OECD tax proposals unfair to small countries say international economists

Later this week, OECD tax officials meet in Berlin to discuss the next steps in their campaign to press low-tax jurisdictions into ending what they see as ‘harmful’ tax practices. The campaign began in 1998 with a book published by the OECD – Harmful Tax Competition: An Emerging Global Issue – followed by the release in 2000 of a ‘black list’ of jurisdictions that allow financial privacy.

However, independent think tank experts are worried that high tax European countries are using the OECD as a means of avoiding local pressures for badly needed economic reforms. Government officials in countries such as Germany, Sweden and France realise that the writing is on the wall for their sclerotic economies, but nevertheless are attempting to delay the inevitable by preventing investors from moving their assets to low-tax jurisdictions.

With EU enlargement, the pressures for reform have become acute, as several of the new member states have relatively low tax rates. Indeed, German Chancellor Gerhard Schroeder and Swedish Prime Minister Goran Persson recently criticised Eastern European countries for having tax rates that are “too low”. But experts from think-tanks around the world point out that competition over tax rates encourage better public policies, acting as a break on corruption and inefficiency.

Slovak economist Martin Chren points out that his country recently introduced a flat income tax of 19% as a direct consequence of tax competition. Slovakia’s flat tax is expected both to enhance economic growth and increase tax receipts. Complex, high tax rates lead to evasion, bribery and corruption; simple, low rates encourage transparency and compliance. Chren, who represents the Slovak Taxpayers Association, observes: “Slovaks welcome tax competition because it encouraged our leaders to introduce the new flat tax. Competition keeps politicians honest and accountable to voters.”

Commenting on the upcoming OECD meeting, Daniel Mitchell, an economist and Senior Fellow of the Washington DC-based Heritage Foundation notes, "The OECD's opposition to tax competition is not only economically misguided, it is unethical. Smaller, less powerful nations are being persecuted by larger nations for adopting the economic growth strategies that America and European countries previously pursued in the nineteenth century.”

The OECD justifies its proposals by arguing that there should be a level playing field. But Julian Morris, economist and Director of International Policy Network in London, points out that there are many ways of creating a level playing field and the OECD strategy is a dangerous one because it could lead to globally high levels of taxation that would promote corruption and inefficiency and stymie economic growth. Morris comments, “What use is a level playing field if all the players are hobbled and the referees are in bed with the goalkeepers?”