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Tuesday, March 3

Barack Obama, Gordon Brown, and the rise of Pussyfoot Totalitarians

Prime Minister Gordon Brown's planned speech to the U.S. Congress on Wednesday will extol the virtues of what he terms the "global society" and the benefits of globalization. David R. Henderson, a research fellow with the Hoover Institution and associate professor of economics at the Naval Postgraduate School, is decidedly unimpressed with Mr Brown's praises for globalization.

Writing yesterday for Forbes, Professor Henderson shrewdly speculated that during their meeting President Barack Obama and Brown might "cook up" a global tax cartel. If that sounds vaguely unsettling, wait'll you learn exactly what a global tax cartel is. Henderson explains:
[...] Various European governments want to "harmonize taxation," their euphemism for agreeing to keep tax rates high so that high-income workers and investors have less incentive to seek out countries with low tax rates.

This high-tax strategy is hampered by small countries, often former British colonies, that have the gall to keep tax rates low. In the past few years, the OECD has pushed vigorously to blacklist such countries, with the idea of imposing sanctions on them.

In their book, Global Tax Competition, Cato Institute economists Chris Edwards and Daniel J. Mitchell write that Gordon Brown "has a long track record of undermining the interests of the U.K. territories that are on the OECD blacklist."

Edwards and Mitchell also point out that in 2000, when Lawrence Summers was President Clinton's Treasury secretary, he claimed that tax competition among governments was "the dark side to international capital mobility."

Fortunately, with the Clinton administration on its way out, Summers put little effort into supporting the OECD's anti-tax-competition agenda. But now Summers is President Obama's main economic adviser. In case you think Summers has forgotten his agenda, he hasn't.

In a paper published in January, Summers and co-author James Hines recognized that the increasingly global economy makes people and capital more mobile and, therefore, will make government hesitant to increase corporate and individual tax rates. But they identified a way to avoid this problem: reduce tax competition between countries. They wrote:

"International agreements have the potential to play significant roles in these strategies. It is already the case that governments cooperate in international settings such as the World Trade Organization to promote international trade and investment, and bilateral and multilateral tax agreements and initiatives serve the function of facilitating tax enforcement and avoidance of double taxation of international income. Doubtless governments will come to rely more heavily on international agreements in the years to come, but it remains to be seen whether they will accelerate or offset the recent trend in the direction of expenditure taxation."

It does remain to be seen. Will the meeting on Tuesday be the opening round in a discussion of a tax cartel? If it is, will we find out?
As you can see 'harmonization,' of the type Henderson discusses, is actually an inversion of globalization -- yet that's not clear from Gordon Brown's calls for cooperation and international coordination in the globalized era.

But now go back and re-read Brown's column for The Times, which I posted yesterday, and which is a clue to what he'll say to the Congress. Henderson's explanation is Open Sesame; suddenly the meaning of Brown's words about the global society is revealed in a completely different light.

Of course tax competition between countries is a very good thing -- the one and perhaps only thing that can keep national governments from taxing their citizens to death.

Globalization, which simply means the free movement of people, goods and services around the globe, has made it possible for workers to relocate to countries where tax rates, wages, and living conditions are better than they find in their native country. For decades this has often worked against citizens whose countries have attractive salaries, etc. But now the shoe might be on the other foot.

Hands up how many American readers would consider working in another country and relocating their family there, if Mr Obama's Marxist revolution takes hold in the USA?

Sure, you can try to fight it, but if you have a young family to raise and you can sell your work skills in a country with a fair tax rate and decent salaries, why stay here and beat your head against a wall during your most productive years?

That's how many people think, all over the world, and they always have. Globalization in the modern era makes it easily possible for such people to cast their vote on their government's worst policies by relocating to another country and with a minimum of hassle.

This won't stand, from the viewpoint of government social engineers. You just can't allow citizens to high-tail it to another country if they don't like being engineered and heavily taxed. But the Stalinist solution is a little hard to pull off in these days of cell-phone cameras and internet communications. It's not longer easy to hide death camps. And thus, the rise of Pussyfoot Totalitarianism, cleverly concealed behind the mask of globalization:

If every nation's government can harmonize their taxation rates and methods of social engineering, the slicks who thought they could escape by going to another country will have nowhere on earth to run.

A German tourist explained it all quite wonderfully to me in 2003: "No one will have much but everyone will have the same."

Can they get away with it? They'll keep trying. For more on how they're trying read Global Tax Competition. But the MO boils down to:

> Incrementalism: Introduce regulations slowly, and make sure no one regulation reveals a big picture.

> Debasement of the language: Fiddle with definitions of words or think up terms that only the initiated can clearly understand.

> Sneakiness; e.g., bury key passages in the middle of 1,000 page documents that only an attorney can decipher.

In other words, the European Parliament way of doing things. Welcome to the globalized era in smoke-blowing.

How likely is it that during their meeting Messrs. Obama and Brown will get around to discussing a global tax cartel?
One minister [in Britain's government] sketched the skein of long-standing political contacts that Brown has in Obama's administration, including Larry Summers, Robert Reich and Timothy Geithner:

"I think Obama will feel very strongly drawn to back Brown ... you can't underestimate how much the development of the new Democrat projects and the new Labour projects of the early nineties are intertwined. Many of Obama's closest advisers are Brown's mates - they have looked up to Gordon for a long time. I think there will be a lot of pressure to help Gordon's position."
Given that Brown and Summers are committed to quashing tax-rate competition between countries -- I'd say its likely they'll bring up the topic, if not during this meeting then at the G20 Summit next month.
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