A meeting was held in Mexico City last week under the auspices of the Paris-based Organization for Economic Cooperation and Development (OECD), whose implicit goal is to create a global high-tax cartel. It claims to be in favor of transparency and global economic growth. However, as with many domestic and international government organizations, the OECD's actions are often contrary to its words. In order to create a global tax cartel, the OECD needs to have tax information shared among nations — which means that the citizen of any country that signs on to this scheme may have his or her tax information shared with other member jurisdictions.

The Center for Freedom and Prosperity sent a delegation to the Mexico City meeting. It included my colleague Daniel J. Mitchell, a senior fellow at the Cato Institute. Mr. Mitchell has written extensively on the importance of global tax competition, which is needed for economic growth, the preservation of human rights and civil societies. Mr. Mitchell was there to provide intellectual support to smaller, low-tax jurisdictions, which were trying to protect their tax sovereignty, and also to report on the meeting.

The international bureaucrats who run the OECD's Fiscal Affairs Committee managed to persuade a hotel to cancel Mr. Mitchell's reservations and then tried to get him thrown out of the public lobby of the hotel where the meeting was held — as he was quietly meeting with delegations from lower-tax jurisdictions and the press. Fortunately, when Mr. Mitchell and members of the press objected to the bullying tactics of the OECD officials, he finally was allowed to stay.

The OECD has managed to get 87 jurisdictions to sign on to its global "tax standard." The high-tax countries are using the OECD to threaten low-tax jurisdictions to sign this agreement. It is worth noting that the tax bullies at the OECD and at other international organizations, such as the United Nations, International Monetary Fund and World Bank, who demand that others pay higher taxes, enjoy tax-free personal income courtesy of the world's taxpayers.

Freedom House, an organization that keeps its eye on human rights abuses and anti-democratic activities by countries, lists a number of the countries on the OECD list of cooperating jurisdictions as "not free" or only "partly free" — including Russia, China and the United Arab Emirates. Yet some democratic and free jurisdictions have been listed as noncooperating by the OECD. According to the OECD, the U.S. should be sharing tax information with nondemocratic and/or corrupt countries on its list. Worse yet, the Obama administration is supporting the OECD in this wholesale violation of basic rights.

The OECD's mission statement says its task is to: "Support sustainable economic growth, boost employment, raise living standards, maintain fiscal stability, assist other countries' economic development, and contribute to world trade." However, its current attempt to stop "harmful tax competition" — which is an oxymoron — and destroy financial privacy is totally contrary to its stated mission. The OECD is supporting the double taxation of capital and trying to quash those jurisdictions that do not levy multiple taxes on savings and investment, i.e., productive capital. Without high levels of productive capital, countries will not grow and new and well-paying jobs will be created only rarely. Taxing capital is not only economically destructive but morally suspect. If the OECD ultimately gets its way, individuals and businesses trying to protect themselves from multiple taxation of their savings and investments — from thuggish and rapacious governments and from criminal gangs — will have nowhere to go, and that will be the end of civil society.

The good news is that some in low-tax jurisdictions are beginning to fight back. Last week, the head of the oldest bank in Switzerland (who holds a doctorate in economics from a leading U.S. university) said he was no longer going to invest in the United States because he found the new IRS regulations — which foreign banks must follow — so vague, onerous and incomprehensible that he could never be sure his bank was not at risk. In addition, he argued that the economic path the U.S. is taking can only lead to slower growth, and his bank sees better opportunities elsewhere.

From the time of the Reagan economic reforms a quarter of a century ago until last year, the United States had the highest average rate of growth of the major developed countries. A substantial part of this growth was fueled by foreign investment in our nation. Those in the Obama administration's Treasury Department (including the IRS) who are working with the tax bullies at the OECD are driving away much of the foreign investment at a time when it is most needed.

The United States and Britain have had the largest "stimulus" programs of the major economies (as measured by increases in government spending and deficits relative to gross domestic product) and yet they are not moving toward recovery as rapidly as most other countries that had far smaller stimulus programs or none.

Many, including yours truly, have argued that the big increases in government spending were more likely to cause, rather than cure, problems, just as such policies led to a much longer period of decline during the Great Depression of the 1930s.

Despite doing better than the United States and the United Kingdom at the moment, France is still far from being a poster child for good economic policy. Its economic growth rate has lagged behind those of the United States, the United Kingdom, Ireland and many other European countries for most of the past three decades, largely because it did not make the economic reforms the others did. There seems, however, to be a growing awareness among the French that they can do better.

In recent years, a number of pro-free-market think tanks and taxpayer associations have been formed in France, and their effectiveness and impact clearly are increasing. These groups include Institut Economique Molinari, the Institute for Economic Studies-Europe, Institut de Formation Politique, Contribuables Associes (French Taxpayers Association), etc.

In part because of their efforts, France has sharply reduced its corporate income-tax rate so it is lower than the U.S. rate. France also has been reducing its individual tax rates so that many Frenchmen now pay a lower maximum tax rate than do the taxpayers of New York, California and many other states.

If the tax-rate increases proposed by the Obama administration and the Democratic Congress are passed into law, all upper-income Americans will be paying higher personal tax rates than the wealthy in France.

The economic reforms in France have not been sufficient to keep large numbers of wealthy French from moving much of their savings and investment to other countries. Rather than make their tax laws sufficiently competitive to keep their capital at home, the French have been on a crusade to force other countries to raise their tax rates and engage in widespread tax information sharing.

These bad habits have been picked up by many in the U.S. Congress as it pushes for legislation to discourage the free movement of capital along with the destruction of financial privacy. The result will be slower economic growth throughout the world, less job creation and more economic misery.

Next door to France is a neighbor that does a far better job in managing its economy — Switzerland. Even though, unlike France, it has few natural resources, Switzerland has maintained a sound currency for decades, along with relatively low tax rates and government spending, yet has managed to deliver a far higher quality of government services than the French and much higher real incomes for its citizens. Rather than emulate the Swiss, many in France try to pressure the Swiss to engage in counterproductive economic and banking policies.

This past week, the French think tank the Institute for Economic Studies-Europe hosted the sixth annual European Resource Bank meeting in Marseille, which brought together two dozen free-market organizations from European countries for a discussion of how they can make all of their institutions more effective and influential. Speakers included a number of leading European and American economists and think-tank leaders as well as Vaclav Klaus, president of the Czech Republic, who is also a noted economist.

