CFP Says Senate Hearing Was Stacked By Democrats

by Mike Godfrey, Tax-News.com, Washington

20 July 2001

Washington-based lobbying organisation The Center for Freedom and Prosperity, which has been prominent in the fight by offshore jurisdictions against the OECD's 'unfair tax competition' initiative, was not invited to participate in the US Senate's Wednesday hearing on 'tax havens' chaired by Democrat Carl Levin. The CFP says that the hearing was stacked, showing that the Senate majority (Democrats) is not confident of its position; so it has put out a statement which it hopes will be included in the Congressional record:

Statement by Andrew F. Quinlan, President of the Center for Freedom and Prosperity.

“Tax competition is a liberalizing force, one that compels governments to be more responsible. Tax competition among nations, like competition between businesses, promotes efficiencies and keeps costs down. This is good for the economy and it controls the growth of government. But this is why special interest groups and their allies in government so desperately want tax harmonization. But whether they want explicit tax harmonization or implicit tax harmonization through information exchange, governments should not conspire against taxpayers. And multinational bureaucracies like the Organization for Economic Cooperation and Development, the European Union, and the United Nations should cease their attacks on low-tax nations.

“The Center for Freedom and Prosperity believes that there are two ways to deal with tax evasion. One approach is to pass ever more intrusive laws that force information exchange and trample the privacy and human rights of individuals. The second choice is to reform our current tax code. A territorial tax system - where nations only tax the income earned inside their borders, combined with the elimination of the double-taxation of income that is saved and invested, would wipe out the incentive to hide economic activity. For what it's worth, it also is good tax policy.

“Money laundering is often used as a club to attack low-tax nations. This is hypocritical and inaccurate. Most criminal proceeds are obtained and laundered in OECD nations. In any event, countries should cooperate in the fight against international crime, but this should be pursued in a sensible fashion. A large number of proposals to crack down on money laundering infringe on civil liberties and the right to due process. There has to be a better way. The Justice Department's most recent data states that fewer than 1/1000th of one percent of currency transaction reports are used in a criminal conviction. But the cost to the economy in collecting this data is staggering. Reports like this, and the attack on our individual freedoms, is why Treasury Secretary O'Neill has asked for a review of our current procedures. I applaud him for this move.

“In order to share our views with Treasury on information exchange and money laundering, I have agreed to become a member of the Task Force on Information Exchange and Financial Privacy. I believe that unlimited information exchange, which is being advocated by the Organization for Economic Cooperation and Development, the European Union, and the United Nations, is a threat to the rule of law and human rights. This new task force will work with government policy makers and law enforcement officials to ensure that civil liberties are protected. I am particularly interested in working to protect America's long-term interests, which would be undermined by any agreement that compelled nations to put the laws of other countries above their own.

“The U.S. is the world-leading beneficiary of tax competition. We have more that $8 trillion in foreign investment in this country. We need to enact laws that protect our market share of the world's capital investment in the U.S. These are the questions that need to be addressed and that is why the Center for Freedom and Prosperity has been so active on this issue.”

In a parallel memorandum, CFP Chairman Dan Mitchell, says that the hearing shows how the Democratic majority will try to undermine administration support for civil liberties and healthy tax competition:

DEMOCRATIC POSITION: Only supporters of tax evasion are unwilling to endorse the OECD's so-called "harmful tax competition" initiative.

"CFP RESPONSE: There are two ways to deal with tax evasion. The approach used by the OECD - the collection and swapping of private financial information by governments so income can be taxed on a worldwide basis - is a back-door form of tax harmonization that would undermine financial privacy and cause conflict between nations. Moreover, this "information exchange" approach surely would increase the underground economy, which already accounts for one-fourth to one-third of GDP in many of Europe's high-tax welfare states. The other approach is to reform the tax code by shifting to a territorial tax system (the common-sense notion that nations only tax the income earned inside their borders) and eliminating the double-taxation of income that is saved and invested. This approach happens to be good tax policy, but it also would wipe out a huge percentage of tax evasion since "offshore" accounts no longer would have a financial advantage over "onshore" accounts."

