The End of Financial Privacy

Why Switzerland, Luxembourg, and Austria caved on protecting its foreign investors.

Veronique de Rugy | March 20, 2009

Despite a long, storied history of protecting financial privacy, Switzerland, Luxembourg, and Austria recently announced that they will soften rules on banking secrecy to root out tax dodgers for foreign countries. Fearful that they might be missing a chance to collect more taxes, European bureaucrats have pressured the three countries to change their policies for years. After the Organization for Economic Cooperation and Development (OECD) threatened to put them on a blacklist of tax havens just before the start of April's Group of 20 (G-20) meetings, Switzerland, Luxembourg, and Austria have finally caved.

Bank secrecy laws have long been seen as an obstacle to tax enforcement. Supposedly by setting up "safe havens" for French euros, bank secrecy laws get in the way of the French government forcing its high income tax rates down its taxpayers' throats. The only way to fix this problem, the French argue, is for all nations to implement an automatic and unlimited exchange of information about nonresident investment. So-called tax havens, goes this line of thinking, should collect private financial data on foreigners and turn that information over to the appropriate governments.

Forcing relatively low-tax jurisdictions to serve as vassal tax collectors for European welfare states is a brilliant idea if one wants to preserve higher-tax policies and impose multiple layers of taxation on saved and invested income. It is a death blow to healthy tax competition, since it would permanently undermine the right of nations to determine how income earned inside their borders—such as interest paid to foreigners on the income they invest in another country—is taxed. Like other forms of economic competition, tax competition is good at generating new and innovative ways of doing business and creating value. But European politicians have always claimed that tax competition and the financial privacy that goes along with it simply abets tax evasion. The politicians want instead a policy of "tax harmonization," which they think would make countries less competitive and reduce capital flight from one place to another.

However, basic economic theory tells us that if a country wants to reduce tax avoidance and evasion, all it has to do is lower its own tax rates and simplify its tax code. These are far more effective tools for thwarting tax evasion and reducing capital flight than tax harmonization across a number of countries. European governments should give tax reform a try instead of trying to force other nations to adopt a single, uniform system.

But most of them won't, and as they keep losing capital to lower-tax nations, they will continue to try to undermine countries with strong privacy laws. Until now the European Union (E.U.) failed to force countries such as Switzerland and Luxembourg to give up their privacy laws, mainly because the United States refused to agree to participate in the shared information schemes pushed by the E.U. As one of the biggest recipients of foreign capital, the U.S. knew that it had much to lose.

So why would Switzerland, Austria, and Luxembourg cave now? The Paris-based OECD announced that it was preparing an updated list of uncooperative tax havens for presentation at the April 2 summit of the leaders of the G-20 countries. These meetings traditionally feature politicians from around the world jockeying to promote bad ideas. This one looks to be no exception, with members planning to discuss sanctions on banking centers that fail to provide legal assistance with international tax probes.

Switzerland, Austria, and Luxembourg were on the new OECD blacklist. After meeting together to discuss the matter, the countries decided to give up their years of resistance to avoid the financial consequences of being treated as rogue financial states. It didn't help that the U.S. and China—two countries who might have been on their side in the past—are going to the meeting with some bad ideas of their own, such as convincing unwilling Europeans to spend more money on stimulus-spending plans. In order to have a better shot at getting what they want regarding pump-priming, Switzerland, Austria, and Luxembourg seem more than ready to sacrifice previous stands on financial privacy. After all, neither the Obama administration nor China appears to value financial privacy much anyway.

While that sort of political compromise is understandable, it is sad news for those who do value financial privacy—or any other kind of privacy. Switzerland claims that it will share information only after a country issues a detailed request on an individual case. Don't count on it. German Finance Minister Peer Steinbrueck has told Der Spiegel that he wants countries like Switzerland to unveil the names of their account holders "even when there's no concrete suspicion of tax evasion." Like virginity, financial privacy is awfully difficult to regain once surrendered.