The current French economic model continues to be far less attractive than economic models in Asia, other European Union states and Switzerland. However, there is good reason to believe that in future years, the French will modify their model so it becomes more, rather than less, attractive.

Before you answer the question, consider the following facts. The proponents claim this tax bill will reduce U.S. carbon dioxide emissions, which are purported to cause global warming. First, despite the claims of President Obama, House Speaker Nancy Pelosi and many in the media, there is no consensus in the scientific community about how much climate change, other than the normal cycles, is taking place, nor how severe it will be, and how much man-made CO2 is responsible. None of the climate models predicted the unexpected global cooling of the last decade.

It is known that the legislation will have a negligible effect on global CO2 emissions, particularly since the big polluters, such as China and India, are not playing ball. It is also known that the "cap and trade" system that the legislation calls for has been a failure in Europe, where it has been in operation for the last few years, in that it has proven to be far more costly than envisioned, has not met the CO2 reduction targets, and has been highly susceptible to corruption and abuse.

In addition, because the legislation requires Americans to use more inefficient energy (wind and solar) sources, it cannot help but raise costs for American businesses and citizens, and hence will kill jobs rather than create them (as contrasted to what Mr. Obama and Mrs. Pelosi have incorrectly claimed).

In sum, serious people understand the legislation will hurt the U.S. economy, reduce the standard of living and yet not accomplish its claimed intent; therefore, why were so many members of Congress willing to vote for it?

Are they idiots, or do they have another agenda? Yes, a few are not that bright, but many more see this as an opportunity to extract wealth from one group of Americans, give it to other groups of Americans they favor, and to their political cronies who will reward them in campaign contributions and in other ways — both seen and unseen. They are willing to engage in more tax oppression in exchange for more political power to themselves.

The tendency for political leaders — even those fairly elected — to look out more for their own personal interests rather than the greater good is not confined to America. The Organization for Cooperation and Development (OECD), whose 30 members are the major industrialized democratic countries, was formed half a century ago to promote policies to increase economic growth and free trade.

Unfortunately, political leaders in high-tax states (notably France and Germany) have captured part of the OECD and are using it as an instrument — by creating "black" and "gray" lists — to squash tax competition from low-tax-rate countries and financial freedom and privacy (which are important for global economic growth).

A European economic policy organization, Institut Constant de Rebecque, has just published an important study, "Tax burden and individual rights in the OECD: an international comparison." As part of the study, the author, Pierre Bessard, created a Tax Oppression Index by using OECD and World Bank data to measure the overall tax burden, public governance, and taxpayer rights. Italy and Turkey were judged to have the most tax oppression, while Austria, Luxembourg and Switzerland were judged to have the least oppressive tax systems. A sample of the major countries in the index can be seen in the accompanying table.

Those who advocate bigger governments and more repressive tax systems claim that the additional tax revenue is needed to promote the common good. In 2007, the government spending in Switzerland was equal to 35.7 percent of GDP (very close to the government share of GDP in the United States of 37.4 percent) while the Italians had a government sector equal to 48.5 percent of GDP.

The Italians and the Swiss share a long peaceful border, but Italy is far richer in natural resources and access to the sea than land locked Switzerland. Yet the Swiss are far more prosperous and do a much better job in delivering government services than do the Italians (or French with 52.4 percent of government spending) while, at the same time, engage in far less tax repression. The Austrian government spends 48.2 of its GDP, which is almost equal the size of the Italian government spending, but manages to raise the necessary tax money in a far less oppressive way.

The United States is in about the middle of the pack, but could have a lower score if it improved its public governance by reducing the corruption and inefficiency in Washington, and did a much better job in protecting taxpayer rights. (The U.S. Constitution explicitly gives citizens the presumption of innocence, but the Internal Revenue Service chooses to ignore the Constitution in this and many other matters.)

The world would be richer and more just if the low-tax-rate countries that protect taxpayer rights and privacy could penalize the states that engage in high levels of tax oppression, rather than vice versa, which is now the case.

The empirical evidence from the new Institut Constant study clearly shows (as have many other studies) that it is not necessary to have high tax rates or deny taxpayers basic rights and financial privacy for the government to obtain all of the revenue it legitimately needs. But as the vote on the "climate" (tax) bill in the Congress clearly showed last week, for all too many politicians, tax policy is not about revenue but political power and control.

Most of the parts of the station that were built in the late 19th century are still there — the great steel trusses and the Victorian brickwork. In its time, it was state-of-the-art, befitting what was the superpower of its day. After World War I, the station slowly was allowed to decay, as was the British economy. Beginning with the Thatcher reforms, England had a quarter-century run as the fastest-growing major economy in Europe, but still slower than that of the United States. Yet the basic structure of Victoria Station was only partially renovated during the good years, even though rail privatization and sleek new trains began to reinvigorate rail travel.

Victoria Station now resembles a poorly designed shopping mall where passengers can shop in small modern stores for the latest in consumer electronics or go to a variety of food servers — from unsightly and even somewhat dirty fast-food outlets to better-maintained, but not elegant, restaurants. Thus, the station is a rather unsightly hodgepodge of shops and trains. The neighborhood directly surrounding Victoria Station, however, has been almost totally rebuilt in recent years with tasteful, modern glass buildings and upscale renovations.

British government spending grew rapidly as a percentage of gross domestic product (GDP) from about 36 percent of GDP in 1950 to a peak of about 48 percent in 1980, which was one of the causes of the economic stagnation and seedy look of Victoria Station that persisted during that time.

In the early 1980s, Prime Minister Margaret Thatcher was able to reduce the relative size of government and the very destructive high marginal income tax rates. But government spending, as in the United States, has been allowed to drift higher during the past decade.

Professor David Smith, a former Bank of England economist and well-known commentator on the British economy, has forecast a rise in government spending to more than 53 percent of national income by 2010, the highest level since World War II. To fund this expanded public sector, net borrowing will increase from 8 percent of national income last year to more than 14 percent next year.

Mr. Smith argues, "There must be serious doubt whether deficits on this scale can be financed in a non-inflationary manner without very large capital inflows from abroad.

And it is hard to see why such inflows should be forthcoming now that the British economy has become so highly taxed by international standards."

If President Obama carries through on his threats to greatly increase U.S. taxes on carbon, etc.; allows the George W. Bush tax cuts to expire next year; and does not begin seriously to reduce spending, many economists will be able to say the same things about the U.S. economy next year that Mr. Smith says about the United Kingdom's economy today.

