The Case Against The OECD

In the last two decades of the century, the bureaucracy’s mission began to evolve, especially with regard to taxation. Ronald Reagan and Margaret Thatcher had implemented major reductions in personal and business tax rates. Those reforms were very good for the US and UK, boosting growth and making their respective economies more attractive for global investors, entrepreneurs, and job creators. Indeed, the US and UK tax reforms were so effective that other governments felt pressure to lower their tax rates. Tax competition was leading to lower tax rates and better policy, just as competition in the private sector leads to lower prices and more efficiency.

Thanks to this virtuous cycle of tax competition, there was a 20-year-plus period of tax rate reductions. Top personal income tax rates fell from an average of nearly 68 per cent between 1980 and 2005. During the same period, average corporate tax rates dropped from an average of 48 per cent to about 24 per cent. But the improvements in tax policy were not limited to statutory rates. Many nations reduced taxes on interest, dividends, and capital gains, and there were also reductions (and even eliminations) of death taxes and wealth taxes.

So-called tax havens were a major factor in encouraging lower tax burdens capital income. Globalization in the late 20^th century made it easier for savers and investors to shift money across national borders in the search for better policies.

Needless to say, there were plenty of politicians who disapproved of this liberalising process. As far as they were concerned, tax competition was “harmful” and “unfair” since it hindered their ability to impose higher tax burdens. This is where the OECD began to play a pernicious role. In a 2012 article for the Columbia Journal of Tax Law, Andrew Morriss and Lotta Moberg described the OECD’s evolution.[1]

‘…the OECD became the main multilateral forum on tax issues through its work on solving double taxation problems caused by the impact of differences across tax systems on entities and individuals operating in more than one jurisdiction. This mission expanded significantly over time as a focus on preventing double taxation shifted to an effort to restrict harmful tax competition on rates among jurisdictions. The OECD began to seek to restrain both member and non-member countries from lowering taxes and to encourage lower tax jurisdictions to raise their rates.’

The bureaucrats in Paris were happy to become a vehicle for pushing tax harmonisation instead of tax competition. As Morriss and Moberg explained, the OECD wanted this role since it meant more money, more staff, and more relevance.

‘…this transition was in part the result of entrepreneurship by a group of OECD staff, who spotted an opportunity to expand their mission, bringing with it a concomitant increase in resources and prestige. They accomplished this by providing a framework for interests within a group of high tax states to create a cartel that would channel competition in tax policy away from areas where those states had a competitive disadvantage and toward areas in which they had a competitive advantage. How an organisation formed to promote economic development began devoting resources to restricting competition to benefit some states at the expense of others illustrates an important problem.’

The aforementioned problem is that the OECD has morphed from an organisation seeking to open markets and facilitate competition to a bureaucracy working to prop up the inefficient and uncompetitive fiscal systems of its most powerful member nations.

Unfortunately, the bureaucrats have been somewhat successful. The OECD’s first victory was the erosion of financial privacy. Faced with threats of financial protectionism, even Switzerland weakened its human rights laws regarding financial privacy. As a result, it is now very difficult for individual savers and investors to benefit from better tax policy in other jurisdictions.

The next step for the OECD is the proposed corporate tax cartel. This process has been underway for a few years and all the world’s jurisdictions are presumably going to have to make sure they have corporate tax rates of at least 15 per cent. Either that or allow other governments to tax the profits earned inside their borders.

Once the OECD coerces all governments into that cartel, it is a good bet to predict that there will be further efforts for tax harmonisation. Some governments are already agitating for a global wealth tax, though that may be too difficult in the near future.[2] A minimum tax on individual capital income may be more likely. And don’t be surprised to see governments agitating to increase the 15 per cent corporate tax requirement. Indeed, it’s already been happening.[3]

So how should proponents of free markets and economic liberalisation react to these threats? There are two possible strategies. One approach is to discourage the OECD’s fiscal imperialism by threatening to reduce the bureaucracy’s funding. The United States is the biggest sponsor of the OECD, and the bureaucrats would not want to see their gravy train derailed. Especially since they receive rather generous tax-free salaries.

