On The Nature Of The Political Influence In International Tax Competition

Regardless of how Government takes money out of your pocket so it can spend it, the legalised method of taking is called taxes. The idea that paying taxes is voluntary or welcomed by the taxpayers is one of the great lies promoted by the Government, including most of the judiciary. Taxpayers either pay or will be made to pay. Some government official with a gun ultimately backstops tax compliance enforcement. For example, why else would the IRS need five million rounds of ammunition on the ready?

Governmental taxing, spending, borrowing, or creating money to pay a debt does not occur in a vacuum. Instead, every action by Government is driven by politics. There was, for example, nothing scientific about adopting the income tax in the United States. The power behind politics comes from those with money. Political campaigns do not come cheap. With the quid comes the pro quo. A quarter goes into the jukebox, and the song picked is expected to be played. Or else, no more quarters.

Money drives the passage of legislation. In the United States, Congress votes on new tax and spending laws which are never read and often before the bills are even written. The idea of a budget is just for political shows. Congress does what it is told.   The terms used to describe this circumstance include words like "shadow government," "dark money," "elites," "globalist," and such. These are intended to describe the people and process of the powers behind the throne.

Both nationally and internationally, policy and the means of enforcement are created through fronting non-governmental organisations, institutes, groups, associations, think tanks, university study committees, and such. The Organisation for Economic Co-Operation and Development is a prominent example. It started in 1948 with the narrow purpose of administering the United States Marshall Plan for reconstructing post-WWII Europe as the Organisation for European Economic Cooperation (OEEC). Like any bureaucracy, mission creep led to an expansion of purposes, with its administrators living tax-free in Paris.

By 1961 it reorganised as the OECD –the Organisation for Economic Cooperation and Development - to fit its global views. The limited membership expanded to include countries worldwide, but its policy directives came primarily from the United States and certain European countries. It was repurposed as a restricted club of countries run, influenced, and directed by a small group of elite globalists. 

In 1998, the OECD, in growing its global influence, formed the Centre for Co-operation with Non-Members (CCNM) to link developing countries into the OECD framework. An outstanding achievement that brought more countries under its sway but who had no real influence or the right to vote on policy. A large base of followers. In his article “The OECD” (March 2004), Professor Richard Woodward focused on the fact that the OECD "no longer has a clearly defined raison d'etre, no clear purpose, few exact commitments…and no simple goals which command public understanding." 

 The OECD's efforts are intimately intertwined with the International Monetary Fund (IMF), World Trade Organisation (WTO), the various "G" groups limited to OECD members (G7, G8, G10, G20, G22, G24, and G30), the European Union, and a host or multitude of other newly formed special purpose non-governmental bodies. Many, if not most, are members or support members of the World Economic Forum. It appears that the ultimate funding source - like determining the ultimate beneficiary in a legal structure - comes from a small group of globalist corporations and foundations.

In April 1998, the OECD issued its Report on “Harmful Tax Competition: An Emerging Global Issue”. Despite the implications of the title, it was not a criticism of OECD members using their income tax systems against each other. Instead, it served as a condemnation of small island jurisdictions as offshore tax havens - as if the onshore OECD countries were not doing the same or more.

However, offshore jurisdictions with their indirect or territorial tax systems are not even in tax competition with the OECD member states. Quite the contrary. Their services were vital to facilitating transactions for multi-national interests, including governments. If the OECD wanted some changes, why would the OECD, particularly the US, opt to use coercion rather than persuasion to achieve consent?

The OECD claims innocence of wrongdoing as it technically has no enforcement powers. But the enforcement mechanism was set in motion by the G20 onshore powers, which put forward a list of enforcement measures based on an analysis of the OECD. Not unlike the spark, which then lights the fuse. The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) are two dramatic policy explosions. Neither of these shots have yet to hit their target.

Understanding Tax In Historical Context

The tax historian Charles Adams (For Good and Evil, The Impact of Taxes on the Course of Civilization) tells us, "Taxes are a powerful mover of people, more than governments either care to admit or realize."

