Havens in a Storm: The Struggle for Global Tax Regulation – By J. C. Sharman

Abstract

Havens in a Storm: The Struggle for Global Tax Regulation . J. C. Sharman . Ithaca, NY : Cornell University Press , 2006 . 224 pp. $39.95 (cloth) . The relative economic autonomy enjoyed by sovereign states for much of the twentieth century is now under siege from an onslaught of interconnected international forces—institutional, ideological, and financial. And while the age in which we live is clearly not your Keynesian political economy anymore, the state seems to matter still. What sustains state sovereignty in the face of economic globalization? J. C. Sharman's new book, Havens in a Storm, offers an answer to this question through a case study of the recent Organisation for Economic Co-operation and Development (OECD) campaign to infiltrate tax shelters in the international economy. Revenue extraction has long been considered one of the defining attributes of territorial-based state sovereignty. But when capital goes global and profits are mobile, revenue extraction efforts of richer and more powerful states may also become extra-territorial. In 1998, the OECD launched a campaign against “tax havens” to force them to reform their tax policy. It targeted nearly three dozen island nations and micro-states that were accused of engaging in “harmful tax competition.” Despite the disproportionate resources available to richer OECD states, the campaign eventually ended with only minimal concessions made by the smaller states. “The OECD suffered a defeat when the central goal of the initiative—the prevention of tax havens from ‘poaching’ geographically mobile investment by means of tax and regulatory concessions—was abandoned” (11). Sharman's book provides a good overview of these events and a cogent explanation for the outcome. Sharman argues that “regulative norms” in the international arena effectively limited the options of OECD states to force these small states to conform to a global system of tax regulation. While military action was never seriously considered, some OECD member states advocated “economic coercion,” in the form of sanctions. But other OECD states refrained from such blatant economic bullying, which they felt was inconsistent with the organization's very identity (69). Because of this indecision, the opportunity was provided for the targeted smaller states to launch a counter-campaign to reframe the terms of the debate, mobilizing sympathetic policymakers in the OECD, free market enthusiasts in nongovernmental organizations (NGOs), economically interested international capitalists, and opinion makers in the mass media. As the campaign unfolded, the OECD and tax haven states became engaged in a “battle of persuasion,” in which the OECD tried to shame the smaller states for their “tax poaching” practices, while the tax haven states stressed the virtues of “healthy tax competition.” In the end, the main weapon employed by the OECD was the threat to create a “black list” to sully the reputations of defiant tax haven states. But without a strong consensus among the richer OECD states, even this could not be sustained. The campaign failed. Sharman offers a “culture”-based explanation, stressing norms, identity, and reputation to explain why the small tax haven states were able to maintain their sovereignty over tax policy against a more powerful international institution. The OECD, according to Sharman, was caught in a “rhetorical trap” of its own making, building on a concept developed by Frank Schimmelfenning. Its liberal consensus-based norms and reputation for impartiality restrained it from mobilizing its preponderant coercive and economic resources to impose domestic policy change over the small tax haven states (127, 128). To arrive at this conclusion, Sharman undertook the unenviable research strategy of traveling to Caribbean and South Islands, where he conducted extensive interviews with government officials and financial agents about their strategies in trying to fend off the campaign. He presents these findings in a tight, well-written narrative. The work, however, is not likely to dissuade those who are more inclined to structural explanations. For example, Sharman gives pro-market international NGOs a prominent part in his narrative, but plays down the role of international capital. But it seems that it should matter that free market think tanks tend to have generous corporate sponsors. Also, the analysis could have given more attention to the implications of the change in presidential administration in the United States, which deprived the OECD's campaign of one of its key supporters. Nonetheless, the book effectively makes a case that norms matter. The book will be of interest to international relations and comparative politics scholars, concerned with the effects on state sovereignty of economic globalization. The book is suitable for graduate and upper-level undergraduate courses in international and comparative political economy.