Tax reform was a popular topic among politicians and members of the media in 2013. Americans suffering in the still weak economy and feeling beleaguered by recent tax hikes were no doubt disappointed that it remained just that – talk. Given the recent history of our government this should come as little surprise, but it’s nevertheless disappointing that they’ve thus far proven incapable of amending our destructive tax code and instituting much needed pro-growth reforms.
At the same time as reform has stalled domestically, unelected international bureaucrats have made significant strides in their own quest to rewrite global tax rules. The bad news is that their desired policies will inevitably lead to higher taxes, reduced economic growth, bigger governments and lower prosperity throughout the world.
In a recent op-ed for the Huffington Post, Organization for Economic Cooperation and Development (OECD) tax policy head Pascal Saint-Amans declared it a “watershed moment for international tax policy.” He asserts a need to “even the playing field and ensure predictability and fairness.” Sounds benign, perhaps, but his words are belied by the radical agenda and anti-American policies of his organization. Specifically, they seek to weed out instances of “double non-taxation,” which is tax collector-speak for keeping jurisdictions from deciding on their own what kind of taxes they wish to impose or not, whether they be on businesses or individuals. Their further desire for new rules establishing a global system of automatic exchange of taxpayer information between nations is a major threat to tax competition, economic prosperity, and taxpayer privacy.
For more than fifteen years the OECD has pursued an agenda aimed at limiting tax competition between nations, which occurs when jurisdictions compete for jobs and investment by offering better tax systems and lower rates than other nations. Competition benefits taxpayers by putting pressure on governments to – at the very least – not raise tax rates so high as to cause taxpayers and businesses to flee their jurisdiction. This is why economists tend to be among the strongest supporters of competition between different jurisdictions. To put it simply, tax competition encourages nations to adopt good tax policy, even when politicians would prefer to adopt class-warfare policies that can appeal to poorly informed voters.
Automatic exchange of taxpayer information threatens the foundations of tax competition by making it possible for all nations to tax income no matter where it is earned, a destructive practice currently that, among developed nations, is only used by the United States. Politicians in other nations are just as greedy as those in the U.S., but many lack the same means as the IRS to track their citizens all over the globe. By enlisting other tax agencies to help spy on their citizens throughout the world, this new system would make it much easier for the rest of the world’s governments to also adopt the practice. Making it harder for citizens to take advantage of jurisdictions with better tax rates through widespread adoption of worldwide taxation would lessen incentives on politicians to adopt competitive rates. The inevitable result is higher taxes and a weaker global economy.
Though the U.S. has lost its competitive edge in recent years – falling from 5th overall in 2007 in the Fraser Institute’s Economic Freedom of the World Report to 17th in 2011, their most recent year analyzed – it nevertheless remains the top destination for foreign indirect investment. There is more than $25 trillion in foreign indirect investment in the U.S. today, making the U.S. the world’s largest so-called tax haven. The steady flow of investment dollars into the U.S. helps provide capital to serve as the lifeblood of the economy, boosting employment and prosperity.
Yet due to the efforts of international bureaucrats and tax collectors, tax competition and all its benefits for the United States may soon come to an end.
Last year the G20 announced that it was committed to presenting “a new single global standard for automatic exchange of information” by 2014. Once officially unveiled and eventually implemented, this standard will require nations to transmit bulk taxpayer data to foreign governments, even if that means collecting information for which the host nation has no need, or sending it to corrupt or untrustworthy regimes. Unlike the current standard of information exchange upon request, no evidence of wrongdoing is required from the destination government. It is simply presumed that they have a right to all information regarding anyone who might owe them taxes!
The new standard raises serious concerns regarding data integrity, the potential for identity theft or misuse of information, and human rights abuses. American citizens who invest overseas will likewise see their information pass through multiple hands before reaching the IRS, which has itself proven an untrustworthy steward of private taxpayer data. Non-Americans will likely have it much worse, as the likes of Venezuela, Egypt and other oppressive regimes are more easily able to comb through the financial records of their citizens. And it would also mean significant costs imposed on the low-tax jurisdictions forced into serving as their deputy tax collectors.
Global tax bureaucrats have long seen the automatic exchange of taxpayer information between governments as a sort of Holy Grail – strongly desired by tax collectors but perpetually out of reach politically. They know that eliminating tax competition and keeping businesses and individuals captive will make it easier to impose exorbitant tax rates. Facing massive debts from their own profligate spending, they are more desperate than ever to divert more money from the productive sector of the economy to government coffers. And thanks to the growing success of political efforts to scapegoat certain taxpayers for the ill effects of excessive taxing and spending, they see an opportunity to establish a radical new global tax regime.
The rhetoric used to advance the agenda of global tax bureaucrats is designed to both inflame popular passions and obscure the true purpose of reforms. Contrary to the claims of Mr. Saint-Amans, without tax competition there is no playing field at all, much less a level one. The new push by bureaucrats at the OECD and the G20 for global automatic information exchange is intended instead to rig the game in favor of politicians – and against taxpayers.
Milton Friedman argued that, “Competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods and services they offer for sale and the prices at which they offer them.”
We should no more accept ending tax competition in order to “even the playing field” than we would ending market competition through price controls and central planning.
Like all bureaucracies, the OECD is ultimately composed of self-interested members. They are currently emboldened by global economic circumstances – and the Obama administration’s sympathetic views to high taxes and big government – to more directly advance an agenda that is against fundamental American interests and would cripple the U.S. economy.
But they can be stopped. American taxpayers bear the largest burden in funding the (ironically) tax-free salaries of OECD bureaucrats. If Congress would stand up and join the fight by taking an active role in protecting the interests of American taxpayers by ending funding for organizations working against U.S. interest, the OECD will rethink its latest assault on tax competition.