Exposing the real nature of its assault, the OECD has also condemned lower tax rates and tax shelters that exist within industrialized countries — such as Australia, Belgium, Canada, Finland, France, Greece, Italy, Ireland, Portugal, Luxembourg, Sweden, Hungary, Iceland, the Netherlands, South Korea, Spain, Switzerland, Turkey and the U.S.8 This result should not be surprising — since it’s based on the same premise: if income or wealth remain untaxed, anywhere in the world, then “state wealth” is being “stolen.” Where might this lead? A leading tax economist in the U.S. has predicted that:
The OECD assault on the tax systems and privacy laws of small nations could be a prelude to an attack on the laws of the U.S. We have been a relatively low-tax country . . . and there are similar financial privacy laws in the U.S. at the federal and state levels. Erosion of U.S. financial privacy rules and forced sharing of tax information with foreign governments could reduce the attractiveness of the U.S. as a place in which to invest.9 (emphasis added)
European Union officials have also joined in the assault.10 For years they’ve been pressuring lower-tax member nations — like Ireland — to raise taxes and to have all members “harmonize” their tax codes so as to prevent tax arbitrage.11 But the EU never advocates “harmonizing” downward — that is, it never advocates that high-tax regimes, say, adopt Ireland’s lower tax rates. Here’s how