As if the Berlin Wall had fallen the other way
The Case For Real Tax Competition
   by  Anton Keller, Geneva

inset: In a market economy worth its name, tax and other gradients are key economic motors,
and tax avoidance no less than sheltering the fruits of one's legal activities from confiscatory taxations
and fiscal double jeopardy are not only basic rights but key obligations of each enterprising citizen.

Geneva, 27 October 2000  -  It is as if the Berlin Wall had fallen the other way.  As if real competition in tax matters would not also be a powerful - and mutually beneficial - incentive for states to provide better services at lower prices.  With the G7, the OECD and the European Union infected with a virus called socialist plain-levellings.  With unelected bureaucrats laboring against enterprising citizens, other free-market pillars and more efficiently operating sovereign states which happen to channel foreign capital into the formers' home markets.  In the case of Switzerland alone, that's to the tune of some 10 percent of foreign investments in the United States.

To hear the finance ministers on both sides of the Atlantic, the flat-world adepts have won this round.  Far from pursuing their objective of more revenues through supply-side economic reforms, they limited their choices to discredited socialist policies.  And over tax harmonization, they preferred a perversion of glasnost, namely a taxpayer glasnost in the form of world-wide and robustly enforced tax data exchanges.  And though earlier in these columns (WSJE 6/26/2000), Britain's Chancellor of the Exchequer explained this to be "in favor of fair and open tax competition ... and to abolish an unacceptable level of banking secrecy", they are in fact afraid of genuine tax competition, i.e. of citizen-oriented fiscal glasnost.  For this would identify real tax havens, break the taxmen's monopoly and promote real economic democracy.  With a readily accessible international tax market preventing the taxmen's brotherhood from rigging the game.

Symptomatically, the EU's finance ministers thus missed another chance to enlarge the cake, opting instead for increased harassment of taxpayers, hot pursuit and penalization of outflowing capital - which is often the sole way for a taxpayer to escape what he sees as confiscatory taxations.

As for the Internal Revenue Service, taxpayer glasnost has long been on its agenda, and now is about to be enforced on all banks doing business in the United States - at considerable, yet hardly noticed risks.

This has been long in the making - of all places under the wings of the industrialized countries' Organization for Economic Cooperation and Development.  Never mind the OECD's original purpose, free market statutes and focus on "the preservation of individual liberty" as key to economic growth and prosperity.  Never mind the EU's four fundamental freedoms of movement of persons, capital, goods and services.  And never mind that genuine fiscal glasnost would thus provide for free tax markets, real tax competition and the new/old human right to anonymous, undisclosed private property.

For a state's sovereign right to tax is inseparable from its obligation to protect the taxpayer from foreign fiscal aggression.  And any state would shoot itself into its feet if it were to betray the taxpayers it was able to attract and keep within its own borders.  Even the democratic presidential candidate Al Gore seems to have understood that when, in an interview with William Safire, he called for "absolute protection of financial privacy" (NYT, 6/15/2000).

Yet, under the leadership of IRS officials and with the gleeful support of equally myopic colleagues from high-tax countries, the OECD was turned into a platform for undercutting national sovereignty, working against individual freedoms, and criminalizing indispensable functions of the market economy.  It is now the instrument of the big against the small, promoting Orwellian ideas, norms and guidelines.

Equipped with a mandate to "combat tax avoidance", the OECD's Fiscal Committee set up the secretive Working Group #8 on Tax Avoidance and Evasion.  The latter has been instrumental in bringing about such Brave New World tools as the so-called INTERFIPOL, i.e. the "Convention on Mutual Administrative Assistance in Tax Matters" (http://conventions.coe.int/treaty/en/Treaties/Html/127.htm), the "Harmful Tax Competition" recommendations, the Financial Action Task Force FATF- as the international financial police - and the "Report on Non-Cooperative Countries and Territories".  As a result, such "tax havens" as Cyprus, Israel, Liechtenstein and Monaco are black-listed as "wrongdoers".  And anti-market, anti-liberty and anti-privacy standards are generally promoted.

The INTERFIPOL convention is an outgrowth of the IRS's long history of pursuing US citizens abroad.  It makes a mockery of fiscal principles.  It causes rather than avoids double taxation.  It causes additional administrative burdens.  And it annuls the tax advantages with which a government hoodwinked foreign investors: by divulging to other governments related information in order to apply the highest available rate, with the take to be split between the governments.  And it obliges governments to collect taxes for others.

In light of these and further effects (decried by the Wall Street Journal on 5/9/1986: http://www.solami.com/Orwell.htm), this project was fought to a standstill in 1988.  A free market coalition, including the International Chamber of Commerce and this journal (20 related contributions), had effectively derailed this Orwellian scheme.  Yet, with the original objections still valid, in 1989, the high-tax countries Finland, Norway and Sweden added theirs to the US signature.  INTERFIPOL was thus reanimated and eventually brought into force on fool's day of 1995.

Unless some constitutional legislators will soon call a halt to such administrative lawmaking, this may become the industrialized world's sunset.  Indeed, in a market economy worth its name, tax and other gradients are key economic motors, and tax avoidance no less than sheltering the fruits of one's legal activities from confiscatory taxations and fiscal double jeopardy are not only basic rights but key obligations of each enterprising citizen.  A purportedly free-market, pro-sovereignty and pro-privacy organization which entertains an apparatus to "combat tax avoidance" is thus manifestly out of its shoes.  If statesmen let themselves be talked into tolerating, heeding and even supporting such aberrations, the market will not fail to take notice.  Citizens will find themselves encouraged, if not compelled, to massively engage in tax evasion.  And the finance ministers will only have themselves to blame for the negative bottom-line impact of their tax officials' growing lack of respect for fiscal principles serving both citizens and foreign investors.

