Tax Competition: Not At All A Bad Thing
(Opportunities for International Financial Centres
in the 21st
Century)
Mason Gaffney
[A lecture delivered July 16, 1999, at a seminar
sponsored by The Bahamas Bar Association and the Organization of
Commonwealth Caribbean Bar Associations]
I am concerned, and I surmise you are, that the OECD is
campaigning to tax mobile capital wherever it may seek shelter.
It tells us that international tax competitition is harmful,
and should be stamped out. Is this just ceremonial, like so much
politics? I fear not. It is more like a smart bomb, with
your name on it. When a powerful international political
organization officially brands you as harmful, look out.
The arts of Power and its
minions are the same in all countries and in all ages. It marks its
victim; denounces it; and excites the public odium and the public
hatred, to conceal its own abuses andencroachments. -- Henry
Clay, U.S. Senate, 14 March 1834.
One of those is slander. Some Administrators become all too handy
at violating the Ninth Commandment, "Thou shalt not bear false
witness against thy neighbor," a sin so damaging to the social
fabric that Moses ranked it right up there with the Sixth, "Thou
shalt not murder." Defamation anticipates oppression,
conditioning suggestible minds to accept it.
The OECD tentacles extend deep into the scholarly world, and get
quick action. The National Tax Journal, a sedate scholarly
outlet that should be detached from political pressures, picked up
the theme instantly. Joann Weiner of the U.S. Treasury's
Office of Tax Analysis (OTA), and Hugh Ault of the OECD itself, and
the Boston College Law School, rushed into print in the September,
1998, issue in a slavish rehash and endorlsement of the OECD report.
The journal review process is ordinarily so glacial that you could
discover the meaning of life and take 5 years to get published, but
Weiner and Ault picked up a Report published April 27, pondered,
consulted, wrote their manuscript, had it peer-reviewed with
breathtaking speed and jumped a long queue: the Journal published it
in September, four months after the OECD Report itself.
More recently, the same Journal published two articles, one of
unprecedented length (37 pages), on international tax competition.
These are more in the literature-reviewing, hemming-and-hawing
style, but John D. Wilson, the major author, concludes: "This
assessment suggests a role for intervention by a central authority
... " - a strong avowal for an academic more disposed to issue
caveats than to affirm.
There are quite a few academics who, like myself, do not agree
that what you do is harmful to the world. We do not teach our
students you are sneaky free riders. (We may not think you are
plaster saints, either, but that is another topic for another day,
and we're not perfect, either.)
I. Precedents
So the OECD tells us international tax competition is harmful. You
may find their own words in the Report of their Committee on Fiscal
Affairs, Harmful Tax Competition, an Emerging Global Issue, which
the OECD Council approved on April 9, 1998, and issued soon
thereafter as a "Recommendation to the Governments of Member
Countries." Anyone who can stay awake through its deadly prose
will recognize a very live assault on your profession, and an
uncritical embrace of personal income taxation at high rates,
imposeworldwide. You may find a readable summary in my response of
August, 1998, "International Tax Competition: Harmful or
Beneficial?"
The OECD ideal is tax among nations. This has a familiar ring to
any economist who follows fashions in the ideologies of public
finance. As one precedent, closely analogous, in 1969 or so,
California pundits told us that interurban tax competition was
harmful, because it kept some cities from raising their sales taxes.
To solve this problem, they invoked the doctrine of "uniformity":
if only every city raised the sales tax, no retailer or buyer could
escape it by fleeing to a city without one. Accordingly,
policymakers forced every city to impose a sales tax, piggybacking
on the existing state sales tax. The State collects it, and returns
it to each municipality of origin. A few years later California cut
its local property tax rates to 1/3 of their former level, and
virtually froze assessed values (the tax base). It replaced the
funds with state subventions, financed by raising state sales and
income taxes, taxes on upward mobility, and subjecting its
once-independent cities, counties and schools to a high degree of
state control.
A uniform sales tax is NOT uniform in its effects. Retailers in
rich locations can bear it and survive; those in marginal locations
cannot. It drives a tax wedge between buyers and sellers, which only
the rich locations have the cushion to absorb. The result is
especially to penalize poorer neighborhoods and regions and
communities.
