Commentary

Bush Should Reject European Tax Cartel

The European Union (EU) just released a document stating that the United States was willing to make American financial institutions enforce foreign tax law. More specifically, the EU is bragging that it has browbeaten America into supporting the “Savings Tax Directive,” a plan designed to stop money from escaping Europe’s high-tax economies and fleeing to low-tax economies. And since the United States is a low-tax country (at least compared to places like France), the plan would require U.S. financial institutions to collect private financial data on non-resident investors so it can be turned over to foreign tax collectors. Is the EU bluffing or is the Bush administration about to put the interests of European welfare states before the interests of the American economy?

It’s hard to believe that the U.S. has capitulated since this initiative is an assault on American sovereignty. European politicians may believe that it is unfair for jobs and capital to flee from high-tax countries to low-tax countries, but the United States has no obligation to prop up Europe’s welfare states. The Savings Tax Directive is a significant threat to market-based policy and fiscal competition. But most of all it is a threat to America’s interests.

America is the best tax haven in the world. Low taxes and a strong commitment to financial privacy combine to attract more that $9 trillion of foreign capital to the U.S. economy. This inflow of money is a key determinant of American prosperity since this money is put to work for the nation and produces more jobs, higher standards of living, and general prosperity.

America is the Cayman Islands compared to Europe. Tax revenues consume more than 40 percent of GDP in Europe, much higher than the U.S. burden, which is less than 30 percent. Moreover, the Congress repeatedly decided, with few exceptions, not to tax the investment income of foreigners and not to report this income to foreign governments. And since European politicians are too greedy to cut taxes, European workers and investors are wise to invest their money in the United States.

Obviously, high-tax nations resent this competition, which is why they are lobbying the U.S. government to support the “Savings Tax Directive.” The EU initiative seeks to protect uncompetitive European nations from the discipline of market forces. In particular, it is an effort to preserve bad tax policy because it assumes that there should be multiple taxation of income that is saved and invested - particularly if the money is invested in America. The EU Directive would give countries like France or Sweden the power to impose oppressive tax rates on income earned in places like America. If the Savings Tax Directive is implemented, the U.S. economy will lose capital, which means fewer jobs and lower wages.

The European politicians claim that their “true” goal is to reduce tax evasion. As such, they claim that the complete destruction of financial privacy is the only way to address widespread tax evasion. Yet, real world evidence shows that lower tax rates and tax simplification are much more effective tools to prevent tax evasion. European governments should try tax reforms instead of trying to force other nations to adopt their bad tax policies.

Since September 11, the EU has also tried to bolster its case by jumping on the anti-terrorist bandwagon, arguing that financial privacy is an obstacle to law enforcement. Yet law enforcement agencies already have the power to obtain financial records when there is sufficient reason to suspect someone of a crime such as murder, terrorism, and drug running. The EU’s information-sharing directive has little to do with law enforcement but everything to do with fighting low taxes.

Fortunately, the EU tax harmonization scheme requires unanimous support from all member nations, as well as the approval of six non-EU nations, including Switzerland and the United States. For months now, the EU has pressured Switzerland to sacrifice its historical commitment to financial privacy in the name of high taxes, but Switzerland has remained firm. Recently, the EU has turned its attention to the United States, another critical holdout. Frits Bolkestein, a senior bureaucrat for the European Commission, even visited the United States to convince the Bush administration to join the tax cartel.

In light of that visit, how should we read the EU’s claim that the United States supports this form of tax harmonization? Since the EU tax cartel would have a terrible effect on the U.S. economy one would think that the United States would be eager to reject this ludicrous scheme. On the other hand, a failure by Treasury officials to disavow the EU statement might suggest that the United States believes that foreign tax collectors are more important than American workers. So which one is it? Let’s hope that the Bush administration will soon call the EU’s bluff and show that the EU never had the cards.

Veronique de Rugy is a fiscal policy analyst at the Cato Institute.