The Ignored Long Term Effects of the Global Forum on Transparency and Exchange of Information for Tax Purposes

First Published: 2015-03-09

When an economist presents his opinion to the public on any subject he should be ask to swear, similar to what witnesses  do in a court trial, that he will follow Henry Hazlitt’s Lesson (Economics in One Lesson – Henry Hazlitt – 1946 – Harper & Brothers):

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

This will drastically reduce the appearance of economists who advocate special interests in media and we would be left with honest discussions about the magnitude of the effects and whether the costs are compensated by the benefits of the proposed acts or policies.

The purposes of the OECD and the G20 in creating, supporting and financing the Global Forum on Transparency and Exchange of Information for Tax purposes are clear: the governments represented in these institutions want to tax capital at its country of origin no matter where that capital is invested, they want the rest of the world to adopt similar tax systems with similar rates and they want automatic exchange of tax information. They are straight about the purpose of all these policies: they want higher revenues, they did not gruberize(1) the issue, but what about the long term consequences and the consequences to other countries in the world. Who is representing the other groups affected by these policies?

This is a modest attempt to complete the faulty analysis of this issue which is being taken for granted even by governments of countries which will be affected adversely.

Economic growth and development go hand in hand. In the long term, countries with higher rates of economic growth become developed. During the XX century many attempts were made to plan economic development and all ended up in failure. It is clear in the XXI century that there are no shortcuts and that the source of economic growth and development is a set of stable institutions protecting private property and free markets that allow for the specialization and capital accumulation that generate sustainable increases in labor productivity. Governments that introduced reforms in such direction have seen the benefits in just a few decades, even within an international monetary system that since the 1970s has increased volatility and provoked several booms and crisis.

When a country does not have enough internal capital and savings, an attractive tax system can accelerate the process. Naturally, foreign capital will flow into the country to be invested in the private sector and will benefit itself and the host country. Even government revenues grow during this process which allows for a faster development of government services (this may be the hidden curse though).

This process I am describing is nothing new, that is how many countries in the southern hemisphere became rich during the XIX century. Capital flowing mainly from Europe helped develop the infrastructure and key industries in countries like Argentina, Uruguay, Australia and New Zealand which became so rich during this process as to end up among the richest in per capita income in the early 1900s.

What are the consequences of a universal tax system and automatic exchange of information with the purpose of eliminating the incentives for capital to flow outside its country of origin?

Basically, this will freeze the present structure of international development. Left to just their own capital and savings and perhaps financing operations from the World Bank and other supranational institutions, poor countries will continue to be in that category for decades to come. It is likely that the gap in per capita incomes between developed and poor countries will increase.

I can certainly understand the interest of the governments of the developed world in implementing these policies, but only the lack of consideration to the long term effects of these measures to other groups within their societies can explain how obediently governments of the less developed countries have accepted these policy push.

As an aside, it is highly ironic and shameful that the institution which pompously calls itself the Organization for Economic Cooperation and Development is promoting the implementation of a series of policies that will damage economic cooperation and will hurt and delay the development of the less fortunate peoples of the world.  I think it is time for a change of name.

(1) Jonathan H. Gruber – professor of economics at M.I.T. specializing in health policy issues.

Definition according to the Urban Dictionary Online:

gruberize – (verb) to obfuscate, unnecessarily complicate, befuddle or fog the description of a government act or policy proposal in order to prevent the public from seeing the true objectives sought by such government. 

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