Washington Foundation Attacks EU Tax Exports

by Mike Godfrey, Tax-News.com, Washington

11 July 2002

Daniel Mitchell, McKenna senior fellow in political economy at The Heritage Foundation, a Washington-based public policy research institute, explains why the EU's aspiration to turn its 15 (soon to be 26) member states into "the most competitive knowledge-based economy in the world by 2010" is a pipedream.

Thanks in large part to the Reagan tax cuts and other free-market policies, says Mr Mitchell, per-capita national income in America is now 50 percent higher than it is in Europe. Our growth rate over the last decade has been about 60 percent higher, and our unemployment rate is about 50 percent lower. Tax policy is America's biggest advantage. Taxes consume about 29 percent of economic output in the United States. This is too high, but America is like the Cayman Islands compared to Europe, where tax collectors seize 42 percent of gross domestic product.

Mr Mitchell asks how Europe is planning to surpass the United States, but concludes that with the exception of small countries like Ireland, which thanks to Reagan-style tax-rate reductions, including a corporate income tax rate of just 10 percent has become the "Celtic Tiger" and is now the European
Union's second richest country, the EU has little chance of success.

'Sadly,' says Mr Mitchell, 'the politicians representing Europe's welfare states have little interest in cutting taxes. Indeed, they censured Ireland for cutting tax rates and growing too fast! Apparently, the French and the Germans consider supply-side economics a crime.'

Perhaps realising that it can't win through straight competition, the EU is in fact doing its best to tilt the playing field in its favour, by exporting its own high-tax policies through its information-sharing Savings Tax Directive and the Digital Goods VAT Directive, which will attempt to impose EU rates of VAT (sales tax) on sales to its citizens by foreign companies. These rates are between 15% (EU-wide the legal minimum) and 25%, compared with typical US sales taxes of one third or less - and on the Internet, under the current moratorium, of course, they are zero.

Individual firms can avoid the VAT Directive simply by ignoring it, but the Savings Tax Directive is more insidious, because it attempts to export EU taxes through co-operation with other governments, asking that they report back payments made to EU nationals so they can be taxed at home. this is the antithesis of tax competition through 'territorial' taxation, and will have a throttling effect on any nation that is silly enough to agree to it.

The US is just beginning to have discussions with the EU over this menacing initiative, but the willingness of bureaucrats in the Treasury to entertain it will hopefully be squashed rapidly by Paul O'Neill and other right-minded politicians.

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