There are unintended consequences. Interurban competition
survives, but takes the new form of competing to attract retail
trade (and hence sales tax revenues) by overzoning for it, and by
subsidizing new retail outlets in various ways. Those best able to
subsidize retailers are the cities already richer, adding to the
bias against marginal locations. A byproduct of that is a retail
vacancy rate approaching 33%, an enormous private and social cost.
Every empty store entails a wasted lot underneath it, and vast
unused parking spaces around it, in a ratio of about 5 s.f. of
parking to one s.f. of floor space.
II. Internal Contradictions of the OECD
Such centralized control is also the aim of the OECD campaign
against tax competition. It is contradictory for those who preach
for competition in the private sector -- what they call liberalization
-- to call for suppressing competition among governments, but that
is what they are doing, in increasingly strident terms, as quoted
below.
It is also incongruous for the OECD to fault tax havens for
distorting world investment patterns when their own internal systems
distort investment on a grand scale. For example, their Report
(p.31) brands a nation as harmful if it lets a person deduct
costs when the corresponding income is not taxed. That sounds
reasonable, and yet that is the standard treatment of much real
estate income in the U.S.A., the largest member of the OECD. The
costs of ownership - interest and property taxes - are fully
deductible. The cash flow is offset by overdepreciation until the
property may be sold. The resulting nominal gain then gets special
treatment as a capital gain, often resulting in no tax at
all, and at most in a lower tax rate, at a deferred date. If it is
an owner-occupied residence with curtilage and pleasance, or a
private pleasure-ground, however vastly spreading and preemptive,
there is not even a nominal tax on the imputed income. A large share
of the land in affluent nations today is in modern country manors,
whose popularity rises in step with the value of their freedom from
income taxation, i.e. the tax rate on cash income. Thus, OECD
members might review Scripture: "First pick the beam from thine
own eye; then thou may see better to pick the mote from thy
neighbor's eye."
III. What is harmful?
The OECD says a "harmful tax regime" is one that "attracts
mobile activities." Many of us see that, rather, as a mark of a
good system, but I'll return to that. First, let's follow them along
a way. Right away we think of low taxes, and that is what the OECD
means - on p.27 they specify low income taxes. They, and allied
international organizations like the EU, also have a history of
jumping nations whose VAT is too low to suit them.
That view is too simple by far. Mexico, for example, has very low
taxes, but repels both capital and labor anyway. A nation may also
attract mobile activities and factors in two other ways. One is by
offering superior public services.That, for example, is how many of
us became Californians, lured by the State University. The other is
by a tax structure that favors mobile activities without stinting on
public services. This may be done simply by targeting taxes on
immobile resources. Let's inspect those points closer.
A. Richness of the tax base
A jurisdiction may enjoy both high public revenues and low tax
rates if it be favored with a high tax base. Alfred Marshall,
renowned Edwardian economist, warned about the excessive magnetism
of London, and, within Greater London, of the richer suburbs.
Vancouver, B.C. is another example of Marshall's principle. It is
such a magnet for Canadians that the Provincial Government
deliberately fosters developments elsewhere in the Province at the
expense of Vancouver. The whole Province of Alberta is another
such magnet, thanks to its monopoly of petroleum in Canada, and
its effective system of raising Provincial revenues therefrom. The
State of Alaska is another magnet. It has the highest
taxes per capita of any U.S. state, but they are paid mainly by a
handful of giant oil companies with favorable leases on
State-owned lands. Its magnet takes the very direct form of an
annual social dividend of over $1,000 per man, woman and child, in
cash. More generally, though, the whole world is divided among tax
jurisdictions with richer and leaner tax bases, ranging along a
wide continuum.
In all those cases, the distortion caused by high public
revenues is in attracting mobile factors, not repelling them. It
is an advantage enjoyed by the major OECD nations, vis-a-vis those
less favored by nature, by virtue of their occupying the best
locationss on the planet. It seems rather shabby of them to deny
nations with poorer lands the best recourse available. If
anything, the situation calls for helping the poorer nations.
Poorer nations may replicate the magnetism given by natural
advantages, and attract mobile activities, in two ways. One is by
maintaining a more efficient and honest government: more service
at lower cost. This is what competition is supposed to achieve in
the private sector: why not in the public, too?
The other way is by adopting a magnetic tax structure.