Mr. Smith also says: "The rise in nonproductive government spending as a share of GDP since 2000 is likely to have cut the U.K.'s sustainable growth rate by some 1.0 to 1.7 percent per annum."

The evidence shows that almost the identical economic slowdown has occurred in the United States over the past decade as government spending has increased as a percentage of GDP. Many studies have shown there are no discernible benefits in terms of objective measures of human welfare from raising the share of government spending beyond the 25 percent to 30 percent mark, yet Britain is slated to go over the 50 percent mark and America over the 40 percent mark.

The British and Americans seem to be in a suicidal race as to which country can put in the most destructive economic policies. The British are ahead at the moment. Unfortunately, there are no winners.

Current examples are all too numerous. Much of the present global financial crisis was caused by the issuance of too much debt by both governments and by private players. A mature thinker would understand that part of the solution must be a reduction in debt, and only an immature mind would advocate the creation of mountains of new and almost never-ending debt - yet this is precisely what the majority of the political class in the United States and many other countries is doing in issuing many trillions of dollars of new government debt.

Stanford University economics professor and former Treasury Undersecretary John B. Taylor has shown how the proposed additional U.S. government debt could cause 100 percent inflation over the next few years, which means most people will see their real standard of living fall as prices double. Long-term interest rates on U.S. government debt have jumped a colossal 81 percent (annualized) in just the last five months and seem slated to go higher as markets see the increased risk of future inflation.

To ameliorate some of the inflation, immature political minds (and even a few immature economists) argue for a massive tax increase to pay for all of the new debt. Mr. Taylor estimates the tax increase would have to be about 60 percent, which, of course, would kill incentives to work, save and invest and would result in a stagnant economy, or worse, massive unemployment.

For centuries in the United States, and even before under English common law, bond holders were secure in the knowledge that in a business failure they would be first in line to collect from the sale of the assets. Suddenly, the immature actors in the Obama administration have overturned well-established bankruptcy law and put a politically favored union ahead of the bond holders in the case of Chrysler and General Motors Corp.

The predictable result is that firms with strong unions already find they have to pay higher interest rates because lenders demand a substantial political risk premium. As a result, unionized firms will be even less competitive and, thus, there will be even fewer union jobs (unless the taxpayers are forced to subsidize the higher union costs).

Another sign of political immaturity in Washington, Paris and London is the attack on low-tax jurisdictions with the demand that they enforce the tax laws of high-tax countries. Just this past week, the Organization for Economic Cooperation and Development in Paris - an organization originally founded to promote economic growth - said it would help coordinate the attack of the high taxers on the low taxers.

One result of this attack is that suddenly fewer and fewer banks will open accounts for Americans living or working in other countries. The banks find the new rules too costly to administer, and thus the safer and less costly course of action for them is to refuse to provide accounts for Americans. The reason given for the attack is to collect the purported $100 billion that Americans are evading in taxes.

The Internal Revenue Service commissioner was recently forced to admit that the $100 billion number was totally fabricated without any evidence. More mature minds (than those now found in much of the Congress, the Treasury and the IRS) would understand that trying to go after a fictitious $100 billion, while putting several trillion of needed foreign investment into the United States at risk, is a fool's game.

Without bank accounts, overseas Americans will not be able to write a check on a U.S. bank to pay U.S. bills or taxes, or to get a U.S.-issued credit card, or to transfer funds to American bank accounts, or to establish a credit rating in the United States, etc. To date, the IRS has refused to do a cost-benefit test on its proposed regulations, despite requests - probably because a legitimate cost-benefit analysis would show that millions of Americans would be harmed - and potentially hundreds of billions of dollars lost - in a futile attempt to catch a few tax evaders.

The good news is that there is still time to reverse the worst aspects of the destructive policies described above - to avoid ever-increasing inflation and interest rates. The bad news is those politicians responsible both for the current mess and these proposed harmful "cures" will probably continue to act like immature teenagers with too much access to money and power.

Other things being equal, would you start a new business in a higher- or lower-tax jurisdiction, and would you prefer to live and invest in a higher- or lower-tax locale? This is not a tough question for most people, but the powers in Washington (the administration and the congressional Democratic leaders) are incensed that the American people are answering the question in a most politically incorrect way by opting out of high-tax places.

Last week, the Treasury announced a whole series of proposed new laws and very complex regulations to prevent both American businesses and individual citizens from investing where they wish. (So much for the promise to simplify the tax code.)

These proposed measures are supposed to make it more difficult and expensive for American businesses to operate in foreign countries and for American citizens to move their financial assets to lower-tax jurisdictions (all in the name of getting more tax revenue). Oh yes, who is in charge of this crackdown on you evil tax avoiders? Why none other than Treasury Secretary Timothy F. Geithner and House Ways and Means (tax-writing) Committee Chairman Charles B. Rangel — both of whom have received some fame for their own tax problems.

If a U.S. business operating globally has to pay a 35 percent (U.S.) corporate tax rate (the second-highest in the world) plus state corporate taxes while its international competitors pay much lower rates, the U.S. company will be at a competitive disadvantage. Rather than provide necessary tax relief, the new Treasury proposals, if enacted, will give American multinational companies two basic choices for the long run — move the company outside the United States to a more tax-friendly jurisdiction, or go out of business and fire the workers.

It will come as no surprise that many of the officials and members of Congress who are behind this piece of economic foolishness come from high-tax states such as New York, Illinois, Michigan and California and seem to be oblivious to the fact that many of their most productive and highly paid residents are in flight to states with no personal income tax, such as Texas, Florida, Tennessee and Nevada.

You may not be aware that foreign citizens who invest in stocks and bonds in the United States do not have to pay U.S. income tax on the interest, dividends and capital gains from those investments. This is good economic policy for the United States because it attracts necessary foreign investment. Without foreign investment, the United States would have far less capital to invest in research and development, new plants and equipment, and job creation; also, the government would have a much more difficult time financing the federal deficit.

Some U.S. citizens have been trying to get in on the good deal the United States offers foreigners by investing in the U.S. through foreign institutions. In order to close this loophole, the Treasury and Congress are proposing regulations of mind-boggling complexity that are likely to drive many foreign investors out of the U.S. market, thus causing Treasury to lose, rather than gain, revenue.

Perhaps if we treated U.S. citizens as well as we treat foreign investors by removing the double tax from interest, dividends and capital gains, the markets would boom, businesses would expand, millions of new jobs would be created and, consequently, more taxable income likely would be created, rather than less.

