Threats to Financial Privacy and Tax Competition

October 2, 2003 • Policy Analysis No. 491

Global economic growth and personal freedom are under attack by governments and international organizations seeking to squelch financial privacy and tax competition. Privacy rights and international tax competition are beneficial constraints on the monopoly power of governments. But high‐​tax nations and organizations such as the European Union are pressing for international agreements to remove those limits on government power at the expense of prosperity and freedom.

Today, individuals hold substantial wealth and have many financial relationships, so financial privacy issues have become increasingly important. Unfortunately, many nations are passing laws to undermine financial privacy with initiatives such as requiring banks to provide governments with personal financial data. In the United States the erosion of privacy started before September 11, 2001, but the war on terrorism has increased government intrusion and further eroded rights.

A parallel series of intrusions on financial privacy has occurred as governments have attempted to gain more tax revenue. Several international organizations, including the Paris‐​based Organization for Economic Cooperation and Development, have launched initiatives to suppress financial privacy in order to create a global net of high taxes on capital income.

Efforts to thwart tax competition through government information sharing and other initiatives have been prompted by the rise in global capital flows in recent years. Some countries, such as Ireland, have taken advantage of the new global economy and cut taxes to attract foreign investments. But the governments of many bloated welfare states feel threatened by this global reality and are taking unproductive steps to defend their high‐​tax economies.

The war on terrorism has given governments the green light to toughen intrusive laws at the expense of individual financial freedom. The USA Patriot Act of 2001 expands requirements that banks report on their customers. Government officials argue that bank secrecy is an obstacle to law enforcement efforts to prevent money laundering. Certainly, stopping money laundering by terrorists is an important strategy for combating national threats, but full frontal assaults on financial privacy have not been shown to aid law enforcement. Indeed, casting a government information net too wide diverts law enforcement from concentrating on individuals engaging in real criminal activities, while permanently undermining the freedoms of law‐​abiding citizens.

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