Global Tax Competition Under Threat From G20

by Mike Godfrey, Tax-News.com, Washington

02 April 2009

Low tax jurisdictions are being made the scapegoats for the world financial crisis and consequent economic strife by the politicians who are gathering in London on April 2 for the G-20 Summit, according to Daniel J. Mitchell of the Cato Institute.

In a Strategic Memorandum released by the Center for Freedom and Prosperity on March 30, Mitchell argued that the collective actions of the 'high tax' states, such as the United States and the 'old' member states of the European Union, and multilateral bodies such as the Organization for Economic Cooperation and Development, in response to the financial crisis will deal a blow to those who support international tax competition and financial privacy.

"These so-called havens are being assaulted by international bureaucracies such as the OECD and European Commission," he noted, adding: "These events do not bode well for supporters of tax competition, fiscal sovereignty, and financial privacy."

While Mitchell accused the George W. Bush administration of presiding over a large expansion in government, he said that the Bush government effectively turned a blind eye to the perceived problems caused by offshore financial centres. This approach, he observed, probably stymied the OECD's last offshore crackdown at the turn of the century. However, with the election of Barack Obama, backed up by a Democratic US Congress, Mitchell stressed that this policy of "benign neglect" is transforming into one of "malign attention."

"A 'malign attention' approach by the new administration has troubling implications for tax competition," Mitchell said. "It certainly is bad news for taxpayers in high-tax nations since their governments may feel less competitive pressure to lower tax rates (and some governments may even decide it is safe to make tax systems more oppressive). It also is bad news for the so-called tax havens since, at the very least, the plethora of attacks may scare away investors and also likely will mean higher costs for both governments and the private sector."

Another worrying sign for low tax jurisdictions, Mitchell warns, is Obama's support for the Levin 'Stop Tax Haven Abuse' bill, introduced into the US Senate recently by Carl Levin and Byron Dorgan.

"To summarize, the new regime in Washington is not good for those who value individual liberty. It is quite likely that the Obama Administration will push for bad unilateral policies – such as the Levin and Dorgan proposals," he predicts. "And it is also likely that the White House will push for bad multilateral policies – unleashing the OECD and other international bureaucracies to harass jurisdictions with pro-growth tax policy."

"The only silver lining to this dark cloud is that the status quo is pro-tax competition and it will take radical changes in order to tip the scales in favor of tax harmonization," Mitchell concluded.

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