Those in Washington who think that all of those Americans who evade or avoid taxes are suddenly going to comply just because the rules are made more complex have lost touch with reality (and are in denial about their own behavior). If the rules on investment become too costly and onerous, an investor can simply ignore the U.S. altogether or just spend the money.

Despite the administration's assertion that its proposed new tax increases will create some unspecified number of new jobs, the large body of empirical evidence shows tax increases decrease gross domestic product. Reputable economic studies demonstrate there is a cost to the economy from approximately $1.60 to $4.50 for each dollar of income tax collected and spent by government. This is because the income tax system is very costly to administer for both the Treasury and the taxpayer.

Also, the taxes collected suck away needed capital investment and discourage productive work and economic activity. The current size of the government is well above the optimal level. President Obama's chairman of the President's Council of Economic Advisers, Christina Romer, and her husband, University of California at Berkeley professor David H. Romer, stated in a paper published in November that "a tax increase of 1 percent of GDP lowers real GDP by almost 3 percent."

Contrary to Treasury's assertions, the new tax proposals will result in less tax revenue, not more; a reduction in U.S. international competitiveness; higher interest rates; more unemployment; and less economic liberty. All suffer when those in charge do not (or wish to not) understand the real-world consequences of their actions.

Congress and the Obama administration now want to make the penalty even more severe, even though that will further tilt the playing field in favor of companies from other countries.

The U.S. is one of the few nations in the world to impose worldwide taxation. This means that American companies are taxed not only on the income they earn in the U.S., but also on income they earn in other countries. That is a problem since any money earned abroad by American companies already is subject to all applicable taxes in those other countries. That's not too surprising. After all, the IRS taxes foreign companies that earn money in America.

Yet if two countries tax the same income, that is an unambiguous form of double-taxation. Even the politicians in Washington realize that two layers of tax would cripple American companies trying to earn market share abroad. As such, American companies with foreign income are allowed a credit for corporate income taxes paid to foreign governments.

That's certainly better than nothing, but now we come to the second problem, and it's a biggie. The U.S. has a 35% corporate tax rate, much higher than most other countries. This high corporate tax rate, combined with worldwide taxation, is a huge liability for American companies.

Let's say an American company is competing around the world against a Dutch company. Both companies have manufacturing divisions in Ireland, servicing divisions in Hong Kong and financing divisions in the Cayman Islands. And to keep our example simple, let's assume each division generates $100 million of profit.

Now let's add taxes to the equation. The Irish government imposes a 12.5% corporate tax on both companies. The Hong Kong government imposes a 16.5% tax on both companies. And the Cayman government imposes zero tax on both companies.

But the U.S. has a worldwide tax system, and the Netherlands has a territorial tax system. This means that the American company owes tax to the IRS on the $300 million earned in the three jurisdictions, but the Dutch company does not need to pay any additional tax on its $300 million. And even if the American company is allowed full credit for taxes paid to the three foreign governments, its total tax bill will be more than $100 million--more than three times higher than the tax bill for its Dutch competitor.

In a competitive global economy, this is a huge disadvantage for an American company. This is why politicians, in an unusual display of common sense, created a policy known as "deferral," which allows American companies--in some circumstances--to delay the extra tax. U.S. businesses still don't get to compete on a level playing field, but deferral does significantly reduce the self-imposed tax discrimination caused by America's worldwide tax system.

Ideally, policymakers would try to fix this competitive disadvantage by lowering the corporate tax rate or shifting to territorial taxation (the commonsense notion of only taxing income earned inside national borders). In the strange world of Washington, however, moving in the right direction does not seem to be an option. President Obama has proposed to make America's tax system even less competitive by restricting deferral.

You're probably asking yourself, "Why would Obama want to hamstring American companies in the global marketplace?" There are two explanations. First, politicians love tax revenue, and the president's budget claims that this portion of his tax plan will collect as much as $210 billion. In reality, it won't collect anywhere near that much because of Laffer Curve effects, but that's no obstacle to politicians. They'll assume the money will materialize, and further increase the burden of government spending.

The second explanation is that some people in Washington think deferral is a subsidy "to move jobs offshore." They argue that if an American firm can earn money in Ireland and only pay 12.5% tax, this gives them an incentive to close down factories in America and ship them overseas.

Since nearly 90% of what American companies produce overseas is sold overseas, according to Commerce Department data, there's not much evidence that this is happening. But there's actually some truth to this argument. If a company can save money by building widgets in Ireland and selling them to the U.S. market, then we shouldn't be surprised that some of them will consider that option.

But this does not mean the president's proposal might save some American jobs. If deferral is eliminated, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland. But U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company's foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.

If deferral is curtailed or eliminated, several bad things will happen. American-based companies will become less competitive since they will face a higher tax rate. Those U.S. companies also will lose market share around the world since foreign companies will have an even bigger tax advantage. America will have fewer exports, since a big chunk of our exports are the goods that American companies sell to their foreign subsidiaries. And American workers will have fewer jobs because of the reduction in exports.

Sadly, politicians either don't understand or don't care. All that matters to them is that they get more money to spend.

Obama's $190 billion business-tax hike will hit Americans whose jobs and pensions depend on these companies doing well, and will increase pressure on already struggling colleges and hospitals. Why? Because millions of individual investors hold the companies' stocks in their portfolios, mutual funds and pension funds, as do many colleges, hospitals, museums and other institutions in their endowments.

Among the important employers in Obama's crosshairs: Aetna, Alcoa, Allstate, American Express, Berkshire Hathaway, Best Buy, Cisco Systems, Coca-Cola, Costco Wholesale, Dell, Dow Chemical, DuPont, Exxon Mobil, Ford, General Motors, GMAC, Hewlett-Packard, Honeywell, IBM, Intel, Johnson & Johnson, Kraft Foods, Kroger, McDonald's, Merck, Microsoft, Motorola, News Corp., PepsiCo, Pfizer, Procter & Gamble, Safeway, Sears, Sprint Nextel, Supervalu, Sysco, Target, Time Warner, Walgreens and Walt Disney.

Obama is outraged that these employers use offshore tax havens to reduce their tax burdens. But America has one of the world's highest effective corporate-tax rates, 36 percent, while the average for most other nations is 20 percent. This undermines US-based companies' competitiveness.

Moreover, America levies taxes on corporate profits when they're earned, and then taxes the portion of profits that are distributed as interest or dividends. And when an investor uses after-tax personal income to buy a stock that happens to go up, the US levies a tax on the capital gain (a tax Obama wants to increase).