There are taxes and then there are taxes. The OECD Report was
written by people wearing blinders that keep their eyes and minds
glued only on kinds of taxes that penalize and repel mobile
activities. Let us liberate ourselves from that fixation.There are
taxes that do not repel mobile factors, but positively attract
them. Now that is Tax Competition! The OECD ignores it, and
apparently bids us ignore it, too, for it will embarrass nations
with repressive and repellent tax structures. I will give you some
examples.
B. Magnetic tax structures
The U.S.A. is a great laboratory for testing tax structures. It
contains 51 or more separate systems, with free migration of labor
and capital guaranteed by The Constitution.
The extraordinary growth of California from about 1900 to 1978
shook and recast the economy of the U.S.A., and parts of the whole
world. It was not done with low taxes and skimpy public services.
It was in part the product of a tax structure that was Magnetic
(compared with other states). California's natural advantages (a
mixed bag) did not promote much growth after the 1849 Gold Rush
and the Civil War, when California growth lagged badly for 20
years or more. Neither did the transcontinental rail
connection, completed in 1867, promote much growth.
Eventually, though, INTERNAL growth-oriented forces prevailed.
California provided superior public services of many kinds: water
supply, schools and free public universities, health services,
transportation, parks and recreation, and others. It held down
utility rates by regulation, coupled with resisting the temptation
to overtax utilities.
That all required tax revenues. California had oil, but did not
tax severing it, and still doesn't. Its wine industry went
virtually untaxed. There was and is hardly any tax on its
magnificent redwood timber, either for cutting it or letting it
stand.There was no charge for using falling water for power, or
withdrawing water to irrigate its deserts. Most of those are good
ideas, but they are not what California did.
Its main tax source was another kind of immobile resource:
ordinary real estate. Its tax valuers focused their attention on
the most immobile part of that, the land, such that by 1918, land
value comprised 72% of the property tax base - and on top of that
there were special assessments on land.
People and capital flooded in, for they are mobile in response
to opportunities. California became the largest state, and a major
or the largest producer of many things, from farm products up to
the tertiary services of banking, finance and insurance.
C. Was this tax competition harmful?
On the contrary, in a world of self-aggrandizing governments,
intergovernmental competition is all that makes life bearable.
Competition from nations or cities with rich tax bases can distort
the allocation of mobile factors, it is true, but that is not what
OECD is targeting. Rather, they are targeting the magnetic tax
structures of governments that are efficient and economical.
If California competition were harmful to the world as a whole,
we would have to conclude by analogy that the discovery of the New
World was, too: Columbus should have stayed home. The Lucayo
Indians whom he exterminated here would probably agree, I must
admit; so might the Aztecs and Incas whom the Spaniards looted.
There was a negative side to the migration of European and African
people and capital to the New World, yet few would suggest that
many people, on balance, would be better off today in a world
shrunk to its eastern hemisphere.
California became the largest producer of cotton, for example,
displacing a good deal of eastern cotton. The damage to
eastern producers was offset by an equal gain to cotton processors
and consumers, with a net gain from higher usage due to the lower
price. Eastern cotton lands were released for other uses, like
reforestation of lands marginal for cotton. (To the extent this
was due to subsidies, and racing for cotton quotas during the
Korean War, I do not vaunt it - but there are few pure examples of
anything in this complex world.)
California attracted eastern workers, tending to draw up eastern
wage rates. The damage to eastern employers was offset by an equal
gain to their workers, with large net gains from two sources. One
is a more equal distribution of wealth; the other is a drop in
welfare costs and social problems like crime that would have
ensued had the Okies, for example, had to remain in the
Dust Bowl instead of finding new lives in California. Even the
braceros, the Hispanic guest-workers who toil in the
fields, send money home, relieving problems in their homelands. It
would be better yet if they could become small landowners and work
their own farms, but in this imperfect world we observe what is,
without denying that it might and should be better. What is
involved here, in spite of its well-publicized abuses, and glaring
shortfalls, is turning useless and even criminal people into
productive people.
As to capital, California offered a higher return on that, too.
There emerged what people called the continental tilt of interest
rates, higher in the west, to overcome the frictions of space and
draw eastern capital to where it was more welcome. Over time,
buildings that wore out in the east were replaced in California.
