The Uncompetitive Effects of Tax Harmonization

By Veronique de Rugy

May 26, 2016 6 min read

During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition.

For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. The global bureaucrats want to rewrite the rules of international commerce to protect uncompetitive nations, such as France, from the consequences of reckless fiscal policy.

The bureaucracies, which are controlled by high-tax nations, don't like it when companies, investors and entrepreneurs invest their capital in low-tax nations.

They have a point. Tax competition means that taxpayers can shop around for the best place to invest money based on a variety of factors, including the tax treatment of their investment. As a result, capital will most likely flow out of high-tax nations to go to a low-tax environment. And that's a good thing.

As Nobel laureate Gary Becker wrote, "competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations."

It was the friendly but fierce tax competition between then-Prime Minister Margaret Thatcher in the United Kingdom and President Ronald Reagan in the United States that led to significant reductions in top marginal income tax rates in both countries, as well as a cut to the corporate rate. Arguably, the cuts unleashed the economic growth of the '90s and led other countries to cut their taxes, too. This is why, as another Nobel laureate, James Buchanan, said, "tax competition among separate units ... is an objective to be sought in its own right."

In most cases, investing in low-tax nations isn't illegal; the problem for high-tax nations and those at the World Bank is that it's getting in the way of maximum tax extractions for countries such as France. They also claim that their fight against tax competition is a fight against tax evasion. However — as we have seen after the release of the Panama Papers, which were stolen from Panama-based firms — for the most part, taxpayers are pretty honest. Politicians, not so much.

Now, some people do evade taxes by investing their assets in low-tax countries. However, that's no reason to force low-tax countries to act as deputy tax collectors. Investors have committed no crime in the country where the money is invested, and low-tax nations shouldn't have to enforce other countries' tax laws unless they sign a tax treaty for that purpose. Second, a more effective way to fight evasion would be for high-tax nations to implement a reasonable and non-punitive tax code that finances a modest-sized, non-corrupt government. This would instantly improve tax compliance.

Translation: If France is upset about tax evasion, it should cut the size of its government and reform its confiscatory tax regime. Forcing financial institutions to automatically share the private information of all their foreign clients won't solve anything.

While international bureaucrats enjoy tax-free salaries, they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development's latest attempt to impose a one-size-fits-all system of "automatic information exchange" that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.

This is bad policy regardless, but just imagine what it would mean for the United States to exchange sensitive financial information — such as balances, interest, dividends and proceeds from sales of financial assets — about American citizens or corporations with countries that have systemic problems with corruption or aren't so friendly to us.

Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it's currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah. But the bureaucrats won't give up. They are true believers in tax harmonization.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. To find out more about Veronique de Rugy and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

Photo credit: Yann Caradec

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