If Obama succeeds in preventing US-based companies from using offshore tax havens, their effective tax rates will go up. There will be further downward pressure on their stocks, many of which are already down by half from recent peaks.

The offshore tax havens at issue include the Bahamas, Cayman Islands, Isle of Man, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands Antilles and Switzerland. To the extent that companies are able to reduce their tax burdens and raise earnings by using offshore tax havens, their stock valuations are likely to be higher than they otherwise would be.

Obama claims it's unfair that US-based multinational employers use offshore tax havens, and most employers operating exclusively in the US don't. But raising the effective tax rate on US-based multinationals would simply erode our competitiveness because offshore-based competitors will continue using tax havens to reduce their tax burdens and capital costs.

Ironically, Obama's increased corporate taxes would probably lead more Americans to seek higher returns by investing in offshore-based companies. The Commerce Department's Bureau of Economic Analysis says US investors hold some $5.1 trillion worth of stock in offshore-based companies. These assets have appreciated as foreign currencies have risen against the dollar, and many Americans have invested in them as a means to diversify and protect themselves from dollar devaluation.

For change we can believe in, Obama could propose abolishing corporate-income taxes altogether.

Corporations don't really pay taxes anyway. Like other costs of doing business, they pass them on to consumers.

Ever since America enacted the corporate-income tax amid a burst of populist fury in 1909, it has become a notorious source of complexity, distortions and scandals. The cost of corporate-income-tax compliance — including the necessity to hire armies of accountants and lawyers — could well exceed the revenue corporate-income taxes generate.

At the very least, Obama could seek guidance from European countries, as he has on other issues. He'd find that they've been cutting their corporate taxes. Following their lead would be much better than socking the stock market when it's trying to get off the canvas.

Among the employers in Obama's crosshairs: Aetna, Alcoa, Allstate, American Express, Berkshire Hathaway, Best Buy, Cisco Systems, Coca-Cola, Costco Wholesale, Dell, Dow Chemical, DuPont, Exxon Mobil, Ford, General Motors, GMAC, Hewlett-Packard, Honeywell, IBM, Intel, Johnson & Johnson, Kraft Foods, Kroger, McDonald's, Merck, Microsoft, Motorola, News Corp., PepsiCo, Pfizer, Proctor & Gamble, Safeway, Sears, Sprint Nextel, Supervalu, Sysco, Target, Time Warner, Walgreens, and Walt Disney.

The stocks of these companies are in millions of portfolios held by individual investors, mutual funds, and pension funds, as well as endowments at colleges, hospitals, museums, and other institutions. Obama's business-tax hike will hit Americans whose jobs and pensions depend on these companies' success — particularly in tough times. Colleges will have a harder time keeping tuition affordable if Obama hammers their portfolio holdings, and hospitals will be under more pressure too.

Obama claims his tax hikes will "level the playing field." He reasons that since U.S.-based companies doing business exclusively in the U.S. don't get to defer U.S. taxes on profits earned overseas, U.S..-based multinationals shouldn't be able to defer taxes either. He wants all U.S.-based companies to be fully subject to U.S. business tax rates that are among the highest in the world.

But U.S.-based multinationals are already paying taxes in the countries where they operate. Almost all countries impose taxes based on residency; you pay taxes where you live or operate. The United States is the major exception, imposing taxes based on citizenship. This means an American stationed abroad must pay taxes both to the country where he or she lives as well as to the United States — double taxation. Although an American can claim a credit on a U.S. tax return for foreign taxes paid, he or she will still have to deal with tax bills from two countries. In 2006, Pres. George W. Bush signed a tax increase on Americans living abroad, and the New York Times reported there was an increase in the number of Americans renouncing their U.S. citizenship.

This gives you an idea how corporate decision-makers are likely to feel about double taxation. A U.S.-based multinational company operating abroad must pay taxes to the country where it operates. Obama wants U.S.-based multinationals to pay taxes on their operations abroad as if those operations were in the U.S. The bottom line is taxes to two countries — heftier taxes, despite whatever credits might be applicable.

In the event Obama were able to impose such double taxation on the offshore operations of U.S.-based multinationals, the consequences could be devastating. U.S.-based business could be wiped out around the world because of the difficulty of competing with offshore-based rivals that have to pay taxes only to the (probably lower-tax) country where they have operations. Taxes are just another cost of doing business, and if they make the total cost of doing business excessively high, a company is bound to lose market share and ultimately withdraw from a market. Large numbers of U.S. jobs are related to business being conducted overseas, so if overseas business contracts, jobs are going to be lost here in America.

Obama, who lacks business experience, seems to imagine that the only reason U.S.-based multinationals have offshore operations is to achieve tax savings. Actually, a company is in a better position to compete with local firms if it has an operation close to its market, compared with a U.S. firm that ships its goods thousands of miles away. An offshore operation is more likely to understand local market conditions, tastes, and trends. Obama's double taxation would provide perverse incentives for U.S.-based companies to give up knowledge, relationships, and other advantages they spent years developing firsthand in world markets.

Another possibility is that Obama's double taxation triggers an exodus of U.S.-based multinationals that re-incorporate offshore. We have seen how, during the past several decades, high New York City taxes played a major role in the dramatic exodus of Fortune 500 headquarters to lower-tax states. More recently, we have seen how California's high taxes have stimulated an exodus of companies from that state, contributing to high-tech "clusters" elsewhere in the country.

Consider how double taxation would affect incentives facing U.S.-based multinationals that make more money abroad than they do in the U.S: General Motors, for example. Why would GM endure double taxation on its profitable overseas operations for the sake of its unprofitable U.S. operation? If Obama had his way with double taxation, we might wake up suddenly to find that GM had become a Swiss-based corporation that walked away from its U.S. operation, leaving it in the hands of the UAW and the U.S. Treasury (or maybe the post office). There could be many defections from the Fortune 500 list.

By undermining the profitability of U.S.-based multinationals, Obama's business-tax hikes would drive increasing numbers of Americans to invest in more profitable offshore-based companies. According to the Commerce Department's Bureau of Economic Analysis, U.S. investors already hold some $5.1 trillion of stock in offshore-based companies. This number could go up significantly. An accelerated outflow of capital from the U.S. would be bad news for U.S. capital markets and stock prices.

