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Why Europe Fears ‘Tax Competition’

Posted By Ted R. Bromund, Ph.D. On June 29, 2009 @ 12:20 pm In International | Comments Disabled

Back in April, after the G20 Summit, we at Heritage warned [1] that the Summit’s attack on tax havens was, at best, an irrelevancy. At worst, it was “the start of a broader campaign to find new sources of money to tax and stigmatize as international wrongdoers states that, as an expression of their national sovereignty, have chosen to have lower taxes.” The idea that states that have lower taxes are committing a crime could not be more wrong. These states are using their political freedom to promote economic freedom. They are benefactors, not malefactors.

The Prime Minister of Finland, Matti Vanhanen, has confirmed our analysis. In a recent article [2], “Europe will need to raise taxes in harmony,” in the Financial Times, he points – correctly – to the fact that public finances across Europe are in terrible shape, and that the long-term rising of entitlement spending is making the bad situation worse. The same thing is true [3] in the U.S. After a quick nod in the direction of reducing spending, the Prime Minister moves on to his main remedy: raising taxes.

But as he appreciates, raising taxes is bad for the economy, so as a way to balance the budget it can be entirely self-defeating. This is particularly true “when a country acts on its own: capital and people can respond by migrating to jurisdictions with lower rates.” That’s what’s known as tax competition, and dislike of it was what lay behind the G20 attack on tax havens: the havens make it harder for other countries to raise taxes by giving investors other, lower-tax, options.

The solution, according to the Prime Minister, is obvious: make sure people don’t have any other options. In his words, “deeper co-operation is therefore necessary if tax revenues are to be increased in a way that truly helps fiscal consolidation.” If everyone agrees to raise taxes together, then there will be no tax competition, and an enormous obstacle in the way of building the ever-bigger state will have been blown away.

In Europe, this can be done through secrecy and misdirection: EU member states, he argues, shouldn’t make tax harmonization legally mandatory. They could simply “agree, for example, to change the levels of certain taxes in parallel.” This is just about the worst kind of EU sovereignty-subversion: it’s a behind the scenes agreement between states to slowly abandon control of their tax regimes, so that they will ultimately be subject to democratic debate at neither the EU nor the national level.

But the real prize for the EU lies in the US. The goal of all this Euro-coordination, the Prime Minister argues, is to “encourage the US – with lower tax levels in most areas – to do what has to be done to address its spiraling budget deficit.” Well, we can agree that the U.S. has a spiraling budget deficit. But what the EU is after is to convince the U.S. that lower American taxes – to the extent that they are, in fact, lower – need to be raised in order to reduce tax competition and thereby make life easier for big-spending European welfare states.

Of course, ceding de facto control of the U.S. tax system to Europe in the name of “deeper co-operation,” the U.S., like the member states in the EU, will have lost a large portion of its political sovereignty as well. EU will undoubtedly view that as another victory. The fact that this will be bad for the economies of the ‘co-operating’ countries, and leave them open to tax competition from everyone else in the world, appears not to matter to the Prime Minister.

Conservatives have been arguing for years that this is the European agenda. We’re grateful to the Prime Minister of Finland for confirming it, and for putting the argument so clearly and concisely.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/06/29/why-europe-fears-%e2%80%98tax-competition%e2%80%99/

URLs in this post:

[1] Heritage warned: http://www.heritage.org/Research/Europe/wm2392.cfm

[2] In a recent article: http://www.ft.com/cms/s/0/af466558-5aa3-11de-8c14-00144feabdc0.html

[3] The same thing is true: http://www.foundry.org/2009/06/26/cbo-do-not-delay-reform-entitlements-now/

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