Did California's vigor seem too ambitious, so as to damage
others? If so, as Shakespeare had Marc Antony say, it were a
grievous fault, worthy of suppression by an OECD. Most economists
believe, however, that investing is the motor that drives
prosperity, and raising investment opportunities is the key to the
ignition. I certainly agree. OECD does not, apparently, for last
July it pressured Spain, an emerging member, to bring down its
interest rates to the "euro convergence rate" of 3.5%.
Apparently any nation pursuing harmful tax policies to raise
investment opportunities would upset some delicate balance or
grand plan. May we not anticipate pressure on Ireland to
raise its corporate income-tax rate on manufacturers drawn from
elsewhere? Will the new European Central Bank not demand Irish
cooperation in holding down continental interest rates?
California competition did tend to pull up interest rates back
east, hurting some borrowers. These losses, however, were offset
by equal gains to savers, with a net bonus from the rise of saving
caused by higher interest rates. There are those who would
intuitively assume that the distributive effects are regressive,
but that is doubtful. In this case the truth is counter-intuitive.
Equity earnings in stocks and real estate vary inversely with
interest rates. Equity values are impacted even more, because
higher interest rates translate into higher capitalization rates,
which mean lower Price/earnings (P/e) ratios and lower capital
gains.
This is too big an issue to settle in a few words.If you find it
counterintuitive, I can only ask you to think about my argument
above. On balance, in my opinion, a rise of interest rates has an
equalizing effect on the distribution of wealth, and the moreso
when the initiating cause is a rise of investment outlets.
The net micro or allocative effect of higher interest rates is
to move capital into higher uses, as directors impose higher
hurdle rates on their managers. (A hurdle rate is a minimum
acceptable rate-of-return on any prospective investment.) Hurdle
rates rose, not because there was less capital overall, but more
opportunities to invest it productively.
Basically, California's remarkable 20th Century growth extended
the American and the Canadian tradition of the western frontier,
in the spirit of Thomas Jefferson, as a safety-valve for mobile
resources oppressed in the older states. It limited the power of
the haves over the have-nots, with net gains all around.
Was California growth the product of untaxing wealth, and
dumping taxes on poor workers and consumers? The OECD says
competition is harmful because it limits the power of OECD nations
to tax wealth, thus more-than-intimating that they are upholding
the interests of labor, like good continental European social
democrats. In this, I suggest they have misstated the issue,
setting an agenda for a false and futile debate, fooling both
their friends and their critics, and possibly even themselves
(although I am cynical as to the last point).
Their premise, at least the one they state, is that wealth is
more mobile than labor. Some wealth is, of course, but California
relied on the property tax, and, to repeat, 70% of this tax base
was land, pure land, totally immobile.The OECD treats land like
one of those four-letter words that is unmentionable. So do its
academic retainers, who are well-trained to believe that land is
just as mobile as capital. This makes them completely useless to
analyze the OECD allegation that a nation's tax regime is harmful
if it attracts mobile resources.
Was California growth the product of southwestern pioneer vigor?
Compare if with New Mexico, not far away. New Mexico has made
itself little more than a Third World Nation masquerading as an
American state. Since before statehood, an oligarchy of giant
landowners, in the million-acre class, have dominated everything,
and kept taxes off their vast lands. New Mexico raises a lower
fraction of its state and local revenues from the property tax
than any other state. Its economic base, such as it is, is mainly
the product of what Senator Albert Beveridge of Indiana called the
free coinage of western Senators. New Mexico gets more federal
spending per capita than almost any state, but that and scenery
are about it. It is picturesque: its boosters call it "The
Land of Enchantment" but The Enchanter has cast a sleeping
spell on its local enterprise. It has the highest poverty rate in
the U.S., and, in its wide open spaces, nearly the highest rate of
violent death in the U.S. - itself a violent nation.
D. Recent changes.
In 1978, California took a giant step backwards by enacting its
Proposition 13, capping property tax rates at about 1/3 of their
previous level. The national ranking of its services began a
precipitous fall; so did its per capita income. Struggling to
maintain itself, the State has raised sales and income and
business taxes to unprecedented levels. These are taxes that shoot
anything that moves, and spare immobile resources that don't. The
result has been the rapid Alabamization of California, as we have
fallen to join Alabama with the worst school system in the nation.