People and capital go where they're welcome, and when they no longer feel welcome, they move on. Obama can talk all he wants about why high taxes are fair taxes, but if they're significantly more burdensome than what's being imposed elsewhere, employers and jobs are going to go away, and all of us here will suffer.

The opposition candidate, Ricardo Martinelli, has a comfortable lead over the incumbent party candidate, Balbina Herrera. Martinelli is expected to win and become Panama's fifth president since civilian constitutional government was restored in 1989. Panama now boasts sound democratic institutions and the political campaign has unfolded like in any other mature democracy. This is quite a change from the authoritarian rule of strongman Manuel Antonio Noriega twenty years ago.

The Panama economy has been humming along nicely. From 2003-2007 its GDP per capita (Power Purchasing Parity) increased at an annual rate of 6.8 percent, the highest in Latin America during this period, higher than Peru, another country that has significantly liberalized its economy in the last two decades. The expansion of the Panama Canal will likely further boost the economy. But Panama's growth has also been underpinned by the current government's efforts to liberalize trade and reduce barriers to conducting business.

Martinelli has made some low-intensity populist promises, such as creating a cabinet ministry for indigenous people and granting pensions to every single senior citizen — including those who haven't contributed to the social security system. But his platform incorporates many elements of sound economic policy, such as cutting and abolishing some taxes, continuing the efforts to cut red tape, unilateral dismantling of trade barriers, and getting rid of energy subsidies.

The most significant proposal, however, is the introduction of a flat tax which, if implemented, would make Panama the first country in the Americas to institute it. A flat tax would rid the country of the complexity of the current tax system, reduce incentives for tax avoidance and tax evasion, and boost its competitiveness.

The introduction of a flat tax in one Latin American country will likely trigger a domino effect in the region such as the one that took place in Eastern Europe after Estonia took the lead with this policy in 1994. A second flat tax revolution might thus be in the making in Panama, which is good news for Latin America where high tax rates and complex rules force large portions of the economy into the informal sector.

Finally, Martinelli is a staunch supporter of the free trade agreement (FTA) with the U.S. that is stalled in Washington's Congress. Current president Martin Torrijos made the strategic mistake of going alone in pursuit of an FTA with the United States, instead of joining other Central American countries in DR-CAFTA. The negotiations took longer than expected and an agreement was reached shortly after Democrats took control of Congress in November 2006. It's been stuck there ever since.

Now that President Obama has finally realized that the U.S. cannot take its friends in the region for granted, the administration has hinted at approving the FTA with Panama. However, leading Democrats in Congress, not satisfied with their efforts to rewrite the environmental and labor legislation of the countries that the U.S. signed trade agreements with, are now objecting to Panama's tax laws, in particular its banking secrecy provisions. Its liberal banking laws have made Panama a financial powerhouse in Latin America. Martinelli should resist any pressure from Congressional Democrats to rewrite Panama's financial and tax legislation so as to undercut this strength in exchange for a FTA with the U.S.

The next five years represent a magnificent opportunity for Panama to position itself as the hub of the Americas. The Obama administration is well aware that growth and economic opportunities are the best antidotes to populism in Latin America. That is why Washington should welcome the election of Ricardo Martinelli with the approval of the FTA with Panama.

This is Chris Edwards' closing remarks in a larger debate on tax policy.

The Economist has chosen a provocative advocate for tax increases. But Thomas Piketty's policies are far out of the mainstream, and I don't think policymakers will take him seriously. Indeed, governments around the world have been slashing top income tax rates in recent decades—the opposite of what Piketty is proposing.

In this article, I will discuss recent reductions in income tax rates. Then I will address Piketty's obsession with corporate executives, which seems to warp his view of tax policy. Finally, I will discuss the effect of tax increases on entrepreneurs—a group of people crucial to the economy that are absent in Piketty's worldview.

In his statements, Piketty has focused on the labour supply elasticity of high earners. But the economic damage caused by high tax rates relates to the entire taxable income response of high earners. Remember that the individual income tax does not just hit labour income, it also hits capital income, including interest, dividends, and small business income. Capital income is more elastic than labour income, particularly in an era of globalisation. That's one reason why top income tax rates have been cut around the world, contrary to the advice of Thomas Piketty.

The average top personal income tax rate in the 30 nations of the Organisation for Economic Cooperation and Development fell from 68% in 1980 to 42% by 2007.¹ Non-OECD countries are also cutting rates. Cuts to top rates since 1985 include: Egypt (45 percentage points), Morocco (43 points), India (27 points), Philippines (28 points), Thailand (28 points), Brazil (33 points), and Peru (35 points).

In response to today's mobility of high earners, countries have also cut other taxes on capital, such as annual wealth taxes. Wealth tax rates have plunged, and many countries have completely abolished these taxes, including Austria, Denmark, Finland, Germany, Iceland, Luxembourg, the Netherlands, and Sweden.

As Piketty is surely aware, France's high income and wealth taxes have led to a brain drain and a wealth drain. Wealthy rock star Johnny Hallyday fled to Switzerland in 2006 to avoid France's high taxes. He said: "I'm sick of paying, that's all ... I believe that after all the work I have done over nearly 50 years, my family should be able to live in some serenity. But 70% of everything I earn goes to taxes."² Unlike Piketty, I take such complaints seriously both as a moral statement about oppressive government and as an indicator about how high-earners respond to taxes. For French every rock star like Hallyday, there are likely many entrepreneurs and scientists who have also fled high-tax France.

Rather than raising top income tax rates, countries should be cutting them. A basic theoretical point is that the economic damage, or deadweight loss, of a tax rises more than proportionally as the tax rate rises.³ In particular, a doubling of an income tax rate causes the deadweight loss to roughly quadruple. Thus, raising the tax rate on someone in a 40% bracket would create much more damage than raising the rate on someone in a 20% bracket. That is why flatter tax rate structures are more efficient than graduated tax structures.

One of Piketty's key arguments for tax increases is that the market for corporate executives does not work very well. As I noted, the economics literature on this is actually mixed. One problem is that numerous regulations distort the market for executives, such as a 1993 tax law in the United States that encouraged the proliferation of stock option compensation.

So let's repeal the distortions first, then we can have a discussion about fixing other problems in the market for executives. How can we make corporate boards more effective? What is the appropriate level of shareholder control over executive pay? I don't know the answers to those questions, but I would note that it might not be in shareholders' interest to cut executive pay. The average pay of CEOs in 1,400 large U.S. corporations represents just 0.1% of corporate revenues.⁴ Given the important role of CEOs in leading companies, it makes sense for shareholders to use compensation policies to secure the best executives they can get.

