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(English) Cartelizing Taxes: Understandig The Oecd’s Campaing Against “ Harmful Tax Competition

By Andrew P. Morris y Lotta Moberg, University of Alabama School of Law

October 27th, 2011

Domestic policy decisions constrained by competition among jurisdictions to attract capital will be transformed into international decisions dominated by a cartel of wealthy nations.

In this paper, we explore the evolution of developed countries‘international cooperation on tax issues from the initial focus on finding solutions to problems that impeded international economic activity to a focus on protecting a few states‘abilities to collect revenues at the expense of other states.5 We ask why the OECD evolved from a forum focused on lowering transactions costs to increase private sector competition across borders into a cartel aimed restricting competition among states. We conclude that 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 organization formed to promote economic development began devoting resources to restricting competition to benefit some states at the expense of others illustrates an important problem for international cooperation more generally. The dynamics at work in the OECD tax competition case are present elsewhere and suggest that the creation of forums to enhance international cooperation is not always a benign development for states and interests excluded from those forums.

The transformation was also in part the result of changes in the competitive position of

developed economies with respect to the rest of the world. In the competition among states to attract economic activity, larger developed economies had been sheltered from competition by the combination of the costs of conducting international transactions and the barriers to such transactions provided by the mix of capital controls, trade barriers, and other restrictions on financial transactions.

As these barriers declined and investors grew more sophisticated at making use of international financial structures to reduce tax burdens on international transactions, states whose economies‘ size had previously been sufficient to make them attractive locations for investment found themselves struggling to capture revenue from newly internationalized transactions. These states then sought to restrict tax competition, which in turn required them to create a means of delegitimizing such competition and by preventing each other from defecting from the cartel by lowering tax rates unilaterally.

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