Topic: International Economics and Development

European Union Wants One-Size-Fits-All Regulation

European bureaucracies such as the Organization for Economic Cooperation and Development and the European Commission are infamous for their anti-tax competition campaigns, but the zeal to harmonize is not limited to fiscal policy. The European Commission has set an explicit goal of exporting EU regulation to the rest of the world. If successful, this would be an unfortunate development. Competition among regulatory regimes helps control excessive government. But if an international bureaucracy succeeds in becoming a global “standard setter,” then politicians will exploit that monopoly position to impose more onerous regulatory burdens. That certainly will be the case if the bureaucrats in Brussels succeed in this latest push for regulatory harmonization. As the Financial Times indirectly notes, the Euro-crats are not very sympathetic to markets:

Brussels wants the rest of the world to adopt the European Union’s regulations, the European Commission will say this week. A Commission policy paper that examines the future of the Union’s single market says European single market rules have inspired global standard-setting in areas such as product safety, the environment, securities and corporate governance. …The paper calls on the EU to encourage other jurisdictions to follow suit – for example by “promoting European standards internationally through international organisation and bilateral agreements”. …The EU’s drive to establish itself as the pacesetter for worldwide business regulation could well lead the bloc into conflict with the US and other trading partners. US officials have often voiced concern about the Union’s growing clout as a global standard-setter, and the two sides have clashed over issues such as rules for the chemicals industry and the EU’s stance on genetically modified foods. …The two sides have very different regulatory philosophies, with the EU placing a heavy emphasis on consumer protection and environmental legislation while the US tends to promote a more market-based approach. Some critics of the European approach argue that the Union’s stance on issues such as GM foods may also reflect a desire to protect the region’s commercial interests.

Kapuscinski Encounters Capitalism

The Polish journalist Ryszard Kapuscinski, who died in January, published an article in the February 5 New Yorker on his first trip outside Poland. Kapuscinski became a legendary foreign correspondent and travel writer, but this was his first international trip, in 1955 at the age of 23. His reminiscences are a useful reminder of the differences between capitalism and communism. Flying into Rome, he recalls:

I was dumbstruck.

The entire length and breadth of the blackness over which we had been flying was now filled with light. It was an intense light, blinding, quivering, flickering. I had the impression of a liquid substance, like molten lava, glimmering down below, a sparkling surface that pulsated with brightness, expanding and contracting. The entire shining apparition was alive, full of movement, vibration, energy.

It was the first time in my life that I had seen an illuminated city. What few cities and towns I had known until then were depressingly dark. Shop windows never shone, there were no colorful advertisements, the street lamps had weak bulbs. Who needed lights, anyway? In the evenings, the streets were deserted, and one encountered few cars.

The next day his seatmate from the airplane took him shopping in Rome.

We started making the rounds of the shops, accompanied by Mario’s wife. For me, these were expeditions of discovery. Three things dazzled me in particular. First, that the stores were brimming with merchandise, the goods weighing down shelves and counters, spilling out in colorful streams onto sidewalks, streets, and squares. Second, that the salesladies did not sit, but stood looking at the entrance; it was strange that they stood in silence, rather than sitting and talking to one another. The third shock was that they answered the questions you asked them. They responded in complete sentences and then added, Grazie! Mario’s wife would ask about something and they would listen with sympathy and attention, inclining forward with such focus that it looked as if they were about to start a race.

Now remember, this is Italy in 1955, only 10 years after its military defeat. Apparently it took only a decade for communism to produce shortages, indolence, and poor customer relations in Poland, while capitalism produced abundance and customer service in post-Mussolini Italy. Not to mention the difference in nighttime lights that anticipated today’s famous image of the two Koreas at night.

More Fallout from Switzerland’s Tax Fight with Brussels

This site has closely followed the European Commission’s attempt to undermine Swiss tax sovereignty - an effort that has implications for the US since high-tax nations like France and Germany could use the same argument (that low taxes somehow are contrary to free trade) against America at the WTO if the anti-Swiss campaign proves successful. Fortunately, that is not likely to happen. The European Commission ultimately has only one weapon, which is the ability to impose protectionist sanctions against Swiss goods and services. But as Euractiv.com notes, there are EU member states that support tax competition and presumably would not approve an effort to punish Switzerland for the supposed sin of good tax law:

The Commission, on 13 February, accused Switzerland of offering unfair company-tax advantages that it says amounts to illegal state aid, in order to lure multinationals away from the EU. …Member states are likely to give strong backing to the Commission, as frustration has grown with the increasing number of multinationals, including General Motors, Kraft Foods and Procter & Gamble, deserting their EU headquarters to set up in Switzerland. Tax competition is also a problem within the EU, with countries like Ireland and Luxembourg luring companies away from high-tax France and Germany thanks to their low business tax rates. But, a Commission move to harmonise tax systems across the EU is being fiercely resisted by low-tax member states.

