Tax Havens Under Attack by High-Tax Countries

Insight on the News, Dec 4, 2000 by John Elvin

High-tax industrialized nations belonging to the Organization for Economic Cooperation and Development (OECD) are leaning on smaller low-tax nations in an effort to curb the flow of investment money to the "tax havens." The OECD has 29 members, including economic powerhouses such as the United States, the United Kingdom, Germany, Japan, South Korea and Mexico. The tax havens include 41 nations such as Aruba, Belize, Grenada, Liechtenstein and Samoa.

OECD member states, including the United States, also are demanding that the tax havens turn over financial data on investors. Those countries that do not eliminate "harmful tax practices" could be hit with a financial blockade, including tariffs and other severe sanctions. Withholding taxes and stiff transactional levies could be imposed on funds destined for the tax havens. A study by the Heritage Foundation calls the effort "an attack on national sovereignty" as well as "an attack on individual privacy."

The OECD has framed the effort as a way to curtail tax evasion and money laundering. But according to the Heritage report, prepared by Daniel J. McKenna, senior fellow in political economy, the real goal is to eliminate competition without becoming competitive. "Globalization is making it harder for governments to overtax," according to McKenna, "because it is increasingly easy for taxpayers to shift their productive activities to lower-tax environments."

The OECD member states have a different sort of globalization in mind. "Supporters of this [attack on low-tax countries] have even stated their desire for a global authority that would have the power to veto tax cuts and block tax reforms," according to the report. McKenna concludes that there is "a right way and a wrong way to fight tax evasion." Instead of forcing global compliance with their high-tax policies, OECD nations should cut their tax rates and reform their tax systems in order to compete for investment.

Some of the countries that would face a blockade have no personal or corporate income taxes, while others have a low, uncomplicated flat rate. A couple of examples show why the OECD countries are up in arms. The Cayman Islands has 580 banks with $500 billion in holdings, plus 2,238 mutual funds, 499 insurance companies and 40,000 offshore companies. Niue, an island nation with a population of 2,000, has 3,000 international business companies. Liechtenstein has 75,000 business entities -- and its people, by the way, have the highest standard of living in Europe.