BrianGarst.com

The onset of globalisation in the 1980s triggered a period of unprecedented global economic growth. Expanding markets matched new consumers with producers to the benefit of both. Such positive developments are not just measured with stat sheets and charts, but with real advances in human welfare. Even the smallest sustained increase in the rate of economic growth quickly compounds to produce visible benefits for people across the globe. This cuts both ways, however, as any threat to future growth is also a threat to the welfare of billions of people.

A less appreciated benefit of globalisation has been the increased ability of capital, taxpayers and citizens to flee poorly governed or overtaxed jurisdictions for more attractive alternatives. Escaping from a jurisdiction with excessive taxes or bad regulations not only provides a real boost in wealth for the individual or business that relocates, but it also pressures bad governments to adopt policies more conducive to economic growth, while simultaneously rewarding governments with good policy.

This process is called tax competition and it almost certainly is partly responsible for the dramatic reduction in tax rates around the world between 1980 and 2008. Triggered by the Thatcher and Reagan tax cuts, nations across the globe lowered top personal income tax rates from an average of more than 67 per cent to less than 42 per cent. Corporate tax rates also have plummeted during that time period, dropping from an average of 48 per cent to 24 per cent, with perhaps Ireland deserving some of the credit. There has also been an explosion in the number of jurisdictions with flat tax regimes, and we have also seen big reductions in the double taxation of dividends and capital gains, as well as the reduction or elimination of death taxes and wealth taxes.

To be blunt, the net result of this tax competition is that politicians have been forced to restrain their appetites for high tax rates. This has been very good news for the productive sector of the economy, which presumably helps explain why the global economy recovered from the doldrums and malaise of the 1970s.

Politicians naturally dislike any restrictions on the ability to tax, particularly where it limits vote buying. It is little surprise, then, that international scheming to undo globalisation’s impact on capital and taxpayer mobility began almost as soon as its effects became apparent. Even worse, after decades of attacks, intentional bureaucrats are now making significant strides toward undoing the gains taxpayers have made over recent decades.

Push Back Through the OECD

Acting primarily through the Organisation for Economic Cooperation and Development (OECD), politicians from high tax nations began pushing even before the end of the century for policies designed to prevent the free flow of capital and citizens. This effort became somewhat visible in 1998 with release of an OECD report entitled, “Harmful Tax Competition: An Emerging Global Issue.”

So-called ‘tax havens’ received considerable attention in the report, but the OECD’s language made clear that any type of tax competition was undesirable, regardless of whether it could be classified as tax evasion, tax avoidance, or tax planning. The OECD and its masters at various finance ministries and treasury departments around the world, recognised that limiting the ability of taxpayers to shift economic activity to low-tax jurisdictions was critical if they wanted to reduce the pressure on high tax nations to lower their own rates.

The United States at the time was not yet on board with the agenda of other OECD members. In fact, as a primary beneficiary of tax competition, the US was a leader in the backlash that erupted, especially following the release of another report in 2000 that created a blacklist of supposed tax havens. Hundreds of members of Congress stood up for tax competition and threatened the OECD with a loss of funding, while the Treasury Department in Washington also expressed some disdain for the project. The net result of all this opposition was that the OECD campaign was stymied.

But it was only a temporary victory for tax payers. Tax collectors would continue targeting tax competition, but they became less open and honest about their true goals.

The organisation’s new public focus became the elimination of tax evasion. The OECD created the Global Forum on Transparency and Exchange of Information for Tax Purposes ostensibly for this purpose, but it has revealed a larger agenda on several occasions.

For instance, at the Global Forum’s 2009 meeting in Mexico City, organisers covertly inserted into their draft “summary of outcomes” a bombshell assertion that legal tax planning and avoidance techniques – such as relocating to low-tax jurisdictions to take advantage of better rates – should be considered to be “harmful tax practices” on par with illegal evasion. The entire operation, in other words, was exposed as a bait and switch. Nations were brought in under the illusion of fighting tax evasion, but the real goal was to eliminate any ability of capability to move for tax reasons.

Once again the tax collectors were rebuffed when attendees revolted, with China surprisingly playing a leading role in torpedoing the effort.

