NCPA - National Center for Policy Analysis

Should Low Tax Countries Be Punished?

July 10, 2000

The controversy over taxing Internet sales is exposing the wide differences in tax rates among the states. Similarly, high tax nations are becoming increasingly worried about their ability to tax in an Internet world. The Paris-based Organization for Economic Cooperation and Development has now issued a study of "harmful tax practices" that condemns nations with low taxes for being "tax havens" that encourage money laundering and tax competition. Those nations failing to bring their tax systems into line with international norms may be subject to sanctions of various kinds.

The OECD report focuses mainly on very small countries that actively court businesses to take advantage of their low or nonexistent income taxes.

  • For example, two years ago, clothing maker Fruit of the Loom shifted its base from Chicago to the Cayman Islands, a move estimated to save almost $100 million in taxes each year.
  • More recently, a number of American insurance companies relocated to Bermuda to save millions of dollars per year in U.S. taxes.
  • And lower taxes have led to an explosion of growth in Ireland -- at 24 percent, Ireland has the lowest corporate tax in the EU.
  • By contrast, Germany's tax rate is more than twice as high and the median corporate tax rate for the EU is 35 percent.

The Internet and globalization do force changes in tax structures. Taxes on things that are hard to tax, like capital, are falling, while those on things that easier to tax (or harder to evade), like wages, are rising. This is one reason why a majority of people in almost every country now complain that their taxes are too high.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 10, 2000.


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