Tag: european commission

The European Commission’s Silent Power Grab

Last week, the European Commission issued an inconspicuously looking seven-page note on economic policy coordination, addressed to the European Parliament and the European Council. Although its publication has attracted scarcely any attention, the document has far-reaching implications. The introduction states, in an unapologetic tone, that:

the Commission considers it important that national plans for any major economic policy reforms are assessed and discussed at EU-level before final decisions are taken at the national level. (p. 2, emphasis added)

While European institutions have traditionally been involved in economic policymaking, their mandate is limited to policing compliance with the rules of the common market and those of the monetary union—with mixed results, one would hasten to add.

The wording of last week’s paper goes way beyond that narrow mandate. While it stipulates that “the process should fully respect national decision-making powers,” (p. 5) it would effectively empower European institutions to harass prospective European reformers in countries that decide to join the scheme. Not that many countries would have a choice—for Eurozone members, there would be a binding requirement to participate in this process of “ex ante coordination.”

Even under the most charitable reading, this would create an additional layer of slow-moving bureaucracy with the potential of delaying reforms. And if “windows of opportunity” for specific economic reforms are limited, it would necessarily imply that certain efficiency-enhancing reforms would be derailed. Arguably, if Slovak or Estonian finance ministers had to justify their tax reforms to their counterparts from France or Germany, the flat tax revolution in Eastern Europe would have never happened.

And why should economic reforms be coordinated across Europe at all? Here’s one argument given by the paper:

 Product, services and labour market reforms as well as certain tax reforms may affect employment and growth in the implementing Member State, and hence the demand for products and services from other Member States. This is because a reform may also have a positive or negative impact on the reforming Member State’s price and non-price competitiveness. (p. 3)

Clearly, cross-border spillovers exist. But the same spillovers exist on a competitive market—whenever a firm changes its strategy or innovates, it can exercise “a positive or negative impact” on sales made by other companies. Yet very few would advocate coordination of innovation or business decisions—partly because the benefits of competition on product or service markets are patently obvious to most people. If anything, the benefits of competition are even more important in the choice of institutions and policies. And that’s why the sneaky power grab by European institutions has to be stopped.

Just as ‘Fair Trade’ Means Protectionism for the Benefit of Special Interests, ‘Fair Tax Competition’ Means Tax Harmonization for the Benefit of Politicians

Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track - and tax - that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right - at the very least - to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.

European Political Elite React to Deteriorating Fiscal Outlook with Decisive Moves to…Kill the Messenger

I’m not a big fan of the rating agencies. I’ve warned in TV interviews that they generally wait too long before downgrading profligate governments.

So when the rating agencies finally catch up to everyone else and lower their outlook for failing welfare states such as Greece and Portugal, one would think that this would be seen as a useful – albeit late – warning sign. But European politicians are not very happy about this development. At the risk of mixing metaphors, they want everyone to keep their heads buried in the sand and to continue complimenting the emperor on his new clothes.

Here are some excerpts from a BBC report.

The European Commission has strongly criticised international credit ratings agencies following the downgrade of Portugal by Moody’s. The Commission said the timing of the downgrade was “questionable” and raised the issue of the “appropriateness of behaviour” of the agencies in general. Earlier, Greek Foreign Minister Stavros Lambridinis said the agencies’ actions in the debt crisis had been “madness”. Ratings agencies have downgraded Greece and Portugal many times recently. …German Finance Minister Wolfgang Schaeuble told a news conference that he wanted to “break the oligopoly of the ratings agencies” and limit their influence. …”The timing of Moody’s decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation,” said Commission spokesman Amadeu Altafaj. “This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies.” Commission President Manuel Barroso added that the move by Moody’s “added another speculative element to the situation”.

This is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest rates to compensate for the risk of lending money to incontinent governments.

Should Legislatures, Commissions, and Such Figure Out Privacy Problems?

The recent European Commission proposal to create a radical and likely near impossible-to-implement “right to be forgotten” provides an opportunity to do some thinking about how privacy norms should be established.

In 1961, Italian liberal philosopher and lawyer Bruno Leoni published Freedom and the Law, an excellent, if dense, rumination on law and legislation, which, as he emphasized, are quite different things.