DEMOCRATIC POSITION: The United States will benefit from "information exchange" since we have - at least for now - a tax code that taxes on a worldwide rather than territorial basis.

"CFP RESPONSE: Information exchange would have no value to the United States if we adopted the long-overdue tax reforms listed above. But even if those reforms are not enacted, the United States would be a net loser under a global information exchange regime. Yes, it is true that the wholesale destruction of financial privacy around the world might generate a few billion dollars of additional tax revenue (catching Americans with accounts in "tax havens"). But this "benefit" must be weighed against the likely costs. The United States is the world's largest tax haven. Nonresident foreigners can invest in U.S. stocks and bonds and pay little or no tax. And since the U.S. generally does not require the reporting of that income, this makes it very difficult for foreign governments to tax this income either. This combination of low taxes and effective privacy protection has helped attract trillions of dollars to the American economy. Yet if the U.S. decides to participate in an international information exchange system, much
of that capital will flee to other jurisdictions."

DEMOCRATIC POSITION: So-called tax havens are major sources of money laundering.

"CFP RESPONSE: This is pure demagoguery. The vast majority of the world's criminal proceeds are obtained and laundered in OECD nations. Indeed, roughly half of the world's money laundering occurs in the United States,
and the plethora of laws and regulations manages to catch less than one percent of that dirty money. Moreover, only seven of the seventeen nations on the Financial Action Task Force (FATF) blacklist are considered tax havens by the OECD. This should not come as a surprise. Criminals have little use of offshore accounts since the entire purpose of money laundering is to create the appearance that assets have a legitimate origin so that the funds can be spent in the domestic economy. This goal is more difficult if the criminal has to figure out both how to shift money offshore and then back onshore. Little wonder, then, that the United Nations reported that "Money laundering can proceed very easily without bank secrecy; in fact, it may well be that launderers avoid it precisely because it acts as a red flag."

DEMOCRATIC POSITION: Financial privacy laws in low-tax jurisdictions make it difficult to investigate and prosecute criminal activity.

"CFP RESPONSE: If there were rogue regimes that acted as havens for terrorists, drug dealers and hit-men, that would justify a coordinated international response. Fortunately, this description does not apply to low-tax nations. So-called tax havens usually have mutual legal assistance treaties (MLATs) and other crime-fighting arrangements with the U.S. and other OECD nations. These agreements allow widespread cooperation in the investigation and prosecution of drug dealers and other criminals. Indeed, most low-tax jurisdictions bend over backwards to cooperate in these matters (and if the Subcommittee uncovers evidence of a regime that does not fulfill its legal commitments, that would be a valuable exercise). Just like the United States, however, low-tax jurisdictions generally do not assist in the enforcement of other nation's laws if the alleged offense is not a crime in the low-tax jurisdiction as well.

The United States, for instance, would never consider (hopefully) helping China persecute escaped pro-democracy protestors or women fleeing that government's forced-abortion policy. Why? Because those activities are not criminal offenses in the U.S. This "dual criminality" principle also explains why many countries do not help high-tax nations that are seeking to impose their tax laws on income earned in other jurisdictions - particularly when they themselves do not tax the affected income."

DEMOCRATIC POSITION: The White House is soft on money laundering.

"CFP RESPONSE: The Administration has announced a review of money laundering laws and regulations, but this is because the current approach imposes a huge regulatory burden on private financial institutions and runs roughshod over due process legal protections and Constitutional protections against unreasonable search and seizure. Combined with the fact that the current approach only detects a tiny fraction of money laundering, the Administration is responsibly researching whether there is a more effective way to use law enforcement resources.

While this process has just begun, it hopefully will result in changes that protect civil liberties and due process. The Constitution's Fourth Amendment, for instance, protects individuals from search and seizure in the absence of probable cause, yet money laundering laws and regulations allow governments - and often require financial institutions - to spy on the financial transactions of law-abiding citizens. (Fewer than 1/1000th of one percent of currency transaction reports are used in a criminal conviction according to the most recent Justice Department figures.). Due process protections require that citizens receive notice of legal proceedings and that they have a right to contest the government, but money laundering laws and regulations usually involve secret actions that deprive citizens of the right to be heard."

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