The Timeshare Beat: Potomac Crossings; EU Tax Cartel

EU Tax Cartel

If the European Union fails to gain international control of United States tax systems through the United Nations (see last week’s column) the EU intends to try and do it by themselves. At the end of the Clinton administration the IRS issued a proposed regulation (REG 126100-000) for comment that would force U.S. banks to report bank deposit interest paid to nonresident foreign nationals. Veronique de Rugy, a policy analyst at the Cato Institute (www.cato.org), has published a report on the effect of this proposed regulation. Its effect is to make our banking system a partner with foreign governments attempting to collect tax on U.S.-source income.

It has proven to be very easy in our Internet Age, she says, for investment funds to cross national borders with a click of the enter key. This mobility creates “tax competition” that forces politicians to exercise a degree of fiscal discipline in order to keep or attract new jobs, capital and entrepreneurs instead of losing them to another, more economically vigorous country.

America’s modest tax burden, she continues, combined with its privacy laws for foreigners seeking to escape oppressive fiscal systems, has helped attract more than $ 9 trillion of foreign investments to the United States. The inflow from high tax jurisdictions is a key source of American prosperity. That money produces U.S. jobs, a higher standard of living and greater general prosperity.

By contrast, high-tax nations such as Sweden, Germany or France, resent tax competition. High-tax nations suffer from tax evasion, capital flight and brain drain. They face two choices – lower taxes or undermine tax competition. Ireland, for example, chose to cut taxes and now enjoys the second-highest living standards in the EU. But Ireland is the exception, not the rule.

The EU has developed a plan – called the “Saving Tax Directive” - to create a global tax cartel by eliminating any individual’s right to financial privacy. One front of the attack is through the World Trade Organization (WTO). The EU is currently interfering with U.S. tax policy by asking the WTO to rule that some provisions of our tax code are impermissible because they create “too much tax competition.”

What does “too much” competition mean? Ms. de Rugy uses France to illustrate her point.. According to French government reports, some 25,000 taxpayers migrate from France every year for tax reasons. The estimated level of tax evasion is 17 percent for those who stay at home. Over half of France’s underground economy is tax driven and tax avoidance is widely in vogue. The reason? With a top personal rate of 54 percent plus an average value-added (VAT) tax of 19 percent, the French tax burden winds up to be 45.5 percent of their Gross Domestic Product (GDP).

How EU commerce operates was also illustrated this week with an announcement from The Times of London (reported in OpinionJournal) that an official EU body was meeting to decide how many lumps a sauce can contain before it ceases to be a sauce and becomes officially classified as a vegetable. (Vegetables face high tariffs but sauces do not.)

The saucemakers have formed a lobbying association which they call Le Comite des Industries des Mayonnaises et Sauces Condimetaires de l’Union Europeene. It told the committee that the current lump limit of 20 percent is unacceptable and no lumps should be allowed. Their opponents countered with market research showing the increased popularity of sauces with “textural interest.” Industry sources suggested that the whole lump threshold system should be abolished. A final decision is yet to be published. (“Those that don’t like it can lump it,” an EU official was rumored to have said, though the translation may not be correct.)

A study by the Center for Freedom and Prosperity notes that international tax harmonization schemes, just like the Kyoto Accords, are aimed at undermining America’s competitive advantage. Much foreign investment is attracted to the United States by our comparatively lower tax rates. With minimum exceptions, our government does not tax the investment income of foreign nationals and does not report their income to foreign governments. Low taxes and financial privacy are the cornerstones of attracting foreign investment from around the world. Participating in a tax cartel, as the IRS rule anticipates, would deal a $1 trillion blow to the U.S. economy.

The global economy is now deteriorating, says Ron Scherer of the Christian Science Monitor. Since European economies run a few months behind the U.S., they are now beginning their ride through the recession rapids that we are just now exiting. If there is a ripple effect from Argentina, especially a Peronist whirlpool, there will be little economic excitement in Latin America or Japan and Southeast Asia either.

The IMF policy pattern, according to David Malpass, Chief International Economist for Bear Stearns, can be seen in Argentina. First the IMF gives bad economic advice, then it lends heavily to support the regimes that take their advice, the funds are wasted and the government’s popularity plummets. When the crisis is deep enough, the IMF blames the government and pulls the plug, knowing that it always gets paid first and in full. The IMF, having created an impoverished nation, then blames the private sector and proposes an even bigger role for itself.

A global slowdown may put the brakes on a U.S. recovery. The Euro has yet to weather the storm created by one of its participating nations needing stimulus while another needs restraint. There is a real risk, says The Economist, that as the world’s economies struggle out of the worse global slowdown in 30 years, wrong policy choices will postpone rather than hasten recovery. Several nations have major fall elections. In such n election year, of course, some political strategists openly advocate slowing the recovery for partisan political gain. Timing is all, they say, in love and politics.

With an iffy 2002 at best, it is a significant danger to our recovering economy to enact this anti-foreign investment IRS ruling. The trick to loosening the grip of a global slowdown is delivering sustainable growth. In the midst of our coalition building against terrorism, it would be easy for the pawn of REG 126100-00 to slip unnoticed into law as a favor to the EU. It’s a $1 trillion dollar error if it does.