Tuesday, 2 September 2003

The EU as Trailblazer on the Road to a Global Tax Cartel

In the 20th century, nobody has done more for liberty than Hayek. To the general public he became known through his political pamphlet The Road to Serfdom of 1944. He dedicated it “to the socialists in ALL parties”. In the Preface of the 1966 edition he remarked that the word “socialism” had changed connotation: originally, it meant central planning and ownership of the means of production, now it meant socialdemocratism. Strictly speaking he should have changed the dedication to: “To the social democrats in ALL parties.”

In 1945 Hayek contributed a seminal paper to the debate on the impossibility of economic calculation in socialism. It was entitled: “The use of knowledge in society”. He drew attention to a special sort of knowledge that could be called “private” knowledge, the knowledge an agent has about his resources, his tastes, and so forth. Hence that knowledge is dispersed among the people -among all the inhabitants of our planet. Only a part of that sort of knowledge could be communicated to a central agency, and, most important of all, it would not be in the interest of the knowledge holder to disclose the information to a central agency. By doing so the individual would relinquish his privacy, in particular his financial privacy. Moreover, if many people did so, a negative externality would ensue: together with privacy liberty would vanish, and with liberty in the long-term prosperity would vanish.

Hayek’s mentor Ludwig von Mises pointed out that—in the long run—central-planning socialism and democratic socialism produce the same result: bankruptcy. They are unable to meet the challenge of competition, and hence they fight all sorts of competition: currency competition, competition of jurisdiction, tax competition, locational competition, and so forth.

Governments around the world have seized eagerly on the ‘war on terrorism’ to restrict individual freedom, including the free movement of capital, the confidentiality of banking and tax information, and the right to reside somewhere without official registration. While some of this may be necessary to track terrorists, the eagerness with which governments grasped the opportunity suggests that other objectives, like more pervasive control and regulation of citizens, were never far from the minds of Western governments.

Many OECD and EU governments have embarked on initiatives that promote information exchange policies, initiatives that are designed to abolish individuals’ privacy and limit tax competition. The expression “information exchange” is a misnomer. In practice, the EU bureaucrats request from offshore financial centers an unrestrained information disclosure on the affairs of private citizens. This inherently amounts to a diminution of private property rights. It foreshadows an intensification of the process of centralization, which we witness in the European Union.

We hear litanies on “harmful” tax competition without ever being told who is being harmed. Recently, in the Neue Zürcher Zeitung a whole-page sermon by the EU Commissioner on the Internal Market appeared wherein he preached against tax competition without ever mentioning who is being harmed. The logic of these proposals is the total abolition of financial privacy and a world where all governments can access the financial information of any individual living anywhere on the planet. (I guess that this scenario corresponds to the dreams of the EU Commissioner Bolkenstein.) Competition is not only a discovery process and a selection mechanism, it is the only means to tame power. Tax competition acts as a check on high-taxing governments. The EU and the OECD initiatives should give a pause to anyone who attaches even the slightest value to financial privacy and the benefits of tax competition. I guess that Hayek, if he were still with us, would write another pamphlet—as a sequel to “The Road to Serfdom”—entitled: “The Road to a Global Tax Cartel”.

Gerard Radnitzky

Text of the acceptance speech for the Hayek Award – Center for the New Europe, Brussels, 7 Feb 03