The Truth Behind Tax Harmonization

Why You Want Tax Competition in an Unfree World

Today's comment is by Bob Bauman,
The Sovereign Society's Legal Counsel and a former Member of the United States House of Representatives from Maryland, (1973-1981).

I welcome the announcement of the Center for Freedom and Prosperity Foundation (CFP) of their upcoming, month-long tax competition education campaign. During this education drive, CFP will hold events in three of The Sovereign Society's recommended offshore jurisdictions, including Panama, Singapore, and Hong Kong. This education campaign is a crucial part of the never-ending campaign to maintain free market tax policies.

Our friend and associate, Dan Mitchell of the Cato Institute, will join CFP's Andrew Quinlan as they give presentations to emphasize value of tax competition. They will also advocate the resistance of the Organization for Economic Cooperation and Development (OECD) and European Union "tax harmonization" schemes. There will also be meetings with government officials, overseas Americans, and interested parties.

Tax competition among nations is vital. Tax competition not only offers potential tax savings to taxpayers, but it also constantly pressures high tax welfare states to keep their taxes lower, if only to compete for tax dollars and to keep taxpayers at home. Just as with any other product or service, if you live in a high tax nation (such as the U.S., U.K., France or Germany), you can move your financial activity elsewhere like Panama, Singapore or Hong Kong and save on taxes.

So it's a small wonder the tax collectors are having fits over globally mobile citizens.

The Truth Behind "Tax Harmonization"
I must hand it to the OECD and their leftist allies for their choice of a moral-sounding slogan.

Their slogan/euphemism "tax harmonization" really means they want every nation to be able to impose higher taxes, without their citizens being able to escape to lower tax jurisdictions. But that's not what they say publicly; they insist their motive is "fairness."

For many years the bureaucrats at the EU and OECD have acted at the behest of high-tax welfare states such as France and Germany, trying to curtail tax competition. In the late 1990s, both the EU and the OECD launched their assault with the baseless argument that it was "unfair" when jobs and capital migrated from high-tax nations to low-tax jurisdictions.

To stop this process, they urged various "tax harmonization" schemes, ranging from mutual agreed upon high tax rates among nations, to the collection and sharing of confidential financial data on every individual's offshore banking and investment activity.

The OECD claimed its campaign was a fight against "tax cheats" and it was not above using blackmail to gain its odious objectives. In 2000 the OECD published a "blacklist" of 41 so-called "tax havens" and outlined a series of punishments against them unless they agreed to rewrite their tax and privacy laws according to OECD orders.


The American political left has agreed with this phony argument.
President Clinton's Treasury secretary even referred to tax competition and capital mobility as the "dark side of globalization." Thanks to a concerted effort by free market groups, including The Sovereign Society, the Bush administration opposed the OECD's harmful tax competition project. Cato's Dan Mitchell observed: "This was a devastating blow to the OECD since any effort to create a global tax cartel had to fail if the world's largest economy did not participate."

With all the complaints about President Bush and his other policies, his administration has been able to thwart these "tax harmonization" advocates. Bush opposed proposals for a global tax authority run by the United Nations and also rejected the EU savings tax directive, another tax harmonization scheme that sought participation from six non-EU nations, including Switzerland and the United States.

This U.S. rejection forced the EU to scale back its proposal and its efforts to destroy financial privacy. However, it's still trying in vain to get places such as Hong Kong and Singapore to adopt such policies, which is yet another good reason for the CFP education drive.

A Global Battle Between Libertarians and Conservatives
You should understand that what is going on here is a global battle between the conservative and libertarian advocates. Libertarians want source-based (territorial) taxation and those high-tax leftists want residence-based (worldwide) taxation. The OECD, and its kooky allies, such as the so-called "Tax Justice Network," avidly support worldwide taxation that would allow governments to collect tax on any income their taxpayers earn worldwide. (That, unfortunately, is the current U.S, tax law.)

But to tax income earned outside their borders, a government's tax collection agency must be aware of the income. Hence, the supposed need to eliminate all financial privacy.

In contrast, under the territorial method of taxation, countries reserve the right to tax the income earned inside their borders, regardless of who earns the money. But they do not assert the right to tax income earned in other countries. While this may seem to be a rather obscure debate, known or understood by very few, the eventual outcome has profound implications for all of us.

BOB BAUMAN, Legal Counsel