According to Adams, "Taxes are the fuel that makes civilization run. There is no known civilization that did not tax. A tax is imposed by Government, and there are decidedly negative consequences for failure to pay them."

As Adams says, "A tax is owned because a government orders it to be paid. Nothing else is required. The essence of a tax is, therefore, the taking of money, or property, or services, by Government without having to pay for it."

He tells us ancient Sumer, some 6000 years ago, is the first civilisation we know that had a tax system. Recorded on clay cones, is the saying "there were the tax collectors." Everything was taxed, even the dead. A proverb on one of the tablets reads, "You can have a Lord, you can have a King, but the man to fear is the tax collector."

In every civilisation, when taxes became too high, the fight to avoid taxation became inevitable. An example of what is too high in terms of taxation is seen in two paragraphs of the Congressional debates which led to the imposition of the income tax in 1913: 

“A fear expressed by a number of opponents was that the proposed law, with its low rates, was the camel’s nose under the tent—that once a tax on incomes was enacted, the rates would tend to rise.

“Sen. William E. Borah of Idaho was outraged by such anxieties and derided a suggestion that the rate might eventually climb as high as 20 percent. Who, he asked, could impose such socialistic, confiscatory rates? Only Congress. And how could Congress—the representative of the American people—be so lacking in fairness, justice, and patriotism?” (emphasis added)

Today the OECD uses a 20 per cent rate as a minimum rate factor defining a tax haven.

With the passage in 1913 of the Income Tax Act, it did not take long for the United States Congress to pass high progressive rates. In 1921 newly elected President Warren Harding appointed Andrew Mellon as Secretary of the Treasury. Mellon was one of the wealthiest men in the United States and the world, whose bank, the Mellon National Bank, financed and held an enormous amount of stock in America's most successful companies. Mellon also served under Presidents Coolidge and Hoover. He favored the reduction of tax rates, balancing the budget, and paying the national debt in the aftermath of World War I. In May 1924, he published his analysis of the US tax system in a book entitled Taxation, The People's Business.

Mellon tells us,

“Since the war [that being WWI], two guiding principles have dominated the financial policy of the Government. One is the balancing of the budget, and the other is payment of the public debt… a moment's reflection will convince anyone that prosperity cannot come from continued plunging into debt. The present condition of Europe [referring to the Weimar Republic] is the best proof of the danger of inflation and financial pyramiding.” 

He was against the Congressional practice of mandatory spending from the Treasury using indefinite or revolving-fund appropriations. The indefinite appropriations not only conceal how much money is being spent but frequently conceal even the fact that an appropriation is made. This Mellon says is evading a Constitutional requirement by "diverting Government funds before they are covered into the Treasury."  Two warnings by Mellon of particular importance are effectively ignored by today’s governments.

“The disposition of vast funds is put into the hands of administrative officers of various departments or Government agencies without limitations to their use, and a situation is thus created which is not only contrary to the intent of the Constitution but is also unscientific and dangerous in the extreme."

“Our civilization, after all, is based on the accumulation of capital, and that capital is no less vital to our prosperity than is the extraordinary energy that has built up this country the greatest material civilization the world has ever seen. Any policy that deliberately destroys that accumulated capital under the spur of no necessity is striking directly at the soundness of our financial structure and is a menace for the future.”

As for the effect of tax and tax rates, Mellon cites an open letter sent to the House Ways and Means Committee (which controls tax policy in the House of Representatives), making points even more applicable today. It notes the impossibility of immediately closing all the tax loopholes. It criticises politicians who vote for tax rates knowing that the vote for those rates will make the taxpayer use the loopholes to avoid tax.

Mellon was detested by President Roosevelt who promoted the socialism of his “New Deal”. It resulted in his being prosecuted for tax evasion. At the trial, he was found not guilty.  It highlights the fact that Presidents and other politicians use tax power as a weapon. Tax is the power to destroy.

While politicians debate the rates of tax, the real question is the honesty and integrity of the progressive income tax system. The justification for eliminating high rates is not to benefit a few rich but to get a tax that can be enforced. As Mellon noted:

“Any rate is too high that pushes the income tax into deeper disrupt...Politicians should not expose tax to contempt as a complicated nightmare of political dreamers.

