Harmful Tax Competition

First Published: 2001-07-26

by 200 Economists including Nobel Laureates 
Milton Friedman and Jim Buchanan

(The following is a letter to President George W. Bush dated May 31, 2001.)

“We, the undersigned economists, urge you to reject the Organization for Economic Cooperation and Development’s so-called “harmful tax competition” initiative. According to the OECD, it is unfair for low-tax countries to attract jobs, capital and entrepreneurial talent away from high-tax countries. To stop this process, the Paris-based bureaucracy is threatening low-tax nations with financial protectionism unless they change their tax and privacy laws so that high-tax nations can more easily double-tax income that is saved and invested – even when that income is earned in other nations. 

“This is a completely misguided initiative. Tax competition is a liberalizing force in the world economy, something that should be celebrated rather than persecuted. It forces governments to be more fiscally responsible lest they drive economic activity to lower-tax environments. Other reasons for our opposition includes: 

  • “The OECD seeks to create a tax cartel – Consumers benefit and the economy is more efficient when gas stations, banks, pet stores, and car companies compete. The same thing is true for government. Competition promotes efficiency and encourages lawmakers to rationalize public finance.
  • “The OECD is threatening global commerce – Protectionism is a bad idea, and it is a really bad idea when the goal is to interfere with international capital flows. The OECD effort is akin to a high-tax state like California trying to block investment dollars from flowing to a low-tax state like Nevada.
  • “The OECD proposal will boost the underground economy – Instead of propping up non-competitive tax systems, criminalizing tax competition will simply drive taxpayers into the informal economy. A low tax burden, by contrast, will reduce incentives to hide, shelter and under-report income. 
  • “The OECD is defending bad tax policy – In order to minimize tax-induced distortions, the tax code should neither subsidize nor penalize different activities. Yet the OECD initiative is driven by a desire to help high-tax nations double-tax income that is saved and invested.
  • “The OECD will hurt growth in less-developed nations – Penalizing countries for adopting market-friendly tax systems will hinder economic reform and reduce growth rates in the developing world. This may even cause more crime since opportunities for honest employment will shrink.

“Mr. President, we ask again that you stop the OECD’s ill-conceived project. As the world’s largest economy and single largest contributor to the OECD’s budget, the United States has the ability to pull the plug on this unwise proposal.”

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