Inmigration has changed to outmigration, and of those who stay,
California has by far the largest prison population of any state,
so large that the union of prison guards is now our most powerful
lobby, and building prisons is our fastest-growing construction
industry. None of these people, prisoners or prison-builders or
guards, are producing goods and services for others, but are not
counted as unemployed, and our unemployment rate is above the
national average even without them.
Today if we look for a new frontier we find it in, of all
places, one of the original 13 colonies, New Hampshire, with its
poor soils, marshy peneplains, harsh climate, impassable
mountains, and lack of natural urban confluences. What New
Hampshire has now is the least repellent tax structure in the
nation: it does not tax personal income or sales, while 2/3 of all
its state and local revenues come from the property tax. It has
bucked the national trend toward taxing income and sales, and IT
HAS PROSPERED! (Details are in a Chapter by Richard Noyes and the
speaker in Fred Harrison (ed.), 1998, The Losses of Nations.)
IV. Is Tax Competition Beneficial?
A more efficient government would offer superior public services
without higher taxes; or the same services with lower taxes. Is this
harmful? Those who sanction competition to regulate private
enterprise to attract suppliers and customers, and undercut
monopolies, should by the same reasoning also endorse competition
among governments to attract people and capital. Such competition is
a major defense against the tyranny that a monopoly government can
exercise.
Every government has some latent monopoly power by its nature - a
monopoly of power over certain lands. The behavior of OPEC during
the 1970s, and the threat posed by Saddam Hussein more recently,
illustrate the point, but by no means exhaust it. Governments try
especially to attract industries that are clean, safe, and
generative of fiscal surpluses. That includes tertiary industries
like yours, of course. Through the OECD, they will fight to keep
them from migrating elsewhere. As Baroness Elizabeth
Symons of Vernham Dean, Minister for the Overseas Territories,
remarked recently, London itself is the largest offshore financial
center.
The benefits of intergovernmental competition are exemplified by
an era in European history. The 16th Century, the age of
nation-building, also saw a worsening in the returns to the mobile
factor, labor. Before that, during the anarchic Wars of
the Roses in England, for example, dozens of petty tyrants competed
to hold onto their retainers and archers, making the 14th and 15th
Centuries a golden age for English labor. Competition tempers
Tyranny. Economic historians have shown that the material living
standards of labor in this golden age were higher than in the 19th
Century, for all its technical progress. (The Church used its vast
landholdings to provide the welfare system of the period.) The Tudor
monarchs then put an end to such wasteful competition among tyrants.
They let their favorites enclose the commons, and replace people
with sheep. They let thousands be cast loose to roam as "sturdy
beggars, and then whipped them back, landless and desperate, to
serve on the masters' terms. Thus was the modern age born in agony,
an agony brought on by ending competition among governments.
V. Should tax regimes be the same everywhere?
Uniform taxation does not produce uniform results, a phenomenon
that tax-economists acknowledge in their theorizing as The Ramsey
Rule. Having nodded to it in theory, many of them then pass over it
in prescribing actual tax policy - a maddening ambivalence that I
will not try to explain here, but only deplore. They would improve
their policy prescriptions if they gave more weight to the Ramsey
Rule. In some disfavored regions, or lean territory, at the edges of
settlement, the land generates little or no surplus above the
opportunity cost of the mobile factors. Labor just makes wages;
capital just makes enough to pay interest. Impose a uniform GST,
PAYE or VAT and it makes economic life non-viable at these lean
edges, because there is no taxable surplus there: you can't squeeze
blood out of a stone or a turnip. The giants of classical political
economy (Smith, Ricardo, or Mill) saw this clearly; so had their
mentors, the French Physiocrats like Quesnay and Turgot. Thomas
Jefferson, a student of the Physiocrats, also saw it clearly, which
is why he opposed the excise taxes favored by Hamilton, which bore
heaviest on the frontiersmen whom Jefferson represented so well. His
brilliant Treasury Secretary, Albert Gallatin, was a French-Swiss
immigrant who also knew his Physiocracy well.
A modern example is the Backveld of South Africa. South
Africa imposed a VAT with the very purpose of extracting taxes from
poor blacks in the Backveld. The result was to sterilize the
Backveld economically, to scorch the earth and drive its people away
to squat in extra-legal shacktowns like Soweto, near Johannesburg,
and The Crossroads near Cape Town. It forced them to survive by
hawking in gray markets on the streets and roadsides, turning also
to drugs, prostitution, and crime. What else were they to do?
