Tax Policy “Harmonization”: Diversity Is Preached, Uniformity Is Practiced

The call is not just coming from academic circles anymore, but from the general public: diversity is the order of the day. There is hardly any organization that does not uphold the principles of diversity in its mission statement. These are usually in the best interests of the institutions. After all, those who include different cultures, genders, ethnicities, or age groups leave the door open to new perspectives. This creates an environment where creativity can flourish, and new things can be tried out. The credo in diversity management is “Strength in diversity”—much like in agriculture, where a mixed culture also promises more success in the long term than a monoculture.

What is considered a source of innovation within an organization, that is, respecting and promoting differences, becomes less relevant when different legal regulations in different areas exist alongside one another.

Nothing controversial so far. Here’s what is irritating: The most ardent advocates of diversity often show a very selective appreciation of the principle. Those advocates who also propagate coercion and quotas to enforce diversity within the company often lose interest in diversity when it comes to matters of political economy. This is true, for example, when looking at rival tax rates, environmental measures, or social norms. What is considered a source of innovation within an organization, that is, respecting and promoting differences, becomes less relevant when different legal regulations in different areas exist alongside one another. Here, the trend is moving in the opposite direction—toward uniformity and institutional monoculture.

The Suppression of Competition and Global Uniformity

A current example is the fight for uniform tax practices. There has been loud cheering in left/green circles since the G-20—and previously the Organization for Economic Cooperation and Development (OECD)—announced plans to lump all countries together. The plan is for large corporations, from any country, to pay at least 15 percent in profit taxes in the future. Diversity is honorable, but when it comes to taxation, many superficial diversity advocates prefer to keep it uniform. They celebrate the agreement on minimum taxes as a revolution. And it probably is. After all, once you agree on a minimum rate, you can easily raise that rate later. The dam is broken.

Ultimately, however, it is the citizen who suffers most. This is because the pressure on governments to be responsible with taxpayers’ money will continue to fall.

The result of such policies is obvious: competition between countries for an attractive location is suppressed. A multitude of competing benefit packages is replaced by a global one-size-fits-all approach. The winners of this uniformity are the high-tax countries. They can put their competitors, who offer a more favorably priced package, in their place. The losers are small countries like Switzerland, which succeed in maintaining a balanced relationship between taxes and state services by exercising financial restraint. Ultimately, however, it is the citizen who suffers most. This is because the pressure on governments to be responsible with taxpayers’ money will continue to fall.

On the Road to a Global Tax Cartel

Can the introduction of uniform taxes be included in the diversity debate? Yes, indeed, it must be. Because the fundamental question is the same: Are we open to diversity, or do we prefer uniformity and enforced conformity? The latter is often dressed up as “harmonization.” This is good marketing, since harmony per se appears to be desirable. And in fact, there are good reasons for standardization, for example in technical standards. In a globalized world, for example, it does not help anyone if every country uses different paper formats, electrical cables, power sockets, or drainpipes. But in most cases, “harmonization” is based on less laudable motives. It is about protectionism and the goal of avoiding the burden of competition.

The fact that the Paris-based authority has only weak democratic legitimacy for these tasks does not detract from its regulatory zeal; the assumption of competence is part of the self-image of this statist organization.

The OECD is a grand master in this discipline. It sets the pace—in tandem with the G-20—on the road to a global tax cartel. Moreover, it sees a lot of potential for further leveling in various other areas—from school education to alcohol consumption to lobbying. The fact that the Paris-based authority has only weak democratic legitimacy for these tasks does not detract from its regulatory zeal; the assumption of competence is part of the self-image of this statist organization. The website states unequivocally that it ensures that “the same rules apply to everyone,” period. Anyone who does not think that the interventionist furor from Paris is such a good idea will find themselves blacklisted by the (unelected) technocrats. Switzerland knows what that means.

Leveling the World: Distrust of Competition between Locations

The EU is also showing a lot of vigor in leveling the old continent. Under the heading of a “level playing field,” national competitive advantages are being eroded. Competition between locations is distrusted, even though it would be better suited to reflect Europe’s cultural diversity The implicit motto is that it is better for everyone to be equally bad than for everyone to be a little better than the others. Regulations are often pushed through with a simple majority; countries that demand country-specific solutions are outvoted. The United Kingdom has suffered because of this phenomenon. In recent decades, the UK has often lost out when it tried to defend itself against more restrictive EU rules. It was left without a chance against dirigiste France, where the open goal is to transfer the higher French level of regulation to the entire EU by majority vote.

Economists refer to this approach as a strategy of “raising rivals’ costs.” Brussels has internalized this strategy.

Economists refer to this approach as a strategy of “raising rivals’ costs.” Brussels has internalized this strategy, and the internal market often serves to mask problems. Intended as a liberal project, it is no longer used merely to eliminate disruptive differences in technical product standards, for example. In the name of the primacy of the internal market, even—welcome—differences in economic policy framework conditions are increasingly being called into question. The attempt at such flattening was an important reason for Brexit, as German economist Roland Vaubel shows in his analysis. While labor market regulations were initially adopted in the face of British resistance, they were soon followed by regulations on financial services, insurance companies, and banking supervision and securities, and this severely restricted London’s freedom.

Whether the initiative comes from the G-20, the OECD, or the EU, the elimination of international competition is based on the same basic fallacy. People succumb to the idea that a global steering committee can devise an optimal plan for everyone thanks to superior knowledge. But technocrats are only flesh and blood; they have no crystal ball. Instead of relying on a one-size-fits-all plan with uncertain success, it is therefore better to rely on a variety of decentralized solutions that meet local needs. If individual nations go wrong, fewer people suffer. And if one measure works particularly well, the others can learn from it and adapt their performance. This method has also been used in recent months to make the most progress in the COVID-19 crisis.

Supranational Fantasies of Omnipotence and Moral Conceit

As convincing as the advantages of institutional diversity and competition between national solutions may be, the fantasies about the omnipotence of supranational organizations often seem more appealing in everyday political life. Accordingly, these authorities are constantly expanding their spheres of control; they are taking on more and more new tasks that go far beyond their original mandate. Why is this so? Swiss journalist Beat Kappeler cites the “sacralization of the international” as an important reason: Those who call for cross-border solutions are seen as internationalists, as solidarity-minded cosmopolitans, and as advocates of a higher moral order. On the other hand, anyone who criticizes the expansion of the power of international organizations and advocates more subsidiarity and decentralization is labeled a populist or nationalist.

It is a paradox: Never before has the demand for diversity received so much public support. And never before has it been so difficult to apply diversity to solving political-economic problems. It is true that hardly anyone questions the fact that diversity in a company leads to better results. Nevertheless, anyone who promotes diversity in the institutional framework as well—for example, within the EU—is at a loss. There, top-down thinking dominates; the centralist dogma of “one size fits all” applies. Ignored in all this is the fact that competition creates the conditions for evolutionary experimentation, learning, and progress. Such ignorance comes at a price. Because the opposite of diversity is uniformity—and that should not be in anyone’s interest.

 

 This article first appeared under the title “Gepredigt wird Vielfalt, gefördert wird Einfalt” in the Neue Zürcher Zeitung, 7.14.2021 p. 17, and online at nzz.ch. Reproduced with kind permission.

 Image license: https://creativecommons.org/licenses/by-nc/3.0/igo/

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