Legislation appears today to be a quick, rational, and far-reaching remedy against every kind of evil or inconvenience, as compared with, say, judicial decisions, the settlement of disputes by private arbiters, conventions, customs, and similar kinds of spontaneous adjustments on the part of individuals. A fact that almost always goes unnoticed is that a remedy by way of legislation may be too quick to be efficacious, too unpredictably far-reaching to be wholly beneficial, and too directly connected with the contingent views and interests of a handful of people (the legislators), whoever they may be, to be, in fact, a remedy for all concerned. Even when all this is noticed, the criticism is usually directed against particular statutes rather than against legislation as such, and a new remedy is always looked for in “better” statutes instead of in something altogether different from legislation. (page 7, 1991 Liberty Fund edition)

The new Commission proposal is an example. Apparently the EU’s 1995 Data Protection Directive didn’t do it.

Rather than some central authority, it is in vernacular practice that we should discover the appropriate “common” law, emphasizes Leoni.

“[A] legal system centered on legislation resembles … a centralized economy in which all the relevant decisions are made by a handful of directors, whose knowledge of the whole situation is fatally limited and whose respect, if any, for the people’s wishes is subject to that limitation. No solemn titles, no pompous ceremonies, no enthusiasm on the part of the applauding masses can conceal the crude fact that both the legislators and the directors of a centralized economy are only particular individuals like you and me, ignorant of 99 percent of what is going on around them as far as the real transactions, agreements, attitudes, feelings, and convictions of people are concerned. (page 22-23, emphasis removed)

The proposed “right to be forgotten” is a soaring flight of fancy, produced by detached intellects who lack the knowledge to devise appropriate privacy norms. If it were to move forward as is, it would cripple Europe’s information economy while hamstringing international data flows. More importantly, it would deny European consumers the benefits of a modernizing economy by giving them more privacy than they probably want.

I say “probably” because I don’t know what European consumers want. I only know how to learn what they want—and that is not by observing the dictates of the people who occupy Europe’s many government bureaucracies.

Thanks to Tax Competition, Corporate Tax Rates Continue to Fall in Europe

Many people assume that Europe is the land of high-tax welfare states and America is an outpost of laissez-faire capitalism. We should be so lucky. The burden of government in America is still lower than it is in the average European nation, but the United States is a lot closer to France than it is to Hong Kong – and the trend is not comforting.

We recently endured the embarrassing spectacle of President Obama arguing with Europeans that they should increase the burden of government spending. Now we have a new report from the European Commission indicating that the average corporate tax rate in member nations of the European Union has plummeted to just 23.5 percent while the corporate tax rate in the U.S. has stagnated at 35 percent. In the past dozen years alone, as the chart illustrates, the average corporate tax rate in the European Union has dropped by nearly 12 percentage points. To make matters worse, the corporate tax rate in America actually is closer to 40 percent if state tax burdens are added to the mix.

This is not to say that European politicians are reading Hayek and Friedman (or watching Dan Mitchell videos on corporate taxation). Almost all of the positive reforms are because of tax competition. Thanks to globalization, it is increasingly easy for labor and (especially) capital to cross national borders to escape bad policy. As such, nations now have to compete for jobs and investment, and this liberalizing process is particularly powerful among nations that are neighbors.

Not surprisingly, European politicians despise tax competition and instead would prefer to impose a one-size-fits-all policy of tax harmonization. These efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there were an effort to require a minimum corporate tax rate of 30 percent.

Fortunately, the politicians did not succeed in any of these efforts. As such, tax competition remains alive and corporate tax rates continue to fall. What remains to be seen, however, is whether America will join the race to lower corporate tax rates – and more jobs and investment.

Great Moments in International Bureaucracy

Greece’s fiscal disarray is a visible manifestation of Europe’s future, but the most appropriate symbol of what’s wrong with the continent comes from Brussels, where there are three “presidents” fighting over the right to represent Europe at international gatherings. The contestants include the President of the European Commission, the President of the European Council, and the European Union President (which rotates every six months among different national leaders).

While these three personalities fight over who gets to sit where and shake hands first, the real problem is that they all agree that government should be bigger, taxes should be higher, and power should be more centralized as part of the effort to create a superstate in Brussels. Inside this gilded cage, insulated from actual voters, Europe’s technocratic elite is content to enjoy a parasitical existence while the welfare states of member nations slowly but surely collapse and lead to social chaos. Here’s an excerpt from the UK-based Express about the fight between the the philosophical descendants of Louis XVI. Or would Nero be a better analogy? How about the Three Stooges? Well, you get the idea:

Promises by EU leaders that the Lisbon Treaty would herald a new era of clarity have been shattered after attempts to settle a major internal power feud resulted in a typical Brussels fudge. Bureaucrats have decided to send not just one president and his entourage to global summits but a tax-draining three. Only four months after the fanfare of Herman Van Rompuy’s appointment as European Council president, his most jealous and powerful rival in Brussels has persuaded allies to allow him to muscle in too. José Manuel Barroso, president of the European Commission, has succeeded in his demands that he should also go to diplomatic summits, such as the G20, after insisting only he has the expertise to deal with specific policy matters. At certain summits there will even be a third representative – the leader of the country holding the EU’s rotating presidency. This seems to justify criticism that the Lisbon Treaty would add to the EU’s murky waters and not be a move towards transparency. …Since the Lisbon Treaty came into force at the end of last year, arguments have raged in Brussels over which department does what. Mr Van Rompuy, the former Belgian prime minister dismissed last month by Ukip MEP Nigel Farage as a “damp rag” and a “low-grade bank clerk”, is the permanent president of the European Council.

Lessons from the Greek Budget Debacle

Fiscal crises have a predictable pattern.

Step 1 occurs when the economy is prospering and tax revenues are growing faster than forecast.

Step 2 is when politicians use the additional money to increase government spending.

Step 3 is that politicians do not treat the extra tax revenue like a temporary windfall and budget accordingly.Instead, they adopt policies - more entitlements, more bureaucrats - that permanently expand the burden of the public sector.

Step 4 occurs when the economy stumbles (in part because more resources are being diverted from the productive sector to the government) and tax revenues stagnate. If the resulting fiscal gap is large enough, as it is in places such as Greece and California, a crisis atmosphere is created.

Step 5 takes place when politicians solemnly proclaim that “tough measures” are necessary, but very rarely does that mean a reversal of the policies that caused the mess. Instead, the result in higher taxes.

Greece is now at this stage. I’ve already argued that perhaps bankruptcy is the best option for Greece, and I showed the data proving that Greece has a too-much-spending crisis rather than a too-little-revenue crisis. I’ve also commented elsewhere about the feckless behavior of Greek politicians. Sadly, it looks like things are getting even worse. The government has announced a huge increase in the value-added tax, pushing this European version of a national sales tax up to 21 percent. On the spending side of the ledger, though, the government is only proposing to reduce bonuses that are automatically given to bureaucrats three times per year. Here’s an excerpt from the Associated Press report, including a typically hysterical responses from a Greek interest group:

Government officials said the measures would include cuts in civil servant’s annual pay through reducing their Easter, Christmas and vacation bonuses by 30 percent each, and a 2 percentage point increase in sales tax to bring it to 21 percent from the current 19 percent. …One government official, speaking on condition of anonymity ahead of the official announcement, said…that “we have exhausted our limits.” …”It is a very difficult day for us … These cuts will take us to the brink,” said Panayiotis Vavouyious, the head of the retired civil servants’ association.

Now, time for some predictions. It is unlikely that higher taxes and cosmetic spending restraint will solve Greece’s fiscal problem. Strong global growth would make a difference, but that also seems doubtful. So Greece will probably move to Step 6, which is a bailout, though it is unclear whether the money will come from other European nations, the European Commission, and/or the European Central Bank.

Step 7 is when politicians in nations such as Spain and Italy decide that financing spending (i.e., buying votes) with money from German and Dutch taxpayers is a swell idea, so they continue their profligate fiscal policies in order to become eligible for bailouts. Step 8 is when there is no more bailout money in Europe and the IMF (i.e., American taxpayers) ride to the rescue. Step 9 occurs when the United States faces a fiscal criss because of too much spending.

For Step 10, read Atlas Shrugged.