Tax Co-operation Or Tax Competition?

Daniel Mitchell, The Heritage Foundation

29 August 2000

Investors Beware: Report Reveals an OECD Hungry for Higher Taxes

This article is reproduced by permission of Investor's Business Daily and Daniel J Mitchell, McKenna senior fellow in political economy at The Heritage Foundation.

The Organization for Economic Cooperation, comprised of 29 industrialized
nations, recently issued a report that says low-tax countries are bad for
the world economy.

Titled "Towards Global Tax Cooperation," the document asserts that these
nations are guilty of "harmful tax competition" because they lure investment
away from OECD member nations.

The report specifically identifies 35 "tax havens" and recommends that the
industrialized world impose the equivalent of a financial blockade against
them.

The OECD is demanding that targeted countries, which include nations as
diverse as Panama, Liberia and Bahrain, as well as offshore financial
centers in the Caribbean and Pacific, commit to ending their "harmful tax
practices." This would mean higher taxes and an end to financial privacy (so
foreign tax authorities will have an easier time collecting revenue).

Those that do not capitulate will be labeled "uncooperative" and could - if
member nations enact the OECD's suggested sanctions - be subject to a wide
range of taxes, fees, penalties, regulations, and other forms of financial
protectionism.

This OECD campaign is not in America's interest. We are a low-tax nation
compared to most other industrialized nations, and we have used our
taxpayer-friendly status to lure jobs, capital and entrepreneurial talent
away from Europe's costly welfare states.

But the Clinton-Gore administration has endorsed the OECD effort, and
Treasury Secretary Larry Summers has spoken about "the need to address
globally the problem of harmful tax competition."

Before allowing the attack on low-tax nations to continue, lawmakers in the
industrialized world should seek answers to three simple questions.

First, is tax competition bad? According to the OECD report, countries with
low taxes "unfairly erode the tax bases of other countries and distort the
location of capital and services." True, businesses and investors will flee
high-tax jurisdictions for low-tax jurisdictions, but this is the natural
intersection of economics and democracy.

Vermont voters have chosen, for instance, to pay for a bigger, more
expensive government than their neighbors in New Hampshire. The French love
affair with high taxes continues, while the socialist German government next
door is seeking to implement dramatic tax rate reductions, and former
communists in Russia have just enacted a 13 percent flat tax.

This tax burden diversity clearly does influence investment, but it hardly
should be said to "distort" capital markets. Indeed, the OECD has even
acknowledged that globalization is "the driving force behind tax reforms
which have focused on base broadening and rate reductions, thereby
minimizing tax induced distortions."

Second question: Are industrialized nations being harmed by low-tax
competitors? According to the OECD's definition of harm (reduced tax
collections), the answer is no. Taxes in member countries consume 37.2
percent of the OECD's aggregate GDP, a level the organization admits is "the
highest figure recorded since revenue data began being collected by the
OECD." If anyone is being harmed, it is taxpayers, not governments.

Defenders of the OECD deflect these facts with a class argument, lamenting
that some taxpayers benefit from low-tax regimes while others don't. Indeed,
they even argue that ordinary citizens should be hit with tax increases to
offset the revenue losses caused by tax avoidance and evasion, thus
compounding the injustice.

This leads to the final question: Will ordinary people benefit if "tax
havens" are abolished? No, given the OECD nations' huge tax burdens. Were it
not for the combination of globalization and low-tax countries, the burdens
would increase.

A successful attack on "tax havens" might make it easier to collect more
revenue from upper-income taxpayers. But without tax competition,
politicians will race to raise the overall tax burden.

To collect more money from the rich and undermine low-tax jurisdictions,
lawmakers should reform their tax codes and reduce marginal tax rates. This
approach, not the OECD's heavy-handed attack on sovereignty, is the way to promote justice and prosperity.

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