The Centre for Freedom and Prosperity has been a long-time advocate of defunding the OECD. More recently, the Cato Institute has become a prominent advocate of this approach. Here are some excerpts from an article by Adam Michel.[4]

‘President Biden’s Treasury Department has been the key driver of the Organisation for Economic Co-operation and Development’s (OECD’s) project to create a global tax system that raises the cost of international investment… Americans are staring down a costly global tax hike. Republicans are right to criticise the OECD, and as appropriations season gets underway, they should renew efforts to limit US funding of the OECD for projects that raise taxes or otherwise promote government-centric policy solutions.’

He further notes that going after the OECD’s funding would send a signal to the rest of the world that it is okay to resist the global corporate minimum tax. Indeed, the entire process might unravel.

‘The primary message other countries are hearing from the United States is from Treasury officials, like Secretary Yellen, who have an ideological stake in the success of the OECD global tax increases. A louder and more forceful congressional message rejecting the OECD deal could go a long way toward undermining the administration’s pressure campaign for other countries to adopt the OECD rules.’

There is a lot to like about this strategy, though it has not worked. Over the past two decades, I have tried several times to get Republicans to wage this battle.[5] But my efforts have not yet been successful, even when the GOP has controlled the White House and Congress.[6] The OECD, to its credit, is very good at ‘wining and dining’ lawmakers, especially since the bureaucracy’s existence is a good excuse for taxpayer-financed trips to Paris.

Another strategy is to simply have the United States opt out any OECD tax cartels. This approach does have a track record of success. When the OECD put together its blacklist of tax havens in 2000, it seemed the Paris bureaucracy would achieve a quick victory. But the Centre for Freedom and Prosperity mobilised congressional Republicans and convinced the Bush Administration to withhold support.

This approach worked because the US is the proverbial 800-pound gorilla of the world economy. And just as in the 1970s when the OPEC oil cartel relied on Saudi Arabia to be successful, an OECD tax cartel will only be successful with American participation. Indeed, the reason the OECD eventually was successful is that Obama took power in 2009, and the US government got back in bed with France, Germany, and the other high-tax governments that dominate the OECD’s membership.

If truth be told, the OECD has no independent power. The only reason low-tax jurisdictions feel any need to pay attention is because of the implicit – and sometimes explicit – threat that failure to comply will result in sanctions from the American government. So if the American government walks away from the OECD, even only figuratively, it is highly unlikely that any tax harmonisation schemes will move forward.

So what does all this mean, given the results of America’s recent elections? The easy answer is that the bureaucrats at the OECD are surely uneasy. Republicans will soon control Washington and they are not sympathetic to a tax harmonisation agenda. In part, this is because they are more sympathetic to free markets and low taxes when considering national and international economics.

But there is also a personal reason for Mr Trump to reject the OECD agenda. Officials from the Paris-based bureaucracy in the past have launched vitriolic attacks against the President-Elect, equating him to Hitler and accusing him of racism. In all likelihood, Trump is completely unaware that OECD officials have made these smears. But if there is a major discussion involving the OECD in the White House next year, suffice to say that Trump will not react favourably if informed about the undiplomatic and unprofessional behaviour by the bureaucracy’s senior bureaucrats.

Combined with the fact that many congressional Republicans are irked by the OECD efforts to grab more money from American companies (a behind-the-scenes motive for the global corporate minimum tax), there are a couple of reasons why the OECD’s gravy train may get derailed.

[1] https://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=1052&context=facscholar

[2] https://danieljmitchell.wordpress.com/2024/03/01/the-tax-cartel-crowd-now-wants-a-global-wealth-tax/

[3] https://danieljmitchell.wordpress.com/2021/07/08/tax-cartels-mean-ever-higher-tax-rates/

[4] https://www.cato.org/blog/its-time-defund-oecd

[5] https://danieljmitchell.wordpress.com/2011/11/11/per-dollar-spent-oecd-subsidies-may-be-the-most-destructively-wasteful-part-of-the-federal-budget/

[6] https://danieljmitchell.wordpress.com/2018/06/03/defend-the-market-economy-defund-the-oecd/

Daniel J. Mitchell
Daniel Mitchell is president of the Center for Freedom and Prosperity, a pro-market public policy organization in the United States.