A rich place like, say, Vancouver might impose a VAT and survive,
but it is not clear that it should, even so. Hong Kong is the
sparkling paragon of a rich territory that embraced magnetic tax
policies. As a Crown colony, it redoubled its natural magnetism by
shunning repellent taxes of most kinds. Its public coffers
overflowed, nonetheless, because the Crown owned all the land there,
and did a tolerable job - not excellent, but better-than-average -
of collecting much of the rent for public purposes.With a tiny land
area, about 5% of The Bahamas, it became a world center of both
secondary and tertiary industry, with a population of 5 millions,
and a high per capita income by world standards. Those who have eyes
to see, let them see.
National governments not owning their own land can replicate the
Hong Kong effect simply by emulating California of yesterday, and
New Hampshire of today, basing most of their taxes on the immobile
factor, land. Tax capital, and capital flight is a hazard, but land
never flies nor flees. Tax labor, and brain-drains are a menace, but
land stays home.
VI. Choices for the OECD nations
If the OECD nations are concerned about tax competition, they have
at least three choices.
They could impose exchange controls to prevent capital export, as
attempted by various authoritarian states before world war II, and
some welfare states afterwards. This approach had its day, and is
now a proven failure, although that is not stopping some desperate
failing Asian nations now from giving it another whirl.
B.They can try muscling small nations into copying, and helping
them enforce, their own repressive tax systems. This means and
requires extending their sovereignty worldwide, as envisioned in the
OECD Report we are discussing. It is in the spirit of the
times, in this age of world cartels, MNCs, the International
Telecommunications Union, world radio and TV networks, the IMF, the
World Bank, the WTO, the MAI (another OECD boon), the Trilateral
Commission, Interpol, the world war on drugs, the U.S. as world
policeman, etc. It is something like the Holy Alliance that
undertook to police each aberrant nation of post-Napoleonic Europe,
only more ambitious: its turf is the whole world, with no exceptions
or refuges, not even any speck of coral in the wide oceans. Any
independent force threatens the whole structure, so it demands
nothing short of worldwide domination: a megalomaniac goal, indeed.
The megalomaniac mindset is seen in a recent statement from
Italian Treasury Minister Carlo Ciampi that the IMF's interim
committee must become the embryo of an economic government for the
world, backing recent calls by Michel Camdessus for the interim
council to become a body producing binding directives rather than
recommendations (ROME, Dec 17 [AFP]). Baroness Elizabeth Symons of
Vernham Dean, Minister for the Overseas Territories, makes it even
plainer when she tells us that the new OECD guidelines are intended
not just for members and their territories, but non-members as well.
It is, therefore, an ambitious attempt to create a new international
standard to apply equally to all jurisdictions. (Address to the
British Virgin Islands Financial Services Seminar, September 1998.)
Bahamians, take note: did I say this is a smart bomb with your name
on it?
In the short run The Bahamas seem positioned to benefit by your
independence. The Edwards Report of the British Treasury, quickly
endorsed by Robin Cook's White Paper, declares an intent to pressure
the Dependent and Overseas Territories into following the UK along
the OECD lines. Cook is also cajoling, holding out the bait of
non-reciprocal UK citizenship for citizens of islands that comply.
(One wonders if he would do this if Hong Kong and the Bahamas were
still British?) Those territories are bending over backwards to
appear cooperative and compliant.This would seem to open
opportunities for The Bahamas to pick up new business. This
honeymoon, however, should it occur, would likely lead to new OECD
pressures on The Bahamas.
C. They could reform their own domestic tax systems along the
lines demonstrated by California before 1978, by Hong Kong before
1997, and by New Hampshire today. They could lead us to a
world of benign tax competition. They could move away from
extra-territorial taxation to purely intra-territorial taxation;
away from in personam taxes towards in rem taxes; and away from a
mobile tax base towards a more immobile tax base. They are not
headed in those directions today, but if one or two nations can face
them down, they will have no other choice. Freedom anywhere foils
tyranny everywhere. Tax tyranny is a balloon: seal every leak, or it
collapses.
