In a little-noticed policy turnaround, the Bush administration recently announced that the US will no longer support an international effort to rein in "tax havens" -- small nations whose lax laws allow wealthy individuals and corporations to evade trillions of dollars of income taxes in their home countries (see the Mother Jones story, Trillion-Dollar Hideaway).
Treasury Secretary Paul O'Neill declared on May 10 that the US will back out of the the Organization for Economic Cooperation and Development's initiative to cut down on border-hopping tax dodgers. O'Neill's opposition, widely regarded as a major setback to the OECD, a group of 30 industrialized nations including the US, marks a dramatic break from the Clinton administration's support of the international effort to rein in international tax evaders. American citizens alone are estimated to have at least $500 billion secretly cached overseas, costing the US government hundreds of millions in unpaid taxes -- and those numbers are widely thought to be growing.
The OECD issued a report in November calling on countries to end what it calls "harmful tax practices" that facilitate foreign tax evasion. These tax havens, many of them in the Caribbean, are famous for fiscal policies that both invite foreign investors with minimal taxes and frustrate foreign attempts to find tax evaders. The OECD is asking such tax havens to start trading information with other countries during legal investigations, to ensure their banks provide financial information, and to give up the common practice of taxing foreigners at lower rates than their own citizens. The OECD established a timeline for tax haven countries to comply and set out a list of potential penalties to induce them to do so.
O'Neill says the administration's decision was prompted out of respect for other nations' rights to determine their own tax system. More outspoken conservatives like House Majority Leader Dick Armey of Texas who oppose the OECD plan say it's an effort to quash competition among governments to attract business by lowering taxes. The European countries heading up the anti-tax haven effort, critics charge, are really trying to raise tax rates in other countries to the levels of their own. "European countries are going after US economic advantage and they're starting with these small countries," says Andrew Quinlan, president of The Center for Freedom and Prosperity.
The anti-OECD push has also picked up some moral support from the Congressional Black Caucus. Dozens of caucus members, including representatives Maxine Waters and Charles Rangel, sent a letter to O'Neill saying the push to close up the tax haven loophole could hurt the economies of developing Caribbean countries. "The free flow of capital plays a critical role in improving economic conditions in poorer nations," they wrote.
OECD spokesman Nicholas Bray says the group does favor tax competition, but wants it on a fair and open basis. The OECD, says Bray, only labels countries as tax havens if they engage in at least one of three "unfair" practices: not supporting transparency in their legal system (e.g. not allowing prosecutors access to bank records), failure to exchange certain information with foreign bodies, or giving foreign investors lower tax rates.
O'Neill has left open the possibility of supporting a pared-down anti-tax haven initiative in the future. "Organizations like the OECD can be used to build a framework for exchanging specific and limited information necessary for the prosecution of illegal activity ... We cannot tolerate those who cheat on their US taxes by hiding behind a cloak of secrecy," he said in announcing the administration's withdrawal from the OECD campaign. Then again, thanks to Bush's tax policies, many of the millionaires who have been taking their cash offshore could soon find more favorable rates closer to home.