Thursday, February 09, 2006

A new front in the anti-tax war

A group called the "Coalition for Tax Competition" has just sent a letter to OMB Director Bolton urging that the U.S. de-fund the Organization for Economic Cooperation and Development" (OECD), due to the latter's strong efforts in recent years to coordinate international responses to tax competition (and, I should add, tax evasion, which is different but can involve the same players).

With Grover Norquist and other anti-tax luminaries being the signatories, their sending this letter to the White House is presumably a formality, in the sense of being merely a PR stage in a coordinated campaign that involved White House participation from the start.

I'll give these guys one thing. The issues raised by tax competition are indeed two-sided. They claim that tax competition is good because it lowers overall tax levels and welfare state funding. Although some on the left (Reuven Avi-Yonah, for example) agree with this albeit seeing it as bad rather than good, I personally feel it's overstated in that the main tax base for all nations - resident individuals' earnings - is not at this point greatly affected. But there are market benefits to reducing the tax systems' cartel power. On the other hand, tax competition can actually be inefficient, since it may simply create tax preferences for mobile businesses that can exploit it and permit tax reduction via wasteful planning transactions. And without cartel power via taxation, it would be impossible to fund public goods. The correct analysis here lies at the margin, and I don't know how it would come out - it depends, for example, on various political imponderables regarding the response to the relatively minor revenue effect.

The signatories also claim that tax competition is good for the U.S. That, of course, depends. They may be right in cases where U.S. individuals who own interests in multinational entities (MNEs) pay less tax to foreign governments by reason of tax competition, and thus possibly more to the U.S. via reduced foreign tax credits. They may also be right in cases where the U.S. can compete successfully with foreign countries for tax base. (Although note that, these days, we have relatively high corporate tax rates.) But they are wrong, from a U.S. national welfare standpoint, in cases where either of these scenarios runs in the other direction - i.e., where we're talking about foreigners' tax payments to the U.S. that would be creditable, or other countries tax-competing with us for a share of the worldwide base.

One point they don't address: the OECD is accused at times, in its anti-tax competition initiatives, of favoring the interests of high-tax developed countries relative to low-tax less-developed countries. Insofar as this is true, the OECD might be serving U.S. interests (and those of our peers) but at the expense of poorer countries. This is certainly open to criticism from a global welfare standpoint.

The easy tiebreaker would be to say: If Grover Norquist is for it, I should be against it. Certainly an excellent rule of thumb, but ultimately too knee-jerk for my taste. This is a subject that could bear being debated more in tax policy circles.

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