Veronique de Rugy is a Reason columnist (read her archive here) and an economist at the Mercatus Center at George Mason University.

Comments

SpongePaul|3.20.09 @ 3:01PM|#

too bad. they caved to other countries. There are many good reasons to have your info private. wether you paid taxes on it or not. it is not the banks concern. I hear Grand Cayman is a great finicial island, when it is not being rebuilt from the yearly hurricanes

Fluffy|3.20.09 @ 3:11PM|#

This would seem to open up an opportunity for a country to become the new tax haven, as long as they don't care about being on some blacklist.

jp|3.20.09 @ 3:14PM|#

Veronique de Rugy ... sounds like an Erle Stanley Gardner character ...

alan|3.20.09 @ 3:17PM|#

I picture the Swiss giving in, Don Corleone getting pissed, and a fine assortment of European and American bureaucrats floating boots up in the waters of Lake Geneva. One can hope.

Rosie O\'Donnell|3.20.09 @ 3:17PM|#

Hey Veronique! Eat a sandwhich!

Hamilton \'Ham\' Burger|3.20.09 @ 3:29PM|#

Veronique de Rugy ... sounds like an Erle Stanley Gardner character ...

No, it doesn't.

|3.20.09 @ 3:41PM|#

As Veronique de Rugy writes, after the Organization for Economic Cooperation and Development threatened to put them on a blacklist of tax havens, the three countries finally caved to European bureaucrats.

Man, change a few names here and there, and it looks exactly like the history of Germany in the 1930s. Or the USA, during the reign of FDR . . . or Il Duce.

|3.20.09 @ 3:46PM|#

Libertarians for union busting, medical lawsuit "reform," and tax evasion! Cuz you're about freedom!

|3.20.09 @ 3:49PM|#

This is one reason we don't need one-world government, or even superpowers for that matter. It isn't just for tax reasons that someone might want a "haven," but if the boss is the same everywhere, or if the bully can reach and grab you anywhere, there can be no havens except, ever so precariously and temporarily, in the world of crime. When havens are outlawed, only outlaws will have havens.

GG|3.20.09 @ 4:02PM|#

Libertarians for union busting, medical lawsuit "reform," and tax evasion! Cuz you're about freedom!

This song goes out to Tony:

Brooklyn Funk Essentials ~ I Got Cash

|3.20.09 @ 4:04PM|#

Libertarians for union busting, medical lawsuit "reform," and tax evasion! Cuz you're about freedom!

And smoking pot - don't forget that one.

|3.20.09 @ 4:05PM|#

Oh I forgot about libertarians for climate change denial. Taste the freedom!

Jerry|3.20.09 @ 4:14PM|#

Who made this OECD master of the universe anyways?

|3.20.09 @ 4:26PM|#

Tony,
Oh I forgot about libertarians for climate change denial. Taste the freedom!

Nobody denies climate change - you're being dishonest, and I mean that in a bad way.

alan|3.20.09 @ 4:27PM|#

I get the feeling that on some liberal blog sites, when a regular visitor goes from being predictable to utterly predictable, someone authoritative tells him, 'you know what would be a great idea, Tony? If you went and shared our ideas with libertarians. Come back in two months and tell us how it all went down.'

|3.20.09 @ 4:28PM|#

Who made this OECD master of the universe anyways?

The community, of course - the community as a single unit marched and voted for this OECD to become . . . Oh, I am channeling Neu Mejican! Sorry!

|3.20.09 @ 4:31PM|#

'you know what would be a great idea, Tony? If you went and shared our ideas with libertarians. Come back in two months and tell us how it all went down.'

Like sending him into space inside the B Ark...

|3.20.09 @ 4:35PM|#

I just want you guys to throw a bone to the notion that poor people deserve liberty to, sometimes.

|3.20.09 @ 4:38PM|#

I'm not here on a mission. I got bored posting on sites that I typically agree with. I prefer debating not circle jerking.

|3.20.09 @ 5:21PM|#

Tony, I for one believe in a society where poor folks and rich ones have equal liberty, in very large amounts.