“Few people, rich or poor, pay taxes they can lawfully avoid.” (Emphasis added).

The full-frontal attack on tax havens by the United States started with a special report in 1981 by Richard Gordon as Special Counsel for International Taxation entitled “Tax Havens And Their Use By United States Taxpayers—An Overview”.

The Government’s starting point was the presumption, a given, that tax havens used by American taxpayers are a problem. Mr. Gordon was tasked to provide optional solutions.

Gordon stated that the jurisdictions under examination had legitimate rights and purposes in choosing their respective national policies. However, he objected to what the United States viewed as diversion of capital, use by narcotics traffickers and other criminal activities, and tax evaders.

He observed that tax evasion was “…difficult to determine, partly because the terms are not well-defined, and partly because the law governing the transactions is imprecise and the information is incomplete. There are many grey areas….”

Gordon attempted to explain some of the characteristics of tax havens. The Report lists some typical characteristics, including low- or no-income tax. Candidly, he observed that “Applied literally, however, this definition would sweep in many industrialized countries not generally considered tax haven, including the United States….” (emphasis added).

However, in what I think is particularly relevant, he noted that “The term ‘tax haven’ may also be defined by a ‘smell’ or ‘reputations’ test:  a country is a tax haven if it looks like one and if it is considered to be one by those who care. Many publications identify jurisdictions as tax havens, and the same jurisdictions generally appear on all of the lists.” 

Some Concluding Observations

The problem with an income tax system is not merely the rates, but figuring out to what the rates apply and how to exert enough power to collect without undue resistance. Charles Adams, the author of For Good and Evil, the Impact of Tax on the Course of Civilization, tells us that civilisations at every age, going back to the Egyptians, Jews, and Romans, tried to use an income tax system. It always failed. Indeed, the primary factor in every revolution throughout history was oppressive taxation.

The European Union experience demonstrates the failure of utopian – socialist – tax delusions. Creating a trade union is achieved mainly because private business interests work out a consensus. Tax matters are always a political battle. Every country wants to shift the burden and loss to someone else but reap the benefits of capital investment.

Political fantasies of the bureaucrats in Brussels are severely crippling EU economies. Personal freedom is being replaced by collectivism. Soon enough, I suspect, The Declaration of the Rights of Man may be declared hate speech and prohibited. As regards tax rate competition, Britain proposes income tax cuts to spur its economy. It is a recognition that lowering taxes enable savings for capital creation or consumption spending and lessens the propensity to tax avoidance. Perhaps tax competition and the race to the bottom are good things, after all?

The United States, as the global superpower, also has a super complex tax system. The Treasury needs 85,000 more agents to administer the system to achieve a reliable level of compliance. Congress has kept the IRS understaffed, overburdened, and underfunded for decades. The consequence is that it cannot produce an accurate set of books and records from which to audit. That alone evidences the utter failure of income tax as the method to finance government.

The principals of free market capitalism dictate the governments use indirect taxation to finance public services. Politics is then forced to benefit the economy and promote social happiness. As we have learned, income tax leads to government manipulating markets and people for purely political benefits. The OECD needs to direct its efforts to implementing free market capitalism and harmonising human rights around the world.

Denis Kleinfeld
Denis Kleinfeld is highly regarded as a lawyer, teacher and author. His private legal practice, Kleinfeld Legal Advisors, is located in North Miami Beach Florida. He is an Adjunct Professor at the LLM Wealth and Risk Management Program, Texas A & M School of Law. His private practice focuses on strategy planning of domestic and international tax, legal, financial, matters involving the wealth and risk management for private clients and private businesses. He is co-author of the two-volume treatise, “Practical International Tax Planning,” 4th Ed. published by Practicing Law Institute. He is the contributing author on Foreign Trusts published in “Administration of Trusts in Florida” by The Florida Bar and authored chapters for the American Bar Association’s in “Asset Protection Strategies: Wealth Preservation Planning with Domestic and Offshore Entities Vols. I and II.” He is a contributing author to the “LexisNexis Guide to FATCA”.