There has been a lot of noise and some heat raised over the issue of tax laundering and gnashing of political teeth in raves against tax havens. While much of the focus of publicity will be on stopping money laundering associated with criminal activity, the subtext of it all will be to restrain tax competition. Despite the initial aim to limit "harmful tax competition," a repackaging spin puts the purpose as a means to increased regulatory rigor and enhanced fiscal transparency.
Last month, European finance ministers raised the issue of tax haven status during the most recent Group of Seven (G7) meeting. In the coming weeks,members of the Organization for Economic Cooperation and Development (OECD),a group that includes the 30 largest industrialized countries, are to meeting Paris to consolidate plans for a crackdown on so-called tax havens. One sideshow will be attacks on the Bush administration for withdrawing its support to yet another (flawed) international protocol.
As it is, in June of last year, the OECD applied the "stick" when it published a blacklist of 35 tax havens and threatened potential national economic sanctions if they failed to agree to share fiscal information by this July. Now a "carrot" is on offer to tax havens to encourage them to improve financial transparency, cooperate with overseas tax authorities and eliminate laws that provide advantages to international investors.
Although the OECD has no jurisdiction or means to enforce such measures, its constituent members can apply a variety of pressures. At least four Caribbean tax havens, all British overseas territories, are expected to agree to cooperate with an international initiative to limit tax evasion and avoidance in offshore financial centers. Their acts are almost certain to be an attempt to avoid economic sanctions. As it turns out, such sanctions in response to non-compliance might actually be in contravention of WTO rules.These moves follow a set of initiatives undertaken in the late 1990s under the auspices of the OECD. Whatever the ostensible purpose, such actions offer protections of the tax bases of countries with high-tax regimes. And they undermine sovereignty. In answer to the complaints against weakening the sovereign rights of governments to determine their own tax rates and systems, the OECD insists that it is only encouraging good tax practices.
Tax-haven threat
Since many OECD members maintain high-tax policies, it is not surprising that they feel threatened by tax havens. Therefore, much of the finger pointing by them should be taken with a grain of salt. However, before the protests to this disclaimer become too audible, consider the following. It is not the small offshore financial centers that are the principal recipients of dirty money. In fact, much more money laundering is being undertaken in London, Frankfurt and New York.
Impeding money transfers by gun runners and drug barons is one thing.However, denouncing differences in tax regimes as "harmful" competition is quite another kettle of fish that ignores the substantial benefits brought about by competitive differences.
These benefits do not accrue only to citizens of high-tax countries. Developing countries can enjoy large gains by developing domestic financial centers that attract offshore capital. In all countries, the presence of tax competition puts political leaders under pressure to consider carefully the local mix of taxes and services. This enhances democracy and can encourage increased efficiency by government agencies. For those countries worried about revenue losses, there is hope. Recent history in the US during the 1980s and 1990s indicates that a good way to capture large additional amounts of tax revenue is to attain high rates of economic growth. And one of the best ways to enjoy high growth is to lower domestic tax rates.
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