Commentary

EU Tax Collection Plan Will Hurt U.S. Economy

Falling stock prices are big news, and with good reason. If current trends continue, the market will have declined for three years in a row, something that has not happened since the Great Depression. Unfortunately, some bureaucrats at the IRS and the Treasury Department are trying to make the market fall even more by driving foreign investors out of the U.S. economy. They are trying to convince President Bush to approve a tax harmonization scheme called the European Savings Tax Directive. This proposal could push $1 trillion out of the economy, driving the markets lower and destroying U.S jobs.

The EU Savings Tax Directive is an enormous threat to America’s long-term prosperity. The proposal would compel U.S. financial institutions to collect private financial data on non-resident investors so it can be turned over to foreign tax collectors. The plan is designed to stop money from escaping Europe’s high-tax economies and fleeing to low-tax economies like America or Switzerland. In other words, the EU wants to help high-tax countries to collect tax on income outside their borders. This would create a global tax cartel, sort of an OPEC for politicians.

From the European perspective, a tax cartel makes sense. The European Union is very uncompetitive in the world economy. The average tax burden consumes almost 45 percent of GNP, and regulatory red tape makes it very difficult for the private sector to create jobs. With this track record, it is not surprising that per capita income in the EU is much lower than it is in the United States. To make matters worse, many European governments face huge unfunded liabilities for pensions, so it is likely that the burden of government will climb rather than fall. Because government in Europe is so expensive and the long-term outlook is grim, capital is fleeing from Europe to low-tax countries.

While a tax cartel makes sense for nations like France and Germany, it is hard to think of a good reason why the United States should participate in any tax harmonization schemes. First, this initiative is an assault on American sovereignty. European politicians may believe 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.

Second, America is the best tax haven in the world. Low taxes and a strong commitment to financial privacy combine to attract more than $9 trillion of foreign capital to the U.S. economy. For instance, 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. This inflow of money is a key determinant of American prosperity. Yet the EU initiative - and the power it would give to countries like France and Sweden to impose oppressive tax rates on income earned in America - would drive capital out of the U.S. economy. This would mean fewer American jobs and lower wages for American workers.

Of course, the European politicians claim that their “true” goal is to reduce tax evasion. 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.

This issue does not generate big headlines, but it represents an enormous threat to America’s competitive position in the global economy. That is why it is important for the White House to take control. If career bureaucrats get to decide this issue, the wrong choice will be made. And since EU officials have been bragging that America is capitulating on this issue, presidential leadership is desperately needed.

The EU tax cartel would have a terrible effect on the U.S. economy. The United States should reject this ludicrous scheme. Treasury and IRS bureaucrats are wrong: Foreign tax collectors are not more important than American workers. Let’s hope that the Bush administration will soon tell the EU to take its plan elsewhere. That will give investors confidence and help boost the stock market.

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