Finally, note that Piketty's solution of a punitive tax on all high-earners is oddly detached from the narrower problem he supposedly identifies with corporate executives. Piketty seems uninterested that his tax policy would hit a wide range of the economy's most productive and entrepreneurial people, not just corporate executives.

The type of people who would be hit by Piketty's 80% tax are on Forbes list of the 400 richest Americans.⁵ The great majority of these people are not the idle or poorly performing executives that Piketty seems to imagine. Today's wealthy are mainly self-made and entrepreneurial—they are not simply passive inheritors of wealth.⁶ They start new companies, they fund venture capital, and they launch innovative charitable activities, as Bill Gates does.

I wrote a study a while back about the role of entrepreneurs, and I was stuck by the power of single individuals to generate broad changes in the economy.⁷ In growing economies, it is often independent entrepreneurs who create new products and industries, not existing large corporations or governments.

Readers of The Economist are familiar with the entrepreneurial stories behind companies such as Apple and Google, but the American model of venture-financed entrepreneurship has been around for decades, even centuries. The Google of the 1960s, for example, was Xerox Corporation. It began as a small photographic equipment firm called Haloid, which struggled for years on a shoestring budget funded by angel investors. It developed an idea for a simpler paper copying machine that had been ignored by the big companies of the day. Haloid struck gold in 1960 when it introduced the world's first modern photocopier. The company changed its name to Xerox and a huge new industry was born. Similar stories of risk capital, struggle, and leadership were behind the companies that revolutionised long-distance telecommunications (MCI Corporation), package delivery (Federal Express), portable computers (Compaq Corporation), and many other industries.

Yet Piketty says that "one should think of taxing the rich pretty much in the same way as taxing pollution activities." Unbelievable! Bill Gates and Steve Jobs are economically equivalent to sludge—now there's an economic theory for the 21st century! Piketty is trying to be provocative, but that sort of thinking is scary to anyone who believes in free markets and economic growth.

Higher tax rates would have a variety of effects on entrepreneurs. I discussed the basic effect of changing their marginal incentives to work less and evade taxes more. With a tax rate as high as Piketty suggests, we would also expect that productive people would head in droves for careers as lawyers and accountants to avoid the risky world of entrepreneurship. Why take risks if the government is going to steal your payoff when you are successful?

Higher taxes at the top end would severely damage savings and investment. Under the Piketty plan, the American who earns $10m would have her tax rate above $1m jump from 35 to 80%, thus reducing her annual earnings by $4m. That would mean less money for consumption, but the more important effect is that it would reduce savings. High-earners save a higher share of their income than lower earners.⁸ When they save, their money goes to work for all of us because it flows through to businesses for capital investment. For an economy to grow, it needs a large pool of savings that is constantly replenished, but Piketty's tax policy would destroy that pool of savings.

The particular way that rich people save is important. I noted that one of Silicon Valley's strengths has been the active role played by each wave of entrepreneurial millionaires in funding the next round of innovations. Successful high-tech entrepreneurs, such as the founders of Microsoft, Dell, and Oracle, channel their wealth back into high-tech start-ups, creating opportunities for new entrepreneurs. Over the years, Microsoft billionaire Paul Allen, for example, has invested in hundreds of companies in telecommunications, biotechnology, and other areas. Such angel and venture investment is crucial for economic growth, and imposing high tax rates on people such as Paul Allen would destroy the virtuous cycle of risk-financed innovation in many industries.

In closing, I'd suggest that Thomas Piketty get his nose out of the academic literature, and spend more time researching the productive activities of high-earners in the real world. We shouldn't treat high-earners as pawns for social experiments, but instead reduce the tax burdens on them so that they can start the companies and deliver the innovations that make us all better off.

1. Chris Edwards and Daniel Mitchell, Global Tax Revolution (Washington: Cato Institute, 2008). The data includes both national and subnational tax rates. Tax rates are also available from the OECD at www.oecd.org/ctp/taxdatabase.
2. Quoted in Doreen Carvajal, "Swiss Tax Deals Lure the Superrich, but Are They Fair?" New York Times, January 14, 2007.
3. Harvey Rosen, Public Finance, 6th Edition (New York: McGraw-Hill, 2002), p. 292. To be precise, deadweight losses rise by the square of the increased tax wedge between pre- and post-tax income.
4. Ira T. Kay and Steven van Putten, "Executive Pay: Regulation vs. Market Competition," Cato Institute Policy Analysis no. 619, September 2008, p. 5.
5. Matthew Miller and Duncan Greenberg, "The Forbes 400," Forbes, September 17, 2008.
6. Luisa Kroll and Allison Fass, "The World's Billionaires," Forbes, March 8, 2007. See also Merrill Lynch and Capgemini, "World Wealth Report," 2006.
7. Chris Edwards, "Entrepreneurs Creating the New Economy," Joint Economic Committee, November 2000.
8. See data here www.bls.gov/cex/2007/Standard/higherincome.pdf and here www.federalreserve.gov/pubs/oss/oss2/scfindex.html.

Despite promises by President Obama and other politicians to simplify the federal tax code, it gets more complicated every year:

• The number of pages of tax rules skyrocketed from 40,500 in 1995 to 70,320 in 2009. Congress is increasingly micromanaging society with special tax incentives for education, energy, and other activities.
• Federal tax paperwork consumes 7.6 billion hours of time annually, which is like having a full-time "tax army" of 3.8 million people.
• There are about 500 changes to the tax code every year as Congress and the Treasury churn out a never-ending stream of laws and regulations.
• The share of taxpayers requiring professional help keeps rising, with 62 percent of returns completed by professionals in 2007.

Aside from the compliance burden, tax complexity creates other problems:

• It complicates decision-making in the economy, for example by confusing family financial planning and generating uncertainty for businesses.
• It encourages an invasion of privacy by the government. Each new tax incentive requires special documentation, which exposes people to scrutiny by the IRS.
• It results in frequent errors by taxpayers and the IRS. Individuals and businesses can get locked into battles with the IRS for years because of uncertain tax rules.
• It encourages tax evasion. High tax rates combined with complexity fosters aggressive tax dodging, which prompts Congress to pass even more complex tax regulations.

The solution to all these problems is to rip out the income tax and replace it with a low-rate flat tax, as two dozen other nations have done.

A flat tax would simplify financial planning, help preserve privacy and civil liberties, and would reduce tax avoidance activities. Taxpayers would win, and so would the government, because administration would be much easier.

