies will be part of a carrot-and-stick strategy. The OECD will continue to threaten low-tax nations with protectionism, while the other bureaucracies will hold out the promise of foreign aid for those that agree to become fiscal colonies.

But will this strategy work? Logically, the answer must be no. Clearly, no amount of government-to-government handouts can possibly make up for the loss of a vibrant private-sector financial services industry.

Yet supporters of freedom and privacy should not become complacent. The politicians representing low-tax governments, after all, do not necessarily act in the best interests of their citizens. And if they are being offered big piles of foreign aid - money they will control and be able to distribute to their political supporters, will the lawmakers put personal self-interest ahead of the economic interests of their respective nations?

This is the real purpose of the Barbados conference. The OECD is hoping to convince lawmakers from low-tax nations to sell out their people. This creates a rather painful irony for the world's taxpayers: International bureaucrats will use their tax dollars to bribe foreign politicians so it will be easier for politicians in OECD countries to raise taxes in the future. Rather like giving a burglar cab fare so he can come rob your house.

Tomorrow: The OECD's Glass House

Daniel J. Mitchell is the McKenna senior fellow in political economy at the Heritage Foundation.