Articles

Imperial Overreach - Disarm The Global Tax Police: It's No Crime To Shelter Cash In Competitive Tax Havens

Friday, May 11, 2001
by Marc J. Lane

Posted online at ChicagoBusiness.com on May 11, 2001.

The Organization for Economic Cooperation and Development (OECD) has called on the United States and its 29 other members, among the wealthiest and highest taxed nations in the world, to combat what it calls "harmful tax competition."

This rich men's club sees that capital is moving offshore at a quicksilver pace, and that low-tax countries are costing the cartel's mostly European members billions of dollars in tax revenues every year.

The OECD has zeroed in on 41 "tax havens." These countries, boasting favorable tax climates and financial privacy laws, attract entrepreneurs and investors looking for higher after-tax returns. The OECD wants to punish tax havens and those who lawfully use them to escape tax in their countries of residence.

The OECD claims to be after tax cheats. And it seeks to impose tough trade sanctions on any country which refuses to repeal its financial privacy laws and to give other governments unlimited access to personal financial information.

So, if a French vice-president of a successful software development company parks money in the Cayman Islands, with her eventual retirement in mind, her bank would have no choice but to report her holdings to the French tax collector.

Outlawing financial privacy, it is argued, is the best way to fight tax evasion. And when nations collect all the tax revenues they're entitled to, everyone's tax obligations will inevitably shrink.

But the OECD would also "harmonize" taxes. It would require tax havens to withhold taxes on income earned by foreigners at their home country's tax rates. And it would require low-tax nations to adopt prescribed tax and fiscal policies.

The OECD couldn't be more misguided.

There is simply no moral justification for going along with modern-day Machiavellis who would fight tax evasion by suspending civil liberties. And the OECD's meddling, let alone its sanctions, would hit especially hard the fragile economies of many developing countries, including some of our closest island neighbors.

The more principled — and more effective — strategy is for wealthy countries to cut tax rates, reform antiquated tax systems, and thereby reduce the incentive to hide assets and avoid paying taxes.

Tax competition should be applauded, not attacked. It makes governments more accountable to their citizens, it puts pressure on politicians to reduce tax rates at home, and it lets people keep more of what they earn. It also increases productivity, savings and investment.

Last month, leaders from 34 North and South American and Caribbean countries met in Quebec City, at their Summit of the Americas, and committed to create the world's largest free trade zone. President Bush, making his first appearance at an international summit, urged his fellow leaders to work toward building "a fully democratic hemisphere, bound by good will and free trade."

So it isn't surprising that the President seems to be backing away from the Clinton Administration's support of trade sanctions to force offshore financial centers to toe the line. After all, subjecting low-tax countries to a heavy-handed financial blockade would surely dry up the free flow of capital among nations.

Without U.S. support, the OECD's initiative appears doomed. And imperial overreach will have given way to the free will of governments which promote sound tax policy, financial privacy and fiscal sovereignty.


Marc J. Lane ([email protected]) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law.

Copyright © 2001 by Crain Communications Inc.


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