That also was only a temporary victory. The OECD eventually succeeded through threats of blacklisting and other forms of intimidation in forcing low-tax jurisdictions to play their game. Finally, an elaborate system of peer reviews was established to grade supposedly wayward nations on how well they complied with demands to alter their tax structures to the benefit of high tax nations.

And comply they did. The OECD dictated that jurisdictions sign a certain number of Tax Information Exchange Agreements (TIEAs) or face repercussions. Low-tax jurisdictions dutifully jumped through the hoops and signed the agreements. But suddenly now it is not enough. Having tasted a few smaller victories, the OECD has once again moved the goal posts and seems determined to cripple tax competition once and for all.

A Turning Point in the Fight

Emboldened by the success of the Global Forum, tax collectors saw in the global financial crisis and its political aftermath a golden opportunity. Politicians looking at stagnant tax revenues due to underperforming economies are desperate to fill funding gaps, and they lack the political courage to control spending. The easy alternative is to tell themselves that huge pots of gold can be found just by chasing a few evasive rainbows.

The campaign to expand the burden of government got a big boost with the Obama Administration giving strong support for anti-tax competition proposals. The dramatic, post-crisis shift in posture by the United States had an unfortunate impact. Rather than being defenders of tax competition, the politicians in Washington instead swung a wrecking ball at the international financial community in the form of the Foreign Account Tax Compliance Act (FATCA). This unpopular bit of fiscal imperialism provided momentum for the latest frenzied push to completely upend the global financial order. The OECD admits using FATCA’s upheaval as an opportunity to press its radical agenda, citing FATCA as “a catalyst for the move towards automatic exchange of information in a multilateral context.”

With the ink barely dry on the numerous tax agreements implementing the OECD’s previously desired standard for sharing information upon request, the organisation decided that more was needed – much more. Reflecting the tax-hungry nature of its member governments, the OECD is now effectively saying that all the work done to meet its demands to this point have been for naught. Instead, jurisdictions are expected to sign up for full, automatic information sharing. Or else.

The OECD’s recently released Standard for Automatic Exchange of Financial Information in Tax Matters amounts to the dropping of a nuclear bomb on financial institutions and low-tax jurisdictions for the ostensible purpose of catching a few tax cheats. It may even stop a bit of tax evasion, but not without doing a tremendous amount of collateral damage.

Financial privacy is being obliterated. The US in implementing FATCA and the OECD in its new reporting standard have made clear that the idea of personal privacy rights when it comes to finances are now passé. What you have, where you have it, and what you do with it are presumptively the government’s business. Anyone who isn’t troubled by this reality has not spent much time studying the numerous historical examples of governmental abuse and violation of fundamental human rights.

The End Game

Beyond its destruction of personal privacy, the OECD’s new standard represents the culmination of the organisation’s war on tax competition. Having successfully convinced the world of the dire threat posed by a few wayward tax dollars not reaching the hands of greedy politicians, they have now perfectly positioned themselves to control the global flow of capital and taxpayers. Far from a simple tool to combat tax evasion, that power represents the ability to turn back the clock on globalisation.

Although the United States is the only nation that currently taxes income earned beyond its borders, it is only a lack of capability, rather than desire, holding back other nations from doing the same. Once a global financial surveillance system is established, that will no longer be the case. OECD tax policy head Pascal Saint-Amans calls this move a “watershed moment for international tax policy.” Whereas globalisation was a watershed moment for taxpayers, Monsieur Saint-Amans and other international bureaucrats are happy that governments will be the big winners.

A world in which politicians can follow taxpayers and capital all over the globe is a world in which tax competition loses its power to benefit taxpayers and the economy. There is no escape from onerous tax rates if those rates can simply follow taxpayers wherever they go. And if taxpayers cannot escape bad tax policy, politicians have little incentive for pro-growth reforms.

At every step in the process, the OECD has relied on the acquiescence of low-tax jurisdictions, financial institutions, and international businesses, along with the apathy of global taxpayers, in order to propel their agenda. It need not be this way. Eliminating tax competition benefits a bureaucratic elite few at the expense of the taxpaying many. It is time for the many to say that enough is enough.

OECD tax competition