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Date: November 7, 2002
To: Supporters of Tax Competition, Financial Privacy, and
Fiscal Sovereignty
From: Dan Mitchell, Heritage Foundation Senior Fellow
Re: The Impact of the U.S. Elections on Tax Competition
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The 2002 mid-term election produced an unexpected Republican victory. The GOP was expected to hold the House of Representatives, but few expected Republicans to win control of the Senate. This dramatic shift
will have important implications for the global battle to preserve tax competition.
Republican control of the Senate is important for several reasons. A GOP majority, for instance, means greater control of
the political process. Republicans will now run all Senate Committees, including the Senate Banking Committee and the Senate Finance Committee. And while not all Republicans are firm supporters of tax competition,
financial privacy, and fiscal sovereignty, they almost always are better on these issues than the Democrats they replace. Republican control also makes it easier to block bad legislation, either by bottling it up in
Committee or by controlling the Senate schedule. Needless to say, the GOP also will have the votes – at least in theory – to win floor fights.
The Republican majority also is important by virtue of the
quality of new members. Many of the new Senators are effective and articulate defenders of market-based policy. Lawmakers like Senator-elect John Sununu of New Hampshire and Senator-elect Jim Talent of Missouri will
take immediate leadership roles in the campaign to improve America's tax system and defend U.S. economic interests.
Conversely, Democrat Senators will have far less power to promote bad tax policy. Senator
Carl Levin of Michigan, for instance, was a Subcommittee Chairman and used that position to demagogue against low-tax jurisdictions. Levin's dishonest efforts doubtlessly will continue, but presumably with less
effect. As one tax reform advocate stated, "Levin will now be like fingernails scraping across a blackboard – an irritating nuisance." The tragic death of Senator Wellstone also is a setback for the tax
harmonization crowd since the former legislator was a leading advocate for fiscal protectionism against companies that re-chartered in low-tax jurisdictions. Other Democrats will try to grab the issue, to be sure,
but it is unlikely that they will be nearly as effective or tenacious.
The Republican Senate majority (and continued majority in the House of Representatives) also will yield indirect benefits. Most
importantly, total Republican control of Congress will give the Bush Administration significantly more leeway to support pro-competition policy. A large number of Republicans – both in the Senate and House – have
encouraged the White House to resist tax harmonization schemes and instead advocated pro-competitive tax reforms. The influx of new Republicans will strengthen those inside the White House who are working to defend
America's national economic interests.
Looking at specific tax competition issues, the Republican victories will have a noteworthy impact on issues requiring legislative action. On issues that depend solely
on Administration decision-making, the reverberations will be more muted. In all cases, though, it is important to realize that potential good news depends on continued hard work from the many groups and
organizations that are working to defend tax competition.
- EU Savings Tax Directive:
The Administration already has decided to reject this scheme to emasculate privacy laws in 15 EU nations and 6 non-EU nations. And since this proposal to require the collection and sharing of private financial data on nonresident investors is predicated on unanimous participation of all 21 targeted nations, the proposal is – for all intents and purposes – dead. Unfortunately, there still is a distinct danger because career bureaucrats at Treasury and the IRS are trying to sabotage the Bush Administration by working to keep the ill-fated initiative on life support. Assuming that supporters of tax competition continue to work hard and educate policy makers, Republican congressional victories will result in much-need oversight of the bureaucracy and therefore help ensure that these disloyal efforts do not bear fruit.
- IRS Interest Reporting Regulation:
Like the EU Directive, this is another issue that will be decided behind closed doors inside the Administration. Dozens of members of Congress already have written the Administration to protest this abusive IRS scheme, and it is likely that many of the new members also will oppose the information-sharing proposal. In the final analysis, however, victory probably will depend on either White House intervention or a legal challenge.
- Anti-Inversion Legislation:
A number of companies have re-chartered in jurisdictions with better tax law. Fiscal protectionists want to deny these companies the right to bid on government contract and also subject them to worldwide tax even though they no longer are US-based firms. The Republican victories should make it much easier to block these misguided proposals, both because the GOP has control in both Chambers of Congress and also because the "inversion" issue did not turn out to be as politically potent as Democrats had hoped. But this battle is far from won. Many Republicans still are not confident that they can respond to demagogic attacks. Also, there is some danger that Republicans will rush through the old version of the Homeland Security Bill, even though it contains anti-inversion government contracting provisions that will both violate international trade agreements and cause the needless waste of taxpayer money.
- International Tax Reform:
This is the issue where the elections may have a major impact. There already was considerable momentum for a shift toward territorial tax treatment of corporate income. Lawmakers increasingly realize that international tax reform is the only pro-growth response to the WTO's multiple decisions against America's tax treatment of export-oriented income. Many member also understand that fixing the flaws in the tax code is the morally just and economically sound way of ending inversions. But it was generally thought that a Democrat-controlled Senate would block any constructive reform of international tax rules. But now that this obstacle is eliminated, the White House and pro-reform lawmakers are likely to be much more aggressive in their efforts to help U.S.-based companies compete on a level playing field.
- OECD "Harmful Tax Competition" Project: If the EU Savings Tax Directive is on life support, the OECD's tax cartel initiative is already six feet under the ground. Moreover, the Republican victories should help ensure that the scheme has no chance of being reborn. That is the good news. The bad news is that the OECD is still trying to bully low-tax jurisdictions into changing their tax and privacy laws. Fortunately, the Paris-based bureaucracy is meeting strong resistance. Low-tax jurisdictions are making good use of the "level playing field" argument, so it seems unlikely that the OECD will succeed. But we also have a new threat to worry about. The OECD is now trying to attack jurisdictions with attractive incorporation laws. Defeating this new effort will require a lot of work on Capitol Hill, particularly with members from Florida, Nevada, Delaware, and other states that would be adversely impacted by the OECD's anti-corporate initiative. Shifting from defense to offense, it is quite likely that Republican leaders will begin a long-overdue examination of the OECD's bloated budget, one-fourth of which is on the back of American taxpayers.
- International Bureaucracies:
Last but not least, supporters of tax competition are monitoring various proposals at the United Nations, International Monetary Fund, Financial Action Task Force, and World Bank. These bureaucracies get the bulk of their funding from OECD nations, and often allow themselves to be used to advance the interests of Europe's welfare states. The Republican victories should help us win these battles – assuming we are vigilant and aggressively work to reduce U.S. funding for any international bureaucracy that seeks to promote tax harmonization.
In conclusion, there has been a dramatic shift since mid-2000. At that time, it appeared that tax harmonization and the
destruction of financial privacy were inevitable. Bill Clinton was in the White House, and his team was actively supporting the interests of Europe's welfare states. The OECD was on the offensive and there was
momentum for the EU Savings Tax Directive.
Beginning with the creation of the Center for Freedom and Prosperity in the late 2000, the battle has dramatically changed. Working through the Coalition for Tax
Competition, free market groups in America have tirelessly worked to educate U.S. policy makers, and those efforts have had an enormous impact. But it is important to realize that our victories are only temporary.
High-tax governments have not given up. They will continue to push for harmonization, and they will continue to use the OECD and EU as their agents. Winning this war will require continued hard work and a relentless
commitment to fight for individual liberty.
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Center for Freedom and Prosperity
P.O. Box 10882
Alexandria, Virginia 22310-9998
Phone: 202-285-0244
E-Fax: 208-728-9639
info@freedomandprosperity.org
www.freedomandprosperity.org
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