VII. Tax intelligence
A cognate concern of the OECD is extending the sovereign powers of
its members to pry into private dealings in other nations. The
French verb percevoir has two meanings: one, of course, is to
perceive the other is to tax. How very perceptive of the French to
notice that connection. To tax something or event you must first
conceive it and see it. Income-tax agents are necessarily voyeurs.
They are frustrated and offended by privacy provisions in other
nations and, as the OECD Report makes clear, they believe they have
the moral authority to pierce those veils, and to invoke political
force for the purpose.
Must it be so? Is taxation always at war with personal privacy and
national sovereignty? Fortunately, no. The OECD Report tacitly
premises that all taxes must be on a personal (or corporate) basis:
what the lawyers call in personam. Some other taxes, however, are
levied on a thing, or in rem. Import duties, for example, are levied
on bringing in dutiable goods, regardless of who does it, or where
they come from (although sometimes this is considered). No deep
inquisition is required into all the personal affairs of the
importer. Duties are enforceable simply by refusing admission until
they are paid or, in extreme cases, seizing the goods. Only in
criminal cases are persons as such penalized or jailed.
There are upper limits on feasible tariff rates. Many national
borders are long and penetrable. Many nations are lowering or
avoiding import duties in the interests of freer world trade, the
strong trend of the times. Many groups rebel against high domestic
consumer prices. The weight of opinion is that import duties, and
all such consumer taxes, are regressive, and socially undesirable.
A purer case of in rem taxation is the tax on real estate. Such
taxes are a lien on the land, not the owner. Sovereignty over land
is unambiguous. Each parcel of land is either inside or outside the
taxing jurisdiction, regardless of who owns it, or where he or she
resides, or what other assets he or she may own, or other income he
or she may receive, here or elsewhere. No international tax treaties
are needed in order for a nation or smaller jurisdiction to tax its
own land. No information need be demanded of any other nation or its
institutions, as a rule. The important exception is a severance tax
on minerals exported by MNCs that use internal pricing to transfer
profits to low-taxbr jurisdictions - a case calling for drastic
remedies on the home front.
Adam Smith wrote in 1776 that if you tax stock (movable capital)
it will be concealed or removed. Worse, some forms of
capital are more concealable and removable than others, so a tax on
capital, even on ALL capital, is necessarily nonuniform. Knowing the
quantity of mobile capital requires a deep inquisition as no people
could support (Wealth of Nations, p. 800). Capital is never
uniformly taxed, and never can be, even within one nation. In
today's world economy, with instant electronic encrypted
international fund transfers, the ability of creative people to
avoid and evade taxes on mobile capital has outrun even Smith's
pioneering insights.
The OECD's response is to call for more enforcement, and to
scapegoat small tax havens. To enforce an income tax today calls for
nothing less than a worldwide intelligence network with vast powers
of search and seizure.
It also calls for worldwide thought-control to give it moral
authority and general support. The end of this thought-control is to
criminalize income.Since that is too absurd to proclaim in so many
words, the OECD nations have added a step: it is not criminal to
earn income, but it is criminal to do so and not admit it and pay a
fine. People's minds have been conditioned to tar that as cheating,
as though it were a kind of moral lapse. It is roughly parallel
(without judging the case) with Kenneth Starr's approach to
President Clinton: what you did was neither criminal, nor public
business; but failing to report it was both, and impeachable. The
OECD Report is the latest move in a longtime thought-control
campaign to universalize that attitude toward earning income. One
earns income mainly by producing goods and services, so that mindset
is stiflingly, massively counterproductive. More: to impose a false,
self-serving morality is the worst kind of immorality.
We have come a long way since Adam Smith gave people credit for
not supporting deep inquisitions into their affairs. How he would
boggle at the inquisitions supported or tolerated today. However,
now it has become clear that income taxation cannot endure without a
worldwide intelligence network: a worldwide inquisition by the
revenue agents of every nation into the records of every other
nation. Here, I submit, is where to draw the line. Here is where a
determined small community, jealous and precious of its sovereignty,
can defy, puncture and collapse a bloated world tyranny. It's been
done before.
Messrs. Gibson and Bastian, speaking at this conference, indicate
a determination to uphold Bahamian independence. I wish them, and
you, the best of luck in doing so. Don't let anyone make you feel
guilty: tax competition is not harmful, but benign. You will be
doing not just yourselves, but the whole world, a good turn.