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Jewish World Review May 7, 2001 / 14 Iyar, 5761

Amity Shlaes

Amity Shlaes
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Why tax havens provide shelter for everyone

Big countries that tax heavily want to gang up on small ones that do not. The Bush administration should not sanction this -- IN two weeks' time, the governments of the Organisation for Economic Co-operation and Development will meet in Paris to review its campaign to crack down on the world's tax havens. But the future of the project will be determined before that in Washington, when the OECD's new mystery member - the Bush administration - settles its position.

Over the weekend, European finance ministers seized the occasion of a Group of Seven industrialised countries meeting to rattle Washington's cage on the tax haven issue.

The energy of these campaigners is not surprising. If the US says "Count me out", it will remove the teeth from the anti-tax haven campaign. But the administration's call has a significance that ranges beyond the Caymans and Vanuatus of this world. It will indicate how the Bush team is likely to come out on the identity question plaguing governments of big capitalist nations: is it at heart a tax-maximiser or tax-cutter? All modern nations are to some degree both; most states cut taxes from time to time and every state needs some revenue. The choice is one of emphasis, and which emphasis better serves national welfare.

This particular story started in the late 1990s, when the rich men's club decided it was time for a tax-maximising push, or, as the document put it, to "develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases". The OECD itself does not have jurisdiction to enforce such measures but its members do. Last June they got serious and organised the publication of an OECD blacklist of 35 havens to be threatened with national economic sanctions unless they agreed, by this July, to help the rich men chase revenues.

Two motives are at work here. The first is to slow the alarming rise in global crime and money laundering. The second, more powerful one is the tax-maximising motive. High-tax regimes want to suppress havens to ensure that funds to their own coffers flow unchecked.

This is the wrong agenda. For while tax competition among countries can be chaotic and give rise to corruption, it also generates enormous benefits. These benefits accrue first to developing nations. New identities as financial centres enable even resourceless countries to build an economic base. This is a point that deserves to be considered by the OECD and by all multilateral entities, which make such a show of concern over growth rates in less developed countries.

The biggest beneficiaries of tax competition are the citizens of high-tax countries. That's because tax competition from abroad puts pressure on their leaders to reduce rates at home. A harmonised world dominated by a tax-maximising culture would relieve that pressure. It is no accident that it was a French finance minister who lobbied hardest in Washington this weekend.

As the Irish government can report after its experience with the European Union, high-tax nations such as France are always the most aggressive on such matters. That's because their leaders have the most to lose if they fail. But it is not in the interests of French citizens to restrain tax competition globally. What the French - and inhabitants of other developed nations - need most is robust growth and one of the best ways to ensure such growth is to lower domestic tax rates.

The Clinton administration weighed these matters and planted itself in the anti-competition, revenue-hunting camp. Foreign fiscal policy reflected domestic fiscal policy: the administration was raising tax rates at home. A large 1993 tax rise increased the US's relative vulnerability to Caribbean tax havens.

In contrast, most members of the Bush administration see themselves as tax-cutters and are seeking to prove it with a programme for across-the-board rate cuts. The free market hawks who serve President George W. Bush at the National Economic Council and the Council of Economic Advisers will not take the lead on the tax haven issue, for OECD matters fall in the Treasury's bailiwick. But most have, at one point or other, noted that international tax competition is good.

After all, America's competitive tax cuts of the 1980s helped ensure that the US was the global growth engine of the 1990s. In retrospect, the 1980s tax cuts proved a win-win move globally, provoking a wave of tax-cutting in countries such as the UK, which then grew apace. A noteworthy by-product of this tax-cutting focus was tax revenue maximisation: revenues derived from growth offset budget deficits.

But while Republican administrations tend to be more tax-averse than Democratic ones, they too share something of the revenue-hound personality. And the US tax system, which lays claim to the global income of US taxpayers, reinforces that personality.

So Paul O'Neill, the treasury secretary, has waffled, saying: "We have no business telling any nation what their tax rates should be. I just want to be able to collect taxes from US taxpayers." Alas, these goals may conflict.

The US decision will be important for the tax haven nations as well as for those who invest or bank there. But it will also affect American efforts to lower taxes at home. Dan Mitchell of the Heritage Foundation points out that the ultimate target of an organised and global anti-competition campaign is likely to be the world's biggest tax haven - the US itself.

The short-term damage could also be great. As the urgency of the weekend campaigners revealed, the US has the authority to set the tone of the world's economic culture. By loudly rejecting the OECD initiative, it would signal that the global philosophy must be one of tax-cutting, not tax-maximising.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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© 2001, Financial Times