FC: Richard Rahn: Eurocrats' "harmful tax competition" scam

[Declan McCullagh <declan () well com>]

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From: Novmgtco () aol com
Message-ID: <186.1b1b72d8.2c19dbd3 () aol com>
Date: Thu, 12 Jun 2003 09:36:19 EDT

The Washington Times
www.washingtontimes.com

Economic murder-suicide
By Richard W. Rahn
THE WASHINGTON TIMES
Published June 12, 2003



On June 3, 2003, the European Commission adopted measures to "tackle 
harmful tax competition." If the term "harmful tax competition" sounds to 
you like an oxymoron, you are thinking clearly. The EU's measures are 
designed to make it easier for them to tax savings but, in reality, will 
largely destroy the small amount of remaining legal savings by EU citizens.

Because of confiscatory levels of taxation, many of those who reside in the 
EU have moved their savings to the United States and other relatively low 
tax jurisdictions. For the last several years, many economic scholars and 
public policy organizations have warned the EU that attempts to reach 
beyond their borders to tax this so-called flight capital would end in 
disaster.

To understand the problem, assume you are a citizen of France. You save 
$1,000 and receive an interest payment of $60 (6 percent). Inflation is 3 
percent, so your real interest earnings are only $30. However, you must pay 
a 59.7 percent tax, or $35.82, on the $60 of interest, plus the $30 
inflation tax. (Remember, inflation is caused by government producing too 
much money.) This leaves you a net loss of almost $6 on each $1,000 saved. 
(In those EU countries where inflation is 3 percent or more and maximum tax 
rates are 50 percent or more, many savers have effective tax rates on 
interest of more than 100 percent.)

People quickly figure out they are worse off rather than better off by 
saving; hence, they either move their savings out of the country to a more 
tax-friendly jurisdiction or stop saving. The EU will receive virtually no 
increase in tax revenue from these new measures. They will only succeed in 
driving their citizens to find legal or illegal loopholes.

Any reduction in savings rates in the EU will be a disaster. Most of the EU 
countries are suffering from very low birthrates and rapidly aging 
populations, plus increasing demands for welfare, medical and retirement 
benefits. Without high levels of saving, there is no way these benefit 
payments can be met.

It is bad enough that the EU is imposing such measures on its own citizens, 
but the EU is attempting to go even further by imposing it on non-EU 
members such as Switzerland, Liechtenstein and dependent and associated 
territories of the United Kingdom and the Netherlands, for which it will be 
economic death.

The EU has even had the audacity to try to get the U.S. to go along with 
this unsavory scheme (some former Clinton administration officials and 
Treasury bureaucrats thought this was a good idea).

The EU bureaucrats realize that if they don't get most of the world to go 
along with their scam, it will not work. The real world fact is, of course, 
it will not work no matter what they do. To sell the scam, the EU had to 
agree to many loopholes, in part so the lawyers and accountants could still 
sell tax shelters to their well-off clients.

The EU has virtually no chance of getting China-controlled Hong Kong, and 
some other non-EU-controlled jurisdictions to go along. Hence, the real 
criminal and terrorist money will no longer be in countries where 
legitimate law enforcement forces of the Western nations can monitor what 
is happening.

How could the EU come up with and sell such an awful idea? The political 
leaders and bureaucrats of "old Europe" had a problem. In their lust for 
power and control, they were killing their economies through excessive 
taxation and regulation.

It is often difficult for many people to move from the prison of tax 
oppressive regimes, but not so financial capital, which could flee by 
electronic means overnight. Old-fashioned capital controls had both failed 
and fallen into economic disrepute, so the idea of "harmful tax 
competition" was suddenly born.

Most people understand that when businessmen get together to limit 
competition, the public interest is rarely served, and the same is true of 
government bureaucrats. EU officials convinced their bureaucratic lackeys 
at the Organization for Economic Cooperation and Development (OECD) to 
develop the concept of "harmful tax competition" to justify trying to force 
all of the world's countries to jack up their tax rates to French-like levels.

More objective and competent economists have clearly demonstrated that the 
concept of "harmful tax competition" is without intellectual merit, 
particularly given that most countries have taxes far above the revenue and 
growth maximizing rates, so tax competition can only be beneficial.

However, these destructive measures have given the U.S. an opportunity to 
challenge the failed European economic model in a very public way. Our 
government leaders should make it clear that the U.S. wants foreign capital 
and is willing to provide it with strong legal protections and lower tax 
rates. The U.S. has just lowered taxes on capital with the capital gains 
and dividend rate cuts. Our government should also state that we will not 
be party to any blanket financial information-sharing schemes designed to 
milk the world's savers.

We should go further and say that any of the associated political 
jurisdictions of the European countries that wish to declare independence 
from their European overlords, rather than see their economies destroyed, 
will have the necessary support of the U.S.

Such a policy is clearly in our own self-interest because most of the money 
that flows through low tax jurisdictions comes from Europe and Latin 
America and is invested in the U.S. Also, if we allow the Europeans to 
destroy the economies of the low-tax jurisdictions, the U.S., not Europe, 
is going to face a new and major refugee problem.

In the 1770s, a certain European nation tried to stuff a destructive tax 
regime down the throats of the American Colonies. We certainly ought not to 
let Europe try this gambit on us and our friends again, 230 years later.


Richard W. Rahn is a senior fellow of the Discovery Institute and an 
adjunct scholar of the Cato Institute.





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