Class Warfare in Berlin

Posted: Jun 17, 2004 12:00 AM

BERLIN ? The US government wastes a lot of money, but few items in the federal budget do as much damage as the $50 million that American taxpayers send each year to the Organization for Economic Cooperation and Development (OECD).  This Paris-based bureaucracy is helping pave the way for higher taxes around the world through a little-known, yet insidious project to stamp out ?harmful tax competition.?

Representing mostly high-tax European nations, the OECD thinks it is unfair when jobs and investment move from high-tax to low-tax nations.  The bureaucrats are particularly upset that so-called tax havens provide a refuge for oppressed taxpayers from welfare states like France, Germany, and Sweden.  As part of its anti-tax competition project, the OECD met in Berlin for a two-day conference during the first week of this month, hoping to bully tax havens into helping high-tax nations track and tax flight capital.

Using various threats, the OECD is pushing low-tax countries into providing information about nonresident investors to foreign tax authorities, meaning that any benefit of investing elsewhere disappears once European tax collectors can impose taxes on money invested outside their borders.

Acting as the Gambino family of the tax world, the OECD has pressured places like Anguilla and Panama to sign ?commitment letters? pledging to participate in something called ?information exchange? ? an odd term for a one-way flow of data from ?tax havens? to high-tax governments.

The OECD is having a problem, though, since it is throwing stones from inside a glass house. The term ?tax haven? conjures up images of small islands in the middle of a tropical paradise, but the OECD?s definition of one clearly covers many of its own member nations, including Switzerland, Luxembourg, and yes, the United States. 

The United States is actually the world?s biggest ?tax haven??passive foreign investments here generally are not taxed, and investors from other nations easily can structure their portfolios so that foreign tax collectors can?t discover assets invested in the U.S.?which makes it all the more ironic that one-fourth of the OECD?s annual $200 million budget comes U.S. taxpayers.

The jurisdictions being persecuted by the OECD insist that there should be a ?level playing field,? meaning that big tax havens like the US and Switzerland agree to the same bad policies that the OECD is trying to impose on little nations and territories.  As such, the ?commitment letters? they sent to the OECD are predicated on all nations agreeing to the same misguided rules.

The OECD?s effort is also complicated by a rebel band of free market activists. Led by Dan Mitchell of the Heritage Foundation and Andy Quinlan of the Center for Freedom and Prosperity, these two policy wonks are fighting the combined might of the Treasury Departments and Finance Ministries of the industrialized world.  These free marketeers warn that the OECD?s efforts to eliminate ?harmful tax practices? will make it easier for governments to raise tax rates and increase the burden of government.

That?s not a partisan spin: that?s how the OECD itself views the issue. Back in 1998, when the OECD began its fixation on ?harmful tax competition,? it released a paper bemoaning the impact low-tax nations have on European welfare states.  Tax competition, the paper complained, was ?re-shaping the desired level and mix of taxes and public spending.?  In other words, as it also noted, tax competition ?may hamper? the achievement of redistributive goals? and ?reduce global welfare.? 

The initial conflicts at the Berlin conference indicate the OECD is having a hard time dealing with these two problems.  In order to enact a stepping stone to getting worldwide information ?exchanges,? the OECD had hoped that a European Union (EU) scheme known as the savings tax directive would solve their problem.

As originally designed, the measure would create a sort of universal information exchange, whereby EU nations would be able to identify?and tax?all flight capital, completely undermining any tax competition among European nations.  But that effort has been floundering.  The US refused to participate and jurisdictions such as Switzerland and Liechtenstein are holding firm. The EU has given up on the original scheme and is telling nations like Luxembourg and Switzerland that they can maintain their financial privacy laws.  In other words, there will not be a ?level playing field.?

During the Clinton Administration, the U.S. supported the OECD?s tax harmonization campaign.  But the Bush Administration, while not perfect, has been much more sympathetic to tax competition ? largely as a result of the relentless efforts of groups like Heritage and the Center for Freedom and Prosperity. 

White House economists understand that proposals such as information exchange will undermine America?s competitiveness and hinder the global shift to lower tax rates and fundamental tax reform.  Treasury Department officials, however, tend to side with the French and the Germans, and they are the ones participating in the Berlin meeting.

Interestingly, the Berlin conference generated some controversy even before it officially began. OECD officials on Wednesday told low-tax jurisdictions that the United States supported the EU savings tax directive ? even though the Chairman of the President?s National Economic Council and the Chairman of the President?s Council of Economic Advisors both announced US opposition back in 2002.

Mitchell confirmed with White House sources that the US position has not changed, leading participants to wonder whether the OECD was ?mistaken? or simply lying.

In either case, so-called tax havens now have yet another reason to believe that they are fighting a dishonest process designed to hinder their ability to be effective competitors in the global economy.  The first session of the Berlin conference is underway, but the OECD has not allowed the media to observe the proceedings.

Alas, many of the OECD participants gathered for, um, social purposes after the event was finished.  Sadly, it is only on reporting on those conversations?in the follow-up to this piece?that will allow U.S. taxpayers to understand how their $50 million is being spent.

Editor?s note: Part II of this report will examine whether the OECD has made ?progress? in its effort to prop up Europe?s high-tax welfare states.