Meanwhile, there were also attempts to pressure the United States to take action. In 1984, Congress enacted a portfolio interest exception, which allowed interest received by non-resident aliens to be exempt from U.S. tax withholding, with the express goal of attracting foreign tax-flight capital. This exemption applied to interest on bank deposits and bonds. The interest earnings did not need to be reported to the U.S. government because there was no tax liability due on the money. EU member states lobbied the Clinton Administration to change the regulation to require tax-information reporting to foreign governments. A few days before the Clinton Administration left office, the Treasury Department issued a proposed regulation to require U.S. institutions to report interest income paid to non-resident aliens. This proposed interest-reporting regulation has never been implemented, but the Treasury has not withdrawn it.

In 1989 the Financial Action Task Force (FATF) was created at the G-7 summit to combat money laundering and financial crime. The FATF is staffed by bureaucrats from 31 countries (many of whom appear to have little regard for the right to financial privacy or protections from self-incrimination). It has put forth forty recommendations, ostensibly to fight financial crime. But they are in effect used by high-tax countries to coerce information-sharing from low-tax countries. Under the threat of international sanctions, these countries are pressured into abdicating their sovereign responsibilities to protect their own citizens.

Low-tax countries and their allies have not given up without a fight, however. In 1998, when the OECD came out with its demands to restrict tax competition and its proposed sanctions, many smaller low-tax jurisdictions were left in a state of shock and panic. Several countries and offshore jurisdictions indicated they would comply, although mostly out of fear of what would happen if they didn't. Fortunately, the Swiss took the lead in demanding changes in the proposals. Switzerland is big enough that it could not immediately be rolled over. The Swiss challenge gave cover to smaller countries and jurisdictions, so they were able to say they would only comply if Switzerland and other countries did so.

Meanwhile, a global coalition of public policy organizations concerned with economic growth and personal liberty formed to argue for tax competition and financial privacy. These topics became the themes of dozens of high-level policy conferences, primarily in Europe and the United States. By the end of 2004, scores of different think tanks located in two dozen countries had published papers or articles challenging the anti-tax competition and anti-financial privacy proposals being put forth by the OECD and its various institutional and national allies. The arguments in favor of tax competition were picked up and echoed by a number of writers in the leading papers of the global financial press. There is also considerable evidence that the papers and studies produced by the think tanks had a positive impact on policymakers, particularly in the United States and several central and eastern European countries.

The opponents of the OECD's anti-tax-competition proposals were bolstered when the Bush Administration took office in January 2001. The president's chief economic advisors--Larry Lindsey, head of the National Economic Council, and Glenn Hubbard, chairman of the President's Council of Economic Advisors--declared that the administration was in favor of tax competition and would not support the European Savings Tax Directive. Treasury Secretary Paul O'Neill and his successor, John Snow, later echoed that commitment.

The OECD was given a scare in the last months of 2004, when it almost lost its U.S. funding. Opponents of the OECD's anti-tax-competition efforts were able to get a number of key Senators to support a defunding proposal for the 2005 budget. It was only through direct lobbying by the State Department (with the help of the French ambassador) and an intervention by other Senators that senior officials of the OECD were able to succeed in obtaining the appropriation.

The high-tax advocates certainly have not won the war, but they have not necessarily lost it either. They have at their disposal tens of millions of dollars of taxpayers' money and an army of self-serving bureaucrats in government ministries. Their opponents, on the other hand, have only a handful of brave, responsible government officials in Switzerland, Luxembourg and a number of smaller low-tax entities, as well as a few courageous business people, some fine scholars, and public policy wonks at think tanks and universities, all operating with a fraction of the financial resources of the pro-tax crowd.

Fortunately, the high-tax countries' argument against tax competition is now widely regarded as intellectually bankrupt. As a result, they are changing their rhetoric--using words like "distorting tax preferences"--to appear to have a different agenda. No doubt some politicians and members of the media will be fooled by this. But time is not on their side. They face a tax-cutting Bush Administration and a growing understanding of why lower taxes on capital are desirable across the globe. Most of the new entrants to the EU see Ireland as a better economic model than Germany or France. Hence, they are cutting their corporate tax rates and enacting low flat-rate personal income taxes, despite continued threats from Old Europe. Indeed, the effort by France and Germany is losing favor with most of the other EU members. The new president of the European Commission, Jose Manuel Barroso, attacked the French and Germans in January, saying: "Some member countries would like to use tax harmonization to raise taxes in other countries to the high-tax levels in their own countries. We will not accept that, and member states will not accept it."

One clear loser so far is the OECD. It was once a respected institution, but it has allowed itself to be captured by high-tax interests who have not only destroyed much of the OECD's credibility, but have also endangered its funding. And the UN's ITO effort is not taken seriously, except by a few utopian globalists. Furthermore, the UN's credibility has been badly damaged by the Oil for Food scandal and general mismanagement.

Unfortunately, the battle against financial information sharing has not gone as well as the battle against tax competition. On the positive side, the opposition of Switzerland, the United States and others derailed the tough early versions of the European Savings Tax Directive. The current version, slated to go into effect in mid-2005, will not have much economic impact--besides enriching the lawyers and accountants who will guide investors though the inevitable loopholes. But its very existence makes it easier to expand destructive provisions in the future.

Furthermore, the events of 9/11 have made it more difficult for the advocates of financial privacy to gain support. In the United States, the Patriot Act decreased financial privacy protections. Those within the Treasury and State Departments who had argued for the implementation of the Internal Revenue Service's interest-reporting regulation were able to use the War on Terror as an excuse for not withdrawing the proposal. Ironically, this regulation could make it more likely for sensitive personal financial information to get into the wrong hands. Given what many in the U.S. government saw as French duplicity (or even sabotage) in the run-up to the Iraq War, the Treasury Department displayed a remarkable amount faith in the French government, declaring, "we can trust the French with sensitive financial information on U.S. companies and individuals."

For years, those who were demanding more information-sharing for the wars on drugs, money laundering and tax evasion were making very slow progress, because civil libertarians around the world fought back. In the post-9/11 world, those fighting for financial privacy are often on the defensive. To be fair, some governments have made good-faith arguments for greater powers in tracing financial flows in order to fight terrorism. But terrorism has also provided the perfect opportunity to expand the scope of cross-border tax management. High-tax countries realize that if they place issues in the context of fighting terrorism, they have a winning hand. Though most Americans favor tax competition, as does the current administration and a clear majority in Congress, concerns about terrorism will swamp concerns about the erosion of financial privacy in the near term.

This raises a question: What can pro-growth economic forces do to reverse these trends? First, they must continue to be aggressive in challenging the concept of "harmful or unfair tax competition" whenever and wherever it is advocated, and clearly detail how it reduces economic growth, opportunity and job creation. Second, they need to do a better job articulating the dangers of unrestricted information-sharing and excessive financial regulation to both the pocketbooks and liberties of ordinary people. Third, efforts must be expanded to teach people why financial privacy is necessary for a civil society and, in turn, how a civil society is necessary to maintain a vibrant and growing economy. Finally, multinational institutions like the OECD that promote anti-economic growth policies should be defunded.

The little-known war for tax competition and financial privacy is likely to drag on for years. The high-tax forces have lost the intellectual battle, in that most economists view competition in a good light. Despite the loss of intellectual respectability, the high taxers keep coming up with new proposals. French President Jacques Chirac, in an address to the World Economic Forum in January, called for an "experimental" international tax to help fund the war against aids. He suggested taxing international financial transactions, and a tax on aviation and maritime fuel. Such proposals will face fierce opposition in the United States and elsewhere, but the high taxers do not appear anywhere near ready to give up.

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