I have been meaning for several months to bring to our readers’ attention a fascinating study published last year. It is “Tax Burden and Individual Rights in the OECD: an International Comparison,” by economist Pierre Bessard, of the Institut Constant de Rebecque, in Lausanne, Switzerland. (The paper is downloadable gratis on the internet.)
Bessard’s paper does two useful things. First, it very nicely articulates the benefits of international tax competition, that is, encouraging countries to keep separate tax regimes. Second, it develops a novel “Tax Oppression Index” to measure the real impact of any taxation regime.
Regarding tax competition, Bessard makes some strong points. In the Organization for Economic Cooperation and Development (OECD), pressure is building for action against “tax havens” (a pejorative term for countries low in taxes and high in financial privacy), so as to bring their taxes more in line with those of the high-tax countries. As the secretary-general of the OECD, Angel Gurrie, put it, “At a time when governments need every tax dollar legally due to combat the world recession, such practices can no longer be tolerated.” Putting aside the ridiculous Keynesian notion that high taxes are the key to ending recessions, note that the goal of this bureaucrat is to shield high-tax countries from competition from low-tax ones. It is all an exercise in protectionism, with high-tax states such as France and Germany berating low-tax ones such as Luxembourg and Switzerland for offering more attractive environments for business.
But as Hayek made clear, competition is a heuristic (discovery) process. It is how we test things for quality. That is why governments seek to prevent monopolies in the private market. So why should they try to prevent other nations from competing when it comes to tax regimes? Bessard notes that even the OECD’s own research shows a correlation between high taxes and low growth.
Still more interesting is the index Bessard has devised to rank countries in regard to the real severity of their tax regimes. Rather than simply looking at, say, the top marginal personal income tax rate or corporate tax rate, his metric uses 18 criteria in three broad categories: “tax attractiveness,” “public governance,” and “financial privacy.”
Under his index, on a scale of 10 to 0, 10 being the high- est in tax oppression (tax hells), and 0 being total lack of tax oppression (tax heaven), the most tax oppressive countries in the OECD are Italy and Turkey, at 6.0. Following closely are such countries as Poland, Mexico, and Germany, at 5.9. The Dutch come in at 5.8. France, Belgium, and Hungary score 5.6; Greece 5.5, and the UK 5.3. Australia, Portugal, and the Czech Republic score 5.1; Spain and Japan rate a 5.0; and Korea, Finland, and Sweden are all a surprising 4.9. Denmark stands at 4.8, New Zealand at 4.7, Ireland at 4.6, and Iceland and Slovakia at 4.5. Canada scores a surprising 4.4 and Austria 4.2. Luxembourg comes in at 3.4 and Switzerland at 2.0.
How does the U.S. score? Surprisingly badly, given how much politicians and pundits complain that Americans are undertaxed. We rate a 5.3 — tied with the UK, and only slightly better than Greece.