Financial Transparency Coalition

OECD/Flickr*

The list of four-letter words in frequent use by policy makers in Washington, Brussels, and other government capitals dealing with potential fiscal insolvency has no doubt grown steadfastly in recent months.  And perhaps the dirtiest, most toxic of those words is also the most innocuous: debt.

Indeed, talks of an American default earlier last month and the real danger of a Greek withdrawal from the Euro zone have called for strong reevaluation of the balance between government spending habits and revenue sources on both sides of the Atlantic.  On the latter point, the issue has brought long-deserved attention to tax loopholes and the corporate practices that exploit them, igniting discussions this week within national and international policy circles alike.

At a recent meeting of the OECD, secretary general Angel Gurría urged policy makers in the world’s most developed economies “to limit the scope for gaming the system with multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage.”  In addition to lost revenue, the OECD also recognizes the negative impacts of “tax arbitrage on competition, transparency, and fairness” in the global economy.

Tax arbitrage is a well-known method for corporations and individuals to assess tax rules that differ from country to country and to strategically exploit these differences in the interest of their bottom lines.  Expert practitioners of tax arbitrage have developed means of tax avoidance that border on the patently absurd, for example chopping cars in half such that they qualify as “spare parts” at the border and then simply welding the two halves back together upon reaching their final market.  By contrast, most corporations do their best to be less visible about their efforts to find loopholes in the tax structure, keeping their operations largely secret and costing governments billions of dollars.

In line with the OECD’s resolve on tax arbitrage, President Obama announced his intention this week to close tax loopholes on foreign investment as a component of his broader strategy to fix the federal budget.  The President confirmed that the U.S. tax system is “full of corporate loopholes” and that his proposed reforms would recover $210 billion from corporate and private abuses.

The posture of the OECD and President Obama towards corporate tax avoidance is encouraging on many fronts.  The top tax official at the OECD, Jeffrey Owens, stated, “Tax was not among the root causes of the financial crisis. But tax measures may contribute in exacerbating non-tax incentives to financial instability in the form of greater leverage, greater risk-taking and to a lack of transparency.”  Let’s just hope their ideas take root among the key players on Capitol Hill, because as we all know, more financial instability is precisely what we do not need at this time.

* Image license: Some rights reserved by OECD.