Threats to Financial Privacy and Tax Competition

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Global economic growth and personal freedomare under attack by governments and internationalorganizations seeking to squelch financial privacyand tax competition. Privacy rights and internationaltax competition are beneficial constraints onthe monopoly power of governments. But high-taxnations and organizations such as the EuropeanUnion are pressing for international agreements toremove those limits on government power at theexpense of prosperity and freedom.

Today, individuals hold substantial wealth andhave many financial relationships, so financial privacyissues have become increasingly important.Unfortunately, many nations are passing laws toundermine financial privacy with initiatives suchas requiring banks to provide governments withpersonal financial data. In the United States theerosion of privacy started before September 11,2001, but the war on terrorism has increased governmentintrusion and further eroded rights.

A parallel series of intrusions on financial privacyhas occurred as governments have attemptedto gain more tax revenue. Several internationalorganizations, including the Paris-basedOrganization for Economic Cooperation andDevelopment, have launched initiatives to suppressfinancial privacy in order to create a globalnet of high taxes on capital income.

Efforts to thwart tax competition throughgovernment information sharing and other initiativeshave been prompted by the rise in globalcapital flows in recent years. Some countries,such as Ireland, have taken advantage of the newglobal economy and cut taxes to attract foreigninvestments. But the governments of many bloatedwelfare states feel threatened by this globalreality and are taking unproductive steps todefend their high-tax economies.

The war on terrorism has given governmentsthe green light to toughen intrusive laws at theexpense of individual financial freedom. The USAPatriot Act of 2001 expands requirements thatbanks report on their customers. Governmentofficials argue that bank secrecy is an obstacle tolaw enforcement efforts to prevent money laundering.Certainly, stopping money laundering byterrorists is an important strategy for combatingnational threats, but full frontal assaults onfinancial privacy have not been shown to aid lawenforcement. Indeed, casting a government informationnet too wide diverts law enforcementfrom concentrating on individuals engaging inreal criminal activities, while permanently underminingthe freedoms of law-abiding citizens.