SMITH/BERLAU: Obama's financial unilateralism

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By Fred L. Smith Jr. and John Berlau

COMMENTARY:

President Obama has attempted to distinguish himself from his predecessor by stressing a more cooperative approach in foreign affairs. Mr. Obama declared at a press conference upon his arrival in London for the recent summit of the group of the world's 20 richest countries: "We can start with the notion that we're prepared to - to listen and to work cooperatively with countries around the world."

Yet in one area of foreign policy, Mr. Obama has taken an approach as - if not more - unilateral than that of the Bush administration. On other nations' tax and financial privacy policies, the Obama administration has taken an aggressive, almost bullying, stance in denouncing some countries as "tax havens" or lax regulators.

The administration recently stunned the nation of Switzerland when, after obtaining, with the Swiss government's full cooperation, the names of 250 UBS AG bank customers suspected of violating U.S. tax laws, it then demanded the names of an additional 52,000 American UBS clients.

Swiss officials, consistent with their financial privacy laws, have resisted, criticizing the American demand as a fishing expedition. Indeed, the U.S. government apparently provided no evidence of wrongdoing. Swiss authorities and some civil liberties advocates maintain that releasing so many names without evidence would be a gross breach of privacy, similar to the type of surveillance Obama supporters denounced when carried out by the Bush administration in the name of fighting terrorism.

As former U.S. Ambassador to Switzerland Faith Whittlesey noted in a recent op-ed article in the Financial Times, "Switzerland negotiated a legal assistance treaty with the US that provides mechanism for sharing information," but this is contingent on the United States showing "reasonable suspicion of criminal activity or tax fraud."

Switzerland has offered to cooperate with U.S. authorities to determine those cases in which such evidence might exist, but the Obama administration continues to insist that such personal financial data must be disclosed for thousands of account holders on demand.

Worse, the United States - the champion of competition in so many areas - seems oblivious to the benefits of competition in disciplining tax and regulatory policies. Treasury Secretary Timothy F. Geithner has indicated the United States will take a "my way or the highway" approach on many of these issues. He proclaimed at a hearing in the House of Representatives, "We need to prevent national competition to reduce standards."

International financial cooperation is warranted to detect Ponzi schemes that cross national borders, to fight genuine tax fraud, and of course to stop terrorist financing. But the United States should recognize that competition among national tax and regulatory regimes is vital for global prosperity.

It is highly unlikely that any nation will perfectly balance the complex risks and benefits of tax and regulatory policy. The world benefits from competition among governments, just as consumers benefit from competition among businesses. For instance, when the United States lowered marginal income tax rates in the 1980s, it encouraged Europe to follow suit, resulting in greater productivity on both continents. Since then, Europe has embraced competition by enacting lower corporate tax rates than those in the United States.

Within America, states compete with one another on levels of taxation. Many Americans routinely relocate to states with no income tax - for example, from New York to Florida and from California to Nevada. This puts pressure on politicians in higher-tax states to justify those higher tax rates, and may in time lead to lower taxes if they fail to create offsetting benefits.

In fact, by some criteria, the United States could be considered a "tax haven." It does not tax interest from foreign-held American bank accounts, as it does interest earned by its own citizens. Nor does it routinely report such interest payments to the financial authorities of foreign bank customers' home countries.

And individuals from all over the world can incorporate in Vice President Joseph R. Biden Jr.'s home state of Delaware, under the names of registered agents.

Like all countries, the United States shares information with other countries via tax treaties and other arrangements, but such agreements are usually crafted to reduce criminal activity, not hinder tax competition. Moreover, such bilateral treaties are generally between nations that share common values, in particular democratic safeguards to protect the rights of their citizenry.

For that reason, banking information should never become globally transparent to everyone. Does anybody want Zimbabwean strongman Robert Mugabe to have access to the account information of people trying to flee his brutal regime?

Competition encourages nations to consider carefully the wisdom of their economic policies, and financial privacy helps protect human rights against tyrannical governments.

If Mr. Obama and Mr. Geithner want to work with other nations to rebuild the world's financial system, they should seek real cooperation in information sharing, rather than denounce other countries as "tax havens" and try to bully them into releasing banking records without any evidence of wrongdoing.

If the Obama team doesn't rein in its unilateralism on financial privacy and tax competition, it could cause untold damage to both world and U.S. prosperity.

Fred L. Smith Jr. is founder and president of the Competitive Enterprise Institute. John Berlau is director of CEI's Center for Investors and Entrepreneurs. CEI associate Seth Bailey contributed to this article.