A similar situation occurred already in the twenties.  Then, Prohibition was another outgrowth of self-serving myopic bureaucrats riding roughshod on society by pursuing some ideas which were not appropriate for law-making.  Analogous effects must be reckoned with in those big and small states which - under whatever pretext - let themselves be stampeded into lowering their legal standards, thus weakening their very capacity to attract, protect and keep foreign investments.

As investment channels, some of the countries currently fingered by the OECD and the FATF have hugely contributed to the recent economic successes of France, Germany, Great Britain and the United States.  Switzerland alone is said to be the banker for one third of the world's off-shore fortunes (1), with an estimated reinvestment of some seven hundred billion dollars in the US economy alone (2).
*
Not least in the interest of the US economy, it may thus be wise for the IRS to reconsider and call back some of its apprentice-sorcerers.  And as taxpayers everywhere need, deserve and thrive on wealth privacy, it may best meet its mandate by enforcing glasnost not on them but only on itself.  So that the US market will again be able to fully benefit from its attractiveness.  Instead of being deprived of the fruits of past and future supply-side tax reforms which are transforming the United States into the world's biggest tax haven.

(1200 words)
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Mr. Keller is Secretary of the Swiss Investors Protection Association, 1211 Geneva 2 (swissbit@solami.com  -
t+f: +4122-7400362, m: +4179-6047707)

(1)    Niklaus Blattner et al., "Asset Management by Banks in Switzerland", Haupt Bern 1996 (http://www.geneve-finance.ch):

"In 1993, Chase Manhattan Private Bank calculated Switzerland's international ranking.  The bank's specialists reached the conclusion that banks in Switzerland manage 35% of global "off-shore" private wealth, i.e. assets of private clients entrusted to asset managers abroad.  However, we have no information on institutional clients." p.5
(2)estimated total global financial assets (in billion US$), off-shore: 6000, managed by Swiss banks: 2000, invested in US through Swiss banks: US$ ~700 billion;  sources:
-    "World Wealth Report", Merrill Lynch 1998
-    "Die Banken in der Schweiz 1999 - Vorabdruck", Swiss National Bank, Zurich 7 June 2000 (http://www.snb.ch/d/aktuelles/pressemit/pre_000607.html - global assets under Swiss bank management: CHF 3522 billion, 1880 of which from abroad)
    total foreign-held US financial assets: US$ 6277 billion ("Flow of Funds Accounts of the United States", Federal Reserve Board, Washington 9 June 2000;  http://www.federalreserve.gov/releases/Z1/Current/)

CF&P E-mail Update, 2 Feb 2004
(Andrew Quinlan, Center for Freedom and Prosperity President, 202-285-0244
quinlan@freedomandprosperity.org ¦ www.freedomandprosperity.org):

$2.3 Trillion of Foreign Investments in U.S. Financial Institutions
New Treasury data shows more than $2 trillion of foreign funds in U.S. banks - including nearly $900 billion from Caribbean.
January 2004, U.S. Treasury International Capital Reporting System, Chart CM-A -- U.S. Liabilities to Foreigners Reported by U.S. Banks, Brokers and Dealers with Respect to Selected Countries  http://www.treas.gov/tic/exhibita.pdf


 *    [Not content with that, and ignorant of both history and some of the fundamentals involved, some IRS officials have found no resistence on their
     path of ever more arrogantly looking out for a kill of further hens capable of laying golden eggs - as happened in the case of the US/Netherlands Antilles double taxation treaty.  Not surprisingly - and even assisted by some servile counterparts abroad - they thus managed to deprive the US economy of substantial foreign investments by riding roughshod on some sensitive tax rules concerning investments made in US titles through foreign banks by so-called US persons (US citizens with or without a second nationality, US residents, green card-holders).

     Behind the back of the US constitutional legislators, these new IRS rules are scheduled to become effective on 1 January 2001.  Operating as IRS agent, with US law becoming directly applicable, banks abroad with IRS-stamped qualified intermediary status will thus be able to offer some advantages to non-US persons (www.solami.com/QI.htm ¦ .../QIcomment.htm) ¦ .../costbenefit.htm ¦ .../swissbanks.htm).  On the other side, all US persons will henceforth be deprived of the right to anonymously invest in US titles.  They either have to take out their stake by the end of the year or identify themselves properly to the IRS.  Failing that, their banks will be responsible for effectuating a confiscatory 31% backup withholding tax on their US holdings.

     In the case of Switzerland, Swiss banks heeding the IRS demands are expected to incur substantial material and immaterial costs, while those few drawing the line may loose some business in the short term - and draw respect and more from those looking beyond this passing phenomena of lex americana universalis.  Swiss branches of U.S. banks are decidedly worse off, for US persons operating through them will loose their banking privileges for all investments anywhere.  In either case, US persons are thus seen to be clearly discriminated against, even though art.2 of the still valid U.S./Swiss Commerce Treaty of 1850 (sic!) is understood to stand in the way of such discrimation at least in the case of US citizens.

     Some observers see these developments as leading to an unwitting withdrawal of significant amounts of foreign investments from the US market before the end of the year.  Like the Y2K phenomena, it may not entail the effects some expect.  Nevertheless, the negative investor advice currently circulating among money managers and investment advisers in Switzerland and elsewhere may indeed snowball.  For this is only the latest and particularly grave twist of the IRS' notorious propensity to neglect the citizen's constitutionally protected privacy.  With the citizens' tolerance levels being what they are, a market stampede would probably more than merely flush the responsible IRS officials out of office.]