Alas, there are few supporters of tax reform in Congress these days, and the Obama administration's tax policy focuses on social engineering and revenue-raising.

Adding to the problem is that 43 percent of U.S. households don't pay any income tax as a result of all the low-income benefits in the code. Those people perceive federal spending to be costless, and thus they are little interested in tax reform or budget restraint.

The trends on the business side of the tax code are equally troubling. Even though we are in the worst recession in decades, President Obama is proposing to hike corporate taxes, which will encourage companies to cut their investment and reduce jobs.

While Canada and Korea have responded to the recession with business tax cuts, U.S. politicians seem unable to comprehend that having the world's second-highest corporate tax rate at 40 percent is a damaging policy.

The total federal tax grab as a share of the economy is currently the lowest it has been in years, but that is an illusion caused by the recession temporarily reducing collections.

Looking ahead, many of President Bush's tax cuts expire at the end of 2010 and Obama's huge spending increases will likely cause him to hunt for higher revenues anywhere he can find them.

Obama has already hiked taxes on cigarette consumers—particularly harming lower-income families—and his budget contains a tax hike on energy consumers of about $80 billion per year.

There are anti-tax "tea parties" planned across the nation for April 15, hopefully signaling growing resistance to the dangerous fiscal direction being taken in Washington. High taxes are bad economics. They empower an overbearing government, and they reduce individual freedom.

Federal policymakers need to change their spendthrift ways and give Americans the low and simple tax code that they deserve.

Several serious proposals are being floated in the nation's capital that would penalize Americans for investing in low-tax rather than high-tax jurisdictions. Proponents say the measures are needed to catch tax cheats — but ignore the fact that most of the low-tax jurisdictions such as the Cayman Islands, Switzerland, etc., already have tax information exchange (for cases of probable cause), or tax withholding, agreements with the U.S. and other countries such as the U.K. and France.

Nevertheless, Sens. Carl Levin (D., Mich.), Byron Dorgan (D., N.D.), and Max Baucus (D., Mont.), as well as officials of the Obama Treasury, want to make it more onerous and costly for American companies to do business around the world and for Americans to invest elsewhere. They would even make it more difficult for non-Americans to invest in the U.S.

Mr. Levin's bill is a hodgepodge of tax increases, more regulations and penalties on American taxpayers doing business in targeted low-tax jurisdictions. Mr. Dorgan's bill would prevent certain American companies that operate and are incorporated outside the U.S. from being treated as nondomestic corporations, thus denying them the right of tax deferral until their income is brought back to the U.S. Mr. Baucus, chairman of the Senate Finance Committee, is circulating a draft bill that, among other things, would extend the statute of limitations from three to six years for tax returns reporting international transactions. The Treasury Department is proposing expanded regulations on foreign financial institutions that bring needed investment funds into the U.S.

In addition to charges of tax evasion, some members of Congress — echoing European politicians including France's President Nicolas Sarkozy and British Prime Minister Gordon Brown — have even tried to scapegoat the low-tax jurisdictions as somehow being responsible for the global recession. They are demanding that the G-20 countries come up with action proposals against them at their meeting next month.

This is nonsense. The so-called tax havens are for the most part no more than way-stations to temporarily collect savings from around the world until they are invested in productive projects, such as building a new shopping center or semi-conductor plant in the U.S. This enables a better allocation of world capital, leading to higher, not lower, global growth rates.

Indeed, to the extent tax competition between jurisdictions holds down the increase in the growth of governments, citizens of all countries experience more job opportunities and higher standards of living. And to the extent that businesses and individuals are discouraged by taxes or regulations from investing outside their own jurisdictions, they may simply choose to work and save less, period.

Those who demand increased taxes on global capital often rail against financial privacy and bank secrecy — forgetting they are necessary for civil society. It is true that not all people are saintly. But it is also true that not all governments are free from tyranny and corruption, and not all people are fully protected against criminal elements, even within their own governments. Without some jurisdictions in the world enforcing reasonable rights of financial privacy, those living in un-free and corrupt jurisdictions would have no place to protect their financial assets from kidnappers, extortionists, blackmailers and assorted government and nongovernment thugs.

It is a fool's errand to pass ever more laws against things that are already illegal, or to pass laws against people trying to protect themselves from rapacious and corrupt governments. Despite the hundreds of local, state and federal laws against financial fraud, and financial regulatory authorities like the SEC, Bernie Madoff was able to conduct the biggest ever Ponzi scheme for decades.

The chief tax writer in Congress, House Ways and Means Committee Chairman Charles Rangel, Treasury Secretary Timothy Geithner, and former Senate Majority Leader Tom Daschle apparently did not report all of their foreign-source income. Their actions tell us that either the tax law is too complex, or they thought the tax burden was excessive. Would their behavior and that of millions of others improve by making the tax law more complex and punitive?

U.S. companies are being forced to move elsewhere to remain internationally competitive because we have one of the world's highest corporate tax rates. And many economists, including Nobel Laureate Robert Lucas, have argued that the single best thing we can do to improve economic performance and job creation is to eliminate multiple taxes on capital gains, interest and dividends. Income is already taxed once, before it is invested, whether here or abroad; taxing it a second time as a capital gain only discourages investment and growth.

In fact, the U.S. does not tax most of the dividend, interest and capital gains' earnings of foreign investors in the U.S. — which means, ironically, that the U.S. is the world's largest "tax haven" for non-U.S. citizens, and that we benefit from hundreds of billions of dollars of needed capital invested here. If the U.S. did not treat foreign investors better than its own citizens (who are double-taxed on most capital income), most of the "tax avoidance" problems critics complain about would disappear.

The proposals by Messrs. Dorgan, Levin, Baucus and the Treasury will almost certainly have the unintended consequences of driving more U.S. businesses elsewhere, discouraging foreign investment in the U.S., and actually encouraging more U.S. investors to move their funds (either legally or illegally) not only out of the country, but to places in Asia or the Mideast that tend to be less cooperative with U.S. tax authorities than are the European and British low-tax jurisdictions.

The correct policy for the United States to follow is to reduce its corporate tax rate to make it internationally competitive, and to move toward a tax system that does not punish savings and productive investment so severely. We know from the experiences of many countries that reducing tax rates and simplifying the tax code improve both tax compliance and economic growth. Tax protectionism should be rejected because it is at least as destructive to economic growth and job creation as are tariffs on goods and services.