Another Attack on Tax Competition

As my good friends at the Center for Freedom and Prosperity have been explaining for many years now, an international campaign is trying to take away a big chunk of our individual and economic freedom. Spearheaded by big governments and statist front groups like the OECD, the campaign aims to make it impossible for you and me to choose where we want to live, work, invest and pay our taxes. Technically, the coalition behind the campaign does not want to stop you from moving across national borders, nor do they want to stop you from moving your money across national borders; their goal is to make sure that you cannot do so and keep more of your own money in the bargain.

In other words, the goal behind the campaign is to end tax competition. This would be a monumental loss to the free world, as Cato Institute senior fellow Dan Mitchell explains very well in these articles:

Tax Havens and Tax Competition Are Crucial If We Want to Restrain Predatory Government

Explaining to the Kleptocrats on Capitol Hill that Tax Havens Should Be Emulated, Not Persecuted

Debating Tax Havens

It is easy to under-estimate the role that tax competition plays in preserving economic freedom. When there are no geographic restrictions of how you dispose of your money, governments are forced to behave just like any sellers of products: they have to give their buyers (taxpayers) a good reason why the buyers (taxpayers) should choose to pay their taxes to one government over another.

Behind the notion of tax competition lies a well-defined, solid natural-rights based principle of property rights. Excellently explained by Robert Nozick in his perennially relevant Anarchy, State and Utopia, this principle says – very briefly – that whatever you earn through work or trade that does not violate the life, liberty and property of another person, is yours and yours only. No one has the right to your property anymore than they have a right to your time, or your body.

Originally a Lockean idea, this property-rights principle has a long history through both the Enlightenment and modern libertarian theory. It has shaped Capitalism and the free market system, thus being an indispensable component in the social and economic success of the Western world.

The activists behind the statist campaign against tax competition do not see things quite the same way. Their view of property rights is a world away from what helped build our modern-day prosperous societies. At best, the statist notion of property is that people have the right to what they earn up until they have satisfied a basic basket of “needs”. This usually means that once you have put food on the table, paid rent for a standard apartment, bought the basic clothes you and your kids need, and paid your monthly mass transit pass to get to work, you have no right to the rest of your income. The fact that governments in today’s Europe do not confiscate everything above that level is a good indication of just how strongly the principles of free-market economics have worked their way into the Western culture.

That does not mean the statists won’t keep trying. I have written repeatedly about the disastrous, purely confiscatory French 75-percent hate tax. Another example of blatant disrespect for property rights is the Cyprus Bank Heist, where the Cypriot government confiscated, Soviet style, large amounts of people’s private bank deposits.

A third example of the ongoing statist attack on private property rights is the campaign against tax competition. That campaign is heating up, as is evident from a recent article in Euractiv.com:

Developing countries will not have access to a new system of automatic exchange of tax information agreed in St Petersburg by the world leaders over the weekend due to their lack of administrative efficiency, a decision that was not welcomed by many development experts. After two days of tense meetings, which focused largely on the Syrian crisis, world leaders agreed that the automatic exchange of fiscal information must become an international standard.

In this particular case the attack on tax competition is tied to the notorious inability of developing countries to maintain a stable tax administration. A push to expand the sharing of private citizens’ information across national borders is motivated with an allegedly noble ambition to improve government funding in developing countries. But the two issues have nothing to do with one another. The drainage of money from developing countries is often driven by pure corruption and the theft of public funds by dictators, their cronies and their family members. (Jean-Bedel Bokassa is a notorious example; Yasser Arafat another.) But the fact that corruption is keeping some developing countries in a deplorable state of poverty and tyranny is no reason for governments in Europe and North America to expand general information sharing on individuals and their financial whereabouts.

It is a sad but crucially important fact that if the campaign against tax competition eventually wins, there is little doubt that we would lose our freedom to invest wherever we want. More than that, we may even lose our freedom to move our money with us as we migrate from one country to another. it would become illegal for anyone to invest anywhere except in the country where he or she lives. At that point government has effectively monopolized itself and can set whatever tax rates it desires. French high-income earners can still escape the confiscatory hate tax, but if champions of economic freedom lose to the anti-tax competition crowd, there is a very high probability that governments in Europe – and the U.S. government through elaborations of FATCA – would completely lock in your money under their jurisdiction.

Euractiv again:

The 19 member states of the international organisation and the EU expect the start of automatic exchange of fiscal information to be operational at the end of 2015, according to the summit’s final declaration. The G20 also accepted the Organisation for Economic Co-operation and Development’s proposal against the manipulation of transfer prices of multinational enterprises, a technique that consists in changing the selling or buying prices of the same enterprise in order to transfer the benefits to a tax haven. “Unfortunately this decision doesn’t concern developing countries, who are the first victims of tax evasion,” says Mathilde de Dupré from CCFD-Terre Solidaire, a development campaign group. Global Financial Integrity, another NGO, estimates that developing countries lose around $100 billion a year due to the manipulation of transfer prices of enterprises. “They lose three times more money that they gain with development aid”, wrote Melanie Ward form Action.

This is another twist to blur the line between lawful, entirely moral tax planning and unlawful, entirely corrupt stealing of public funds that is so pervasive in many developing countries. It is exceptionally deceptive to argue that because there is very weak rule of law in some countries in the Third World, we need to make it harder for law-abiding citizens in Europe and North America to invest their money based on centuries-old principles of private property.

As for the criticism of transfer pricing, the hunt for more tax revenues from internationally active corporations is having a depressing effect on international trade. This was well demonstrated by Mansori and Weichenrieder already in 1999. In other words, by trying to squeeze more money out of a given tax base, governments are shrinking that same tax base. The end result may very well be a net loss of tax revenue.

The campaign against tax competition has been going on for well over a decade now. There is a lot more at stake than just the ability of wealthy investors to allocate their capital as they please. A government with full tax monopoly is a government with no restraints on either side of its budget.