What you class warriors have never noticed is that in any society, the poor have the least ability to evade the jackboot of the state. You cannot increase liberty for the poor without increasing it for everyone. I doubt anyone of our regular small-l libertarian posters would disagree with that.

Do you?

Jordan|3.20.09 @ 5:23PM|#

I just want you guys to throw a bone to the notion that poor people deserve liberty to, sometimes.

The bum on the street has the exact same rights that Bill Gates has.

|3.20.09 @ 5:31PM|#

Except the right to avoid paying taxes?

|3.20.09 @ 5:35PM|#

I just want you guys to throw a bone to the notion that poor people deserve liberty to, sometimes.

"Poor people's liberty. See: Handouts"

The Statist's Dictionary, page 324.

|3.20.09 @ 5:37PM|#

Except the right to avoid paying taxes?

The bum of the street doesn't pay any taxes, so bringing this up looks like some sort of joke from your part.

|3.20.09 @ 5:46PM|#

The bum of the street doesn't pay any taxes

How lucky for him! What a great life he must have not paying any taxes (except of course when he does). Because as we all know the only oppression is taxes, and the rich are its biggest victims.

Loupeznik|3.20.09 @ 5:48PM|#

Any insights on where to put loose change now? Which bank? Which conuntry?

Jordan|3.20.09 @ 5:50PM|#

How lucky for him! What a great life he must have not paying any taxes (except of course when he does). Because as we all know the only oppression is taxes, and the rich are its biggest victims.

No. What we all know is that you're an idiot who substitutes straw men for substantive argument.

|3.20.09 @ 5:52PM|#

I'll stop it with the straw men when Reason stops selling corporate wish lists as liberty.

|3.20.09 @ 6:07PM|#

How lucky for him!

Why would it be a matter of luck? The bum on the street chooses to be a bum on the street. That life does not come without its perks, such as not paying income or property taxes.


What a great life he must have not paying any taxes (except of course when he does).

Maybe, sales tax, for his liquor. The State is certainly cruel.

Because as we all know the only oppression is taxes, and the rich are its biggest victims.

Not the only oppression - there are other forms of oppression as well, like licensing laws, Eminent Domain, car registration fees, drug prohibition, animal rights laws, zoning laws, obscenity laws . . .

|3.20.09 @ 6:47PM|#

Tony-

Although R C Dean's 5:21 post is spot-on, I assume that you are quite aware of the differences of opinion expressed here between posters who self identify as libertarians.

Many of us are critical of certain positions taken by Reason and its writers. In fact, it appeared to me that you ignored how many of us expressed our disagreement with the author of the piece regarding the Wyeth case the other day. There are some of us here who abhor crony capitalism and immunity for private actors, in addition to public ones, and say so consistently.

No phony strawmen allowed.

Craig|3.20.09 @ 8:04PM|#

...basic economic theory tells us that if a country wants to reduce tax avoidance and evasion, all it has to do is lower its own tax rates and simplify its tax code.

Nice recap of theory, but obviously they don't just want to reduce tax avoidance, they want to reduce tax avoidance while maintaining their current high tax rates and complex tax codes to shape social behavior and help in extorting political donations.

I'm not sure why Switzerland caved in though -- they would seem to have much more to lose from lost banking business than from any bad publicity due to being black-listed.

|3.20.09 @ 8:05PM|#

in theory economic privacy (as other privacy rights) should be, and is, very important.

in reality, the vast majority of citizens do not have this privacy (from their government, anyways).

the european tax haven changes don't really impact most of us. even the upper middle class or much of the upper class doesn't have numbered swiss accounts.

so the impact on this story is that the economic privacy of the super-rich is being degraded (privacy from government knowledge, this information generally isn't being publicly disclosed).

my understanding of the spy-like tactics swiss bankers were using here (to escape US government detection) seems to imply an organizational attempt to break US law (while operating in the US).

