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The OECD's Version Of Tax Harmonisation

Daniel J Mitchell, The Heritage Foundation

28 December 2000

This article, which appeared in the Wall Street Journal on December 21 2000, is reproduced here by kind permission of the author, Daniel J Mitchell, McKenna senior fellow in political economy at the Heritage Foundation and the chairman of the Center for Freedom and Prosperity.

The United Kingdom has been very skeptical of the European Union's push for tax harmonization, and with good reason. Both marginal tax rates and the aggregate tax burden in the U.K. are lower than EU averages, which is an important reason why the British economy is doing better than its neighbors' across the Channel. Needless to say, U.K. policy makers would be foolish to discard this competitive advantage.

At the EU summit in Nice, Prime Minister Tony Blair appeared to have understood this basic principle. He scuttled a misguided plan to end the unanimity rule that gives every member nation a veto over EU tax policy. This was a major victory since the plan being pushed by some members -- increasing the use of qualified majority voting -- would have allowed Europe's high-tax nations to force the U.K. to raise its fiscal burden.

By protecting his nation's fiscal sovereignty, Mr. Blair helped ensure that the U.K. can continue to attract highly productive economic refugees from France and other nations with oppressive tax regimes. Jurisdictional tax competition has been a big plus to the British economy, and Mr. Blair certainly deserves some credit for defending this important feature of a just international order.

Unfortunately, Mr. Blair's opposition to tax harmonization seems to vanish when the public is not paying attention. Tony Blair defends tax competition when dealing with the EU, and clearly enjoys the voter support he receives for this position, yet his government has been an avid supporter of another tax-harmonization campaign - one that has been launched by the Organization for Economic Cooperation and Development.

The OECD's "harmful tax competition" initiative may not be receiving as much attention as the qualified majority voting policy developed in Brussels, but it could prove even more dangerous to the world economy. Unlike the EU, which sought to impose its foolish QMV proposal only on nations that are members of the Union, the OECD's ambitions spill beyond its membership list.

A major feature of the OECD's program, for instance, is an attempt to dictate tax and privacy policy to countries that do not belong to the organization. The Paris-based OECD is urging its member nations to slap sanctions on 41 countries it has identified as tax havens unless they agree to help Europe's welfare states collect more tax revenue.

The key demand the OECD is making is that financial institutions in low-tax regimes share private financial information with foreign tax collectors. High tax nations in the OECD are going after their own residents, who may have parked money abroad to escape onerous tax levels. But they want more than that. They want unlimited financial information that would help them determine if there's any nexus that makes an entity taxable in their country.

Effectively it means getting, say, the Bahamas to enforce the laws of, say, Germany. The result would be to reduce the incentives investors now have to shift economic activity to market-friendly jurisdictions. The sanctions include asking corporations in OECD members to impose special withholding taxes on bond holders who reside in one of the 41 countries; asking banks to do likewise with special fees to financial transactions with the "offending" countries, etc. Of course, this is not quite the same thing as demanding that tax rates across countries actually be coordinated. And too, the OECD has no enforcement power on its members. The body is largely a talking shop, and all it can do is recommend this laundry list to its members.

But, ironically, the OECD initiative may end up having farther-reaching consequences than the EU's doomed tax harmonization plan. The real culprits here are the treasury and finance ministry officials who got the OECD to become a vehicle for this type of activity, perhaps judging that doing the same thing through the EU would prove more public and controversial than a quieter OECD bid.

British Chancellor of the Exchequer Gordon Brown and his Director of the International Division of Inland Revenue Gabriel Makhlouf have been active proponents of the OECD's scheme. Indeed, Mr. Makhlouf is the Chairman of the OECD's Committee on Fiscal Affairs, which is the division of the organization responsible for the most egregious assaults against tax competition, fiscal sovereignty, and financial privacy.

Perhaps most revealing, the U.K. has apparently been bullying its territories and possessions to capitulate to the OECD. Many of the "tax havens" within the U.K. -- including the Caribbean islands of Bermuda, the Cayman Islands, Turks & Caicos and Anguilla, the Channel Islands of Jersey and Guernsey, and the Isle of Man -- complain privately that Mr. Blair's government is pressuring them to surrender their fiscal sovereignty to the OECD. And both the private sector and government officials from Bermuda and the Cayman Islands, which are among the small handful of jurisdictions that have nominally capitulated to the OECD's demands, bitterly complain that they were browbeaten by London.

Needless to say, this raises an obvious question: What is Mr. Blair's real agenda? Perhaps Mr. Blair really does oppose tax harmonization and is using his colonies as a bargaining chip to secure what he sees as a less onerous form of it. A less charitable explanation is that Mr. Blair actually favors tax harmonization, but must hide this position from voters. According to this theory, resistance to the EU's scheme is a convenient facade.

Or perhaps it is merely that Mr. Blair is not fully aware that his appointees are actively working with the OECD to force countries to open private accounts to government scrutiny. Whatever the explanation, Mr. Blair's government has become an advocate of a kind of harmonizing of tax rules. This is bad for the U.K. and bad for the world economy. It would allow politicians to create a cartel of high-tax nations. It would mean a loss of financial privacy (witness the EU's recent information-exchange agreement, a supposed "victory" engineered by Mr. Blair). And it would mean a loss of fiscal sovereignty.

Too bad voters do not know this is happening. Perhaps the time has come for Mr. Blair to choose which group is more important to him: OECD bureaucrats or British taxpayers?


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