Frits Bolkestein, a senior bureaucrat for the European Commission, just visited the United States in an effort to convince the Bush administration to join the European Union's proposed savings tax cartel. This plan, known as the "Savings Tax Directive," is 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 (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.
European politicians believe that it is unfair for jobs and capital to flee from high-tax countries to low-tax countries, and that the United States should prop up Europe's welfare states. The Savings Tax Directive is a significant threat to market-based policy and fiscal competition and to America's interests.
The United States is the best tax haven in the world. Low taxes and a strong commitment to financial privacy combine to attract more that US$9-trillion of foreign capital to the U.S. economy. This inflow of money is a key determinant of U.S. prosperity because 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% of GDP in Europe, much higher than the U.S. burden, which is less than 30%. Moreover, the U.S. 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 "Saving 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 the United States. The EU Directive would give countries like France or Sweden the power to impose oppressive tax rates on income earned in places like America.
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.
In the words of Commissioner Bolkestein, "both the EU and the U.S. need to work much more closely together to frame legislation that can help capital flow more freely between the EU and the U.S." However, empirical evidence shows that capital does not have any problem flowing from Europe to the United States. European politicians are upset because capital is reluctant to flow from the United States to Europe, with the exception of low-tax Ireland. Frits Bolkestein is really trying to negotiate a directive that would reduce the amount of capital coming to America.
The EU tax cartel would have a terrible effect on the U.S. economy. If the Savings Tax Directive was implemented, the U.S. economy would lose capital, which would mean fewer jobs and lower wages. Equally important, an EU victory would have a big impact on America's ability to reform its tax system in the future. The EU scheme, for instance, would make a flat tax or some other tax reform plan impossible.
In reality, Commissioner Bolkestein wants U.S. financial institutions to serve as vassal tax collectors for Europe's welfare states. If implemented, the EU savings tax cartel initiative would undermine the right of U.S. policy-makers to determine the tax treatment of income earned inside U.S. borders.