as long as we accept the premise of any taxes, and we think some people will cheat if we only take people at their word in regards to their income, then government intrusion on personal financial privacy seems inevitable.

certainly privacy from 3rd parties, individuals, and corporations is important to me - but reforming the credit reporting agencies is the route to financial privacy here. it is the credit reporting agencies that are private and largely unaccountable that are of concern to me.

protecting financial privacy from individuals and corporation probably involves government regulation and intervention.

this conversation is interesting in theory, but in reality identity theft is a greater concern to me than my non-existent swiss accounts being revealed to tax-men.

el io

Epicurus|3.21.09 @ 5:09PM|#

"even the upper middle class or much of the upper class doesn't have numbered swiss accounts."

A voice of reason. This is a non-issue. I'm not going to lay awake at night worrying about Bernie Madoff's financial privacy. Should ten Bernie Madoffs be allowed to keep their ill-gotten gains because one honest person might be revealed to have a secret account?

While perhaps a few honest people have such accounts, I suspect the vast majority are criminals, and not just of the tax cheat variety.

Speaking of criminals, I would like to know which of our congressmen and senators have one. Of course I'm sure all the money they have deposited was legally obtained. Oh yeah.

|3.21.09 @ 11:32PM|#

I'm not sure why Switzerland caved in though --

That's rather disappointing, to say the least. They kept their bank secrecy laws when the Nazis were leaning on them in the 1930s and 40s.

-jcr

|3.22.09 @ 10:54PM|#

Tony:

You forgot about hookers, pornography, and base jumping.

|3.24.09 @ 12:46PM|#

1) This means that if you are a superstar you should renounce your citizenship early not later. For example structure your super bonus to occur a year after you renounce. Once lost these super stars are gone for good. I can't wait for the first sports stars (Tennis?) to start doing this.

2) It will mean that citizens of low tax countries have incentive to be super stars that others do not. Notice the companies moving to Switzerland. Even in a globalized world the kid growing up next to the the corp. HQ has a better shot at those jobs.

3) I think the whole thing is a farce, they are going for the bad guy businessmen. My guess is that all that Iraq 'development' money is sitting in former US gov officals secret bank accounts.

David Mueller|3.24.09 @ 11:23PM|#

The OECD is making a blacklist of uncooperative tax havens. Yet the bureaucratic hypocrites in the OECD, by treaty, are exempt from any income tax.

Before telling other countries how to run their tax systems, these bureaucrats ought first to learn how to be good taxpayers themselves.

|3.26.09 @ 3:14AM|#

Epicurus writes: "I'm not going to lay awake at night worrying about Bernie Madoff's financial privacy. Should ten Bernie Madoffs be allowed to keep their ill-gotten gains because one honest person might be revealed to have a secret account?"

Awesome logic. Should we worry about one person's privacy on the street when cameras on every corner could catch 9 criminals? Should be worry about one innocent person dying from a Taser shock when 9 criminals could be executed on the spot?

Epicurus|3.27.09 @ 3:22AM|#

islander writes: "Awesome logic. Should we worry about one person's privacy on the street when cameras on every corner could catch 9 criminals? Should be worry about one innocent person dying from a Taser shock when 9 criminals could be executed on the spot?"

The ideal response from a libertarian ideologue--the kind of people who make up a political party that is lucky to get 3% of the vote (for very good reasons). Most people realize that there are trade-offs to be made between individual rights and the security of the group. Unlike you, I don't have an expectation of privacy on a public street so if the cops can catch more criminals with cameras on the street corners, more power to them. I prefer to give up whatever privacy rights I might have on public streets if the streets can be made safer from criminal predation. On the other hand, I do have a problem with the cops using excessive force against people who are presumed to be innocent. Can you understand the difference?

Epicurus|3.27.09 @ 4:42PM|#

I misspoke. This statement is too broad: "I prefer to give up whatever privacy rights I might have on public streets if the streets can be made safer from criminal predation."

Cameras I can live with, but not random searches.

Every trade-off has to be carefully weighed.