The US Starts To Recognize EU 'Information Exchange' Problem

by Mike Godfrey, Tax-News.com, New York

20 June 2002

Congressman Jim DeMint of South Carolina has written to Treasury Secretary Paul O'Neill urging him to have nothing to do with the EU's Savings Tax Directive. The EU had wanted to impose a withholding tax on investment returns accruing to the citizens of member states, but was stymied by the Brits, who feared for the international bond business which makes up a large proportion of the City's revenue.

Instead, EU leaders agreed on a scheme to exchange information, whereby each member state would report payments made to other member states' citizens. However, they recognised that this would make EU financial institutions uncompetitive by comparison with outside financial centres such as Switzerland, the US and offshore jurisdictions such as Jersey and the Isle of Man. Thus they made the information-exchange regime conditional on the inclusion of all these other countries, and have been struggling since to persuade Switzerland in particular to sign up to information exchange.

There has been little news about the discussions which are presumed to be taking place between the EU and the US on the issue of information exchange, and Jim DeMint's letter, reproduced below, is aimed at stiffening resistance in the Treasury Department to the EU's plans.

May 2, 2002

The Honorable Paul O'Neill
Secretary of the Treasury
Department of Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Re: Global Tax Harmonization Is Another "Abomination"

Dear Secretary O'Neill,

As you have repeated many times, our tax code desperately needs reform. High tax rates, pervasive discrimination against capital income, and needless complexity combine to hamstring our economy's potential. Indeed, I am pleased that the President's budget strongly endorsed tax simplification and look forward to working with you to create a tax code worthy of a civilized nation.

I am in complete agreement with your characterization of the tax code as an abomination. It is for this reason that I have taken over as lead sponsor of Rep. Largent's Date Certain Tax Code Replacement Act, H.R. 2714. This bill, which passed the House in the 105th Congress and 106th Congress, has become a major rallying point for the tax reform community. While it does not specify a reform solution (i.e. flat tax or sales tax) it is a necessary prerequisite for fundamental tax reform to take place since it sunsets the existing tax code. It is my plan to build support for this bill in an effort to pass it in the House again and any assistance you could lend would be much appreciated. Your support would greatly enhance our chances for success.

Unfortunately, there are many obstacles that threaten tax code modernization. In particular, the tax harmonization agendas of the European Union and the Organization for Economic Cooperation and Development clearly would undermine fundamental tax reform. Two of the most important principles of tax reform are territorial taxation – the common sense notion that countries should tax only the economic activity that occurs within their borders – and neutral treatment of income that is saved and invested.

Yet the "information exchange" proposals advocated by supporters of tax harmonization explicitly are based on the misguided notions that savings and investment should be double-taxed and that governments should be allowed to impose those discriminatory taxes on income earned in other nations.

This is bad tax policy and bad economic policy, but it also is a threat to America's competitive position in the world economy. We create more jobs and enjoy higher incomes in part because our tax burden is much lower than the tax burdens in most other industrialized nations. Needless to say, it would be foolish to compromise this advantage by agreeing to participate in a tax cartel – an OPEC for politicians.

I want to thank you for your opposition to these harmful initiatives and encourage continued vigilance against proposals to restrain tax competition. Tax harmonization proposals such as "information exchange" would hurt our economy and greatly hinder the chances of fundamental tax reform.

Sincerely,

Jim DeMint M.C.

Recommended