EU On Verge Of Economic Suicide, Rahn Suggests

by Mike Godfrey, Tax-News.com, Washington

17 June 2003

In a recent Washington Times opinion piece, Richard W. Rahn, a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute warned that Europe was about to commit both economic suicide and murder with the EU Savings and Tax Directive agreed by member states earlier this month.

The basic premise of the directive, which has been some fourteen years in the making, is to stamp out banking secrecy by compelling citizens of member states with bank accounts in another member state or territory covered by the agreement to divulge details of their accounts to their state of residence - with a few notable exceptions. Switzerland (not part of the EU but one of the primary targets of the directive as the world's most prominent 'tax haven'), Luxembourg, Austria, Belgium, the Channel Islands and the Isle of Man (both closely linked to the United Kingdom) have been permitted to levy a withholding tax in preference to exchanging information for fear of a mass exodus of business from their lucrative banking industries.

Other notable banking centres, including Liechtenstein, Monaco, Andorra and San Marino will also be imposing a withholding tax on EU citizens' savings. This tax will gradually be phased in from January 2005, starting at 15% and rising to 35% by 2011.

The European Commission's desire to eliminate 'harmful tax competition' wherever it sees it, whilst making it easier for the authorities to tax individuals savings "in reality, largely destroy the small amount of legal savings by EU citizens," according to Rahn.

"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," he continued.

To illustrate the somewhat self-defeating consequences of the high tax regimes of certain EU countries, Rahn pointed out that a combination of high taxes and inflation combine to wipe out any benefits of interest, and leave the saver actually being penalised via negative interest rates. Any European country with inflation of 3% or more, where top tax rates are over 50% will actually be imposing an effective tax rate of 100% or more, the opinion piece explained. "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," the Discovery Institute fellow suggested.

However, perhaps the most serious piece of folly on the part of the European Union is its mission to force the legislation down the throats of non-EU countries such as Switzerland and the British and Dutch territories in the Caribbean, which according to Rahn can only lead to their "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.

"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."

However, as Rahn pointed out, the EU's loss will likely be the US's gain and he suggested the Bush administration has the chance to highlight the failings of the 'old Europe' economic model in a "very public way".

Rahn went on to urge the US government to reject European overtures to become involved in information exchange arrangements designed to "milk the world's saver" and argued that 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."

"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," he concluded.

http://www.washtimes.com/commentary/20030611-093247-4381r.htm

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