- The Washington Times - Tuesday, April 17, 2001

Our tax code has many flaws. Rates are too high, leading many taxpayers to engage in inefficient tax planning and sometimes even tax evasion.

Another problem is that income that is saved and invested is often subject to multiple layers of taxation, a foolish policy that deprives workers of the capital they need to become more productive. Our tax system even seeks to tax income earned in other nations, a practice which causes conflicts with other nations and imposes high compliance costs on both taxpayers and the government.

Fortunately, there are many proposals that would fix these problems. Some advocate sweeping reform, fixing all the problems in one fell swoop. Others seek to address the problems on a piece-by-piece basis. President Bush´s tax plan, which would lower tax rates and eliminate the death tax, is a good example of incremental reform.

A big argument for tax cuts and tax reform is that America needs to remain competitive in a global economy. Indeed, one of the reasons why America has the world´s strongest economy is that our tax burden is lower than most of our competitors´. Combined with the fact that we are a tax haven for foreign investors, this low-tax status makes America a magnet for global capital.

In other words, the United States is using "tax competition" to lure savings and investment from other nations in the same way that low-tax states like New Hampshire and Nevada use their attractive fiscal policies to lure economic activity away from high-tax states like Vermont and California. But no one remains No. 1 by standing still, which is why further tax cuts are needed to keep the United States prosperous.

Unfortunately, our ability to enact pro-growth tax reforms is being threatened by an international bureaucracy. Acting at the behest of high-tax nations, the Organization for Economic Cooperation and Development (OECD) wants to eliminate tax competition. The Paris-based bureaucracy asserts that it is unfair for low-tax nations to lure savings, investment, and entrepreneurial talent away from Europe´s welfare states, and the organization wants to destroy this competitive process.

More specifically, the OECD wants to make it easier for its member nations to tax the worldwide income and assets of individual and business taxpayers by forcing low-tax nations to change their tax and privacy laws. If successful,this assault on fiscal sovereignty would cripple tax competition since overburdened taxpayers will have much less incentive to shift their economic activity to lower-tax environments. Why take your money out of France, after all, if France has the power to impose French tax rates regardless of where you earn your income?

This initiative is profoundly troubling on several levels. Tax competition is a liberalizing force in the world economy, and any effort to hinder this process would be akin the setting up a cartel for the benefit of high-tax nations like an OPEC for politicians

At its core, the OECD assault against tax competition represents an effort to prop up uncompetitive tax systems and preserve bad tax policy. The organization freely admits, for instance, that its main concern is financial capital and the degree to which taxpayers are "evading" taxes by shifting their money offshore. Yet this concern would disappear if nations did not try to double-tax income that is saved and invested.

Consider what would happen, after all, if all income was taxed the year it was earned, but taxpayers were free to save their after-tax income without fear of being hit by a second layer of tax? This type of system a universal back-ended, or Roth IRA is good tax policy. But it also is a great way to eliminate tax evasion. Under this system, it would not matter if the taxpayer invested money in France, the United States or Liechtenstein. The tax was collected up-front, by the government where the income was earned.

Eliminating the double-tax on income that is saved and invested is a good idea, but countries will have less incentive to adopt sensible tax policy in the absence of tax competition. Another desirable tax reform is territorial taxation, the common-sense notion that governments only tax the income earned inside their borders. Just as good fences make good neighbors, territorial taxation avoids fiscal conflict between nations since governments agree they won´t tax income earned in other nations. But since the OECD´s initiative is explicitly designed to help enforce worldwide tax systems, territorial taxation would be another casualty in the battle against tax competition.

The OECD has the wrong idea. You don´t fight tax evasion by creating a global network of tax police. Not only would this approach destroy financial privacy and fiscal sovereignty, it also wouldn´t work. Taxpayers would simply shift to the underground economy. And with more than 20 percent of economic activity already off-the-books in some European nations, the time has come for the OECD to withdraw its misguided proposal.

Fortunately, President Bush understands that low tax rates and fundamental reform are the best way to fight tax evasion. His tax plan will move America in the right direction, and the administration already has signaled that the next step is tax reform. This may not be good news for the bureaucrats in Paris, but it is great news for American taxpayers and it will be great news for foreign taxpayers when competition forces other nations to follow suit.

Judd Gregg is a Republican member of the U.S. Senate from New Hampshire.

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