Needless to say, the Swiss-EC fight has nothing to do with trade and everything to do with tax competition. Politicians from high-tax nations despise fiscal rivalry since it forces them to lower tax rates (or at least not to raise rates even further) in an effort to prevent the loss of jobs and capital. Switzerland is a beneficiary of this liberalizing process, both because its overall tax burden is low compared to the rest of Europe, but also because the nation has a genuine federal system, meaning that regional (cantonal) and local governments must compete to offer the most attractive fiscal policies. A recent paper published by the Center for Freedom and Prosperity explains the role of intra-national tax competition, and a report from Euro2day.gr shows that Swiss leaders understand the valuable role of their federal structure:

Zug has been particularly exposed. “We don’t understand why the Commission has made these accusations now,” says Peter Hegglin, the cantonal finance minister. …Like most Swiss, Mr Hegglin emphasises the role of tax competition as a cornerstone of Switzerland’s extreme form of devolution, where individual cantons and communities set their own levies, and as an instrument to ensure lean, efficient government. “Tax competition is something that is so deeply ingrained in Switzerland internally that the government has little leeway to negotiate anything,” says Walter Kielholz, chairman of Credit Suisse. …Zug is now the hub for companies from global commodities traders, such as Glencore, to the regional headquarters of leading pharmaceuticals groups. Nord Stream, the Russian dominated consortium planning a new gas pipeline under the Baltic, is the latest of many arrivals. Zug’s appeal lies in its proximity to Zurich, its lawyers, accountants and consultants – and its modest taxes. All companies must pay Switzerland’s nationwide 8.5 per cent federal profits tax. Some others also face cantonal and municipal levies, taking the total to 16-16.5 per cent.

Last but not least, a letter-to-the-editor of the Financial Times mockingly asks whether the bureaucrats in Brussels will extend their complaint about Switzerland’s tax laws to other policies:

The Swiss know many more ways of unfair competition to lure successful businesses to settle there. Take my own typical recent travel experience: Queueing for check-in and security control at Kastrup airport, Copenhagen: 2hr 15min. Queueing at Birmingham international airport: 1hr 45min. I always avoid using Heathrow and BA because it is even worse. No queueing at Geneva airport, check-in and security control completed in less than 20 minutes. …In the UK or Sweden the whole rail system breaks down if 5cm of snow falls. The Swiss trains run 90 per cent on time, even if it is snowing! Another example of unfair efficiency. The political system with its direct democracy is less corrupt in Switzerland than in the UK, Germany and Sweden. Is this not an outrageous example of unfair competition? Because of low taxes the Swiss public services must be well organised and more efficient than in Scandinavia and the UK. The efficiency of public services together with reasonable taxes is Switzerland’s most important advantage.

A More ‘Social’ EU

Nine EU nations are calling for a greater focus on “social protection” and “social rights” in order to promote “social Europe.” Needless to say, “social” is a code word for bigger government.

Most of the nine nations are in the usual-suspects category, but Hungary and Bulgaria are strange additions. Do they really think they can overcome the legacy of communism by shackling themselves to socialism?

The EU Observer reports on the latest skirmish in Europe’s fight against globalization:

France, Italy, Spain, Cyprus, Bulgaria, Luxembourg, Hungary, Belgium and Greece have all signed up to a two-page long declaration in which they argue that the 27-country bloc should be more than just an internal market. Calling their statement, which has been sent to all member states, “enhancing social Europe” the currently nine-strong group want to use the ongoing negotiations on the EU constitution as a springboard for their ideas.

It continues by saying that a Europe of 27 member states “cannot just be a free trade zone but shall guarantee the necessary balance between economic freedom and social rights.” Social Europe is defined as a set of “common values” such as social justice, equality and solidarity.

The call for more social Europe goes to the heart of a debate in Europe about the extent to which the bloc should adapt to the force of globalisation and the extent to which it should set certain social, environmental and work standards, which detractors say could hamper growth and competitiveness.

Singapore Cuts Corporate Tax

If the average state levy is included, the U.S. corporate tax rate is about 40 percent, which is higher than the coporate rate in every European welfare state. American companies also must endure heavy regulatory burdens — especially in the aftermath of Sarbanes-Oxley.

Politicians fret that America is losing manufacturing jobs and they complain when American companies build plants overseas. Contrast the short-sighted behavior of U.S. lawmakers with those in Singapore. As noted by tax-news.com, the government of Singapore has just announced that the corporate tax rate is being reduced to 18 percent to boost international competition. The government also is boosting the value-added tax, so Singapore is not a perfect role model, but at least lawmakers understand the negative impact of high corporate tax rates:

In his Budget Statement for the Financial Year (FY) 2007, Second Minister for Finance, Tharman Shanmugaratnam announced a two percentage point reduction in the corporate income tax rate to 18% to sharpen Singapore’s competitive edge. However, the corporate tax cut will be balanced against a number of revenue raising provisions, such as…an increase in the GST rate from 5% to 7%.

OECD Says Sweden Should Consider Abolishing the State Income Tax

In a report on the Swedish economy, the Organization for Economic Cooperation and Development revealed more of its schizophrenic nature (see this article for more information on the OECD’s Jekyll and Hyde personality). While the Paris-based bureaucracy has become infamous for its so-called harmful tax competition project that seeks to penalize jurisdictions with pro-growth tax law, the economists at the OECD often write studies and reports that reflect a solid understanding of the negative impact of government intervention. The Policy Brief on the Swedish economy is a good example. As excerpted below, it notes the problems of high tax rates and excessively generous welfare benefits. It calls for the elimination of the wealth tax and reductions in punitive marginal tax rates. It even suggests that Sweden abolish the state income tax:

…the new government has renewed the commitment for sound macroeconomic framework conditions and will stick to the target for general government net lending of 2% of GDP over the cycle which is necessary to keep public finances on a sustainable path. Underlying this target is the assumption that taxes can be sustained at current levels which could be difficult in the future, not least due to mobile tax bases and international tax competition. …the share of 20 64 year olds who depend on public income transfers has declined to 20% in 2006, but it remains well above the 15-16% of 1990-91. …Sickness absence among those employed and the number entering disability pension increased rapidly from the late 1990s. The numbers are now falling, although the stock of disability pensioners remains among the highest in the OECD. …Letting people keep a bit more of the value they create is vital to encourage both labour supply and entrepreneurship. The plans to abolish the wealth tax should therefore be endorsed, as it sets in at a rate of 1½ per cent already from wealth slightly above the average price of a metropolitan-area one-family house. Abolition of the wealth tax might lead to repatriation of capital, possibly making more investment capital available for new small firms. Marginal income taxes are also important, though, because high rates kick in already from slightly above average full-time earnings. The combination of social contributions, income and consumption taxes drives the effective marginal tax rate above 70% for over a third of the full-time employed, helping to explain why working hours for those employed are below the OECD average. …Moving up the threshold by SEK 100 000 from 105% to 135% of average full-time earnings, for example, would halve the number of persons exposed to the above-70% combined marginal tax rate, which results when the state income tax sets in on top of social contributions, municipal income tax and consumption taxes. …In fact, completely abolishing the state income tax would cost just 1½ per cent of GDP.

Swiss Leaders Defend Low Taxes, Reject Complaint from Brussels

The tax bureaucrats at the European Commission apparently believe that low tax rates and territorial taxation (the common-sense principle of only taxing income earned inside national borders) are a violation of free trade rules. The Swiss, not surprisingly, have a different perspective. This European fight has long-term implications for America. If the Euro-crats succeed in characterizing good tax policy as an unfair trade subsidy, it will be only a matter of time before high-tax nations use the same theory at the World Trade Organization. Ideally, Switzerland will hold firm and this will never happen. As explained by tax-news.com, the EU has very little leverage in this battle unless they are willing to impose protectionist barriers against Switzerland, but there are a number of low-tax EU nations that presumably would side with Switzerland and block any sanctions:

Switzerland has rejected criticism from the European Commission of corporate tax rates in some cantons, saying it will not yield its sovereignty over this issue. …Finance Minister Hans-Rudolf Merz shot down the EU proposal, saying in Bern that there was nothing to negotiate. …The commission wants the Swiss to change tax rules that it claims offer unfair advantages to firms operating out of Switzerland. It said low corporate taxes offered by cantons such as Obwalden and Zug violated a 1972 trade agreement, calling it a disguised state subsidy. …Merz said he does not fear a backlash from Brussels since so far all the talk is about negotiations. He reckons that sanctions are also unlikely, as some EU member states would probably not back them. The finance minister admitted though that the European initiative was aimed at stopping firms – and their tax money – leaving the union for Switzerland’s greener pastures.