OECD vs. OECD: Political appointees diverge from economic experts

One of the major challenges in combating the OECD’s work to undermine tax competition and eliminate financial privacy is that the organization operates in relative obscurity compared to its better-known counterparts like the UN, IMF and World Bank. Outside of the technocrats who work on wonky tax issues and who are more likely to identify with their fellow bureaucrats than taxpayers, decision makers know little about the organization.

What knowledge that lawmakers and their staff do possess is typically limited to the organization’s original mission to promote economic cooperation and its role as a repository for world economic statistics and the accompanying analyses it provides. The OECD’s activist arm has successfully repurposed the credibility earned through these activities to advance with little resistance an ideological agenda that is often not only against the interests of taxpayers, but that is at odds with the findings of the organization’s own analysts.

The OECD generates hundreds of studies each year on economics, taxes and trade, among other topics. While the authors of these papers ultimately speak only for themselves and not the organization, it seems reasonable to expect that those promoting best policy practices would pay heed to the findings of the OECD’s own expert scholars. Sadly, that often is not the case.

On corporate taxes

When it comes to taxing corporations, the OECD’s Centre for Tax Policy and Administration has been leading the charge to ensure that tax collectors are able to reach into corporate coffers as deep and often as desired. To justify its Base Erosion and Profit Shifting (BEPS) program, the OECD sounded the alarm on disappearing corporate tax revenues, due to firms working to minimize their tax burdens, despite the OECD’s own report showing that average corporate tax revenues across the OECD have increased over time.

OECD ministers cited “massive revenue losses” from “aggressive tax planning schemes” in their push to mobilize support for the BEPS project. Even if their own evidence did not refute this claim, why is the issue such a high priority given that they have published work from economists on multiple occasions showing the limits of corporate income taxes?

In “The capacity of governments to raise taxes,” Oguzhan Akgun, David Bartolini, and Boris Cournède acknowledge the constraints of a Laffer Curve for corporate income taxes. They estimate the revenue maximizing effective marginal rate at roughly 25 percent, but also point out that “estimates of revenue-maximizing rates should not be seen as policy objectives or recommendations, as they imply high levels of economic distortions or tax avoidance.” That is a stark contrast from the logic of BEPS, which assumes that avoidance has nothing at to do with high tax rates, and that with sufficient effort, its impact can be significantly reduced in order to allow for taxes to be raised even further.

That study was published in 2017, so perhaps the BEPS-pushers can be excused for not being aware of it in 2013. But it is hardly the first OECD work to tackle the subject. In 2008, Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, Cyrille Schwellnus and Laura Vartia found in “Tax and Economic Growth” that “corporate taxes are found to be the most harmful for growth, followed by personal income taxes, and then consumption taxes.”

Nevertheless, Secretary-General Angel Gurría editorialized that “corporate tax rate competition … raises challenging questions for governments seeking to strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues necessary to fund vital public services.”

The OECD claims that its missions is to “promote polices that will improve the economic and social well-being of people around the world.” And yet, its most ambitious international tax project is all about making it easier for nations to raise taxes in the most economically destructive manner.

On size of government

The OECD offers unsolicited advice to countries on just about every public policy question imaginable. Most of the time, this advice consists of calls for higher taxes and more government spending.

For instance, last year’s review of Costa Rica’s tax system called for “raising more tax revenue,” even though the nation’s government already consumes 23 percent of GDP. It even found that high tax burdens contributed to the nation’s informal economy, but instead of calling for cuts, suggested other measures to force more workers into being caught in the tax net.

In Revenue Statistics in Asian Countries 2016, the OECD made the astonishing claim that “the minimum tax-to-GDP ratio of 25 percent [is] deemed essential to become a developed country.” That is news to Singapore, which maintains a roughly 14 percent tax-to-GDP ratio and is among the world’s wealthiest nations. In the 2017 edition, it was lamented that “some countries have experienced a decline in tax revenues,” and thus “further efforts are needed to increase tax revenues.”

And in Economic Policy Reforms 2017, the OECD called for the United States to undertake new spending on mass transit, broadband, job training, and paid parental leave, among other things. In its annual economic surveys, the OECD regularly calls for various new spending programs and tax increases for almost every nation.

The OECD uses various euphemisms to obscure the meaning of its recommendations from any ordinary citizens that might stumble upon its arcane jeremiads. Raising taxes is “increasing tax mobilization.” New spending is “fiscal easing.” Running deficits is “making full use of available fiscal space.” Nevertheless, the ideological preferences of the organization are clear for those who pay attention. And they conflict even with the findings of the organization’s economists.

In “The Effect of the Size and the Mix of Public Spending on Growth and Inequality,” Jean-Marc Fournier and Åsa Johansson report that “larger governments are associated with lower long-term growth,” and they also acknowledge that there is a lot of pre-existing research, including other OECD works, showing that economic growth is harmed by government spending. For instance, a 1997 study found that “a cut in the tax-to-GDP ratio by 10 percentage points of GDP (accompanied by a deficit-neutral cut in transfers) may increase annual growth by ½ to 1 percentage points.” And a 2001 study reported that “The overall tax burden is found to have a negative impact on output per capita.”

Conclusion

The OECD is an organization divided. The growth of globalization and the emergence of international tax issues allowed it to carve out a role as the primary multilateral forum in international tax policy. But that has come at a cost. No longer is the organization simply focused on expanding economic development. Focused on serving the interests of the tax collectors that serve as representatives from its member nations, it is now an enforcer for high-tax regimes. And instead of strictly following the evidence, its policy recommendations reflect the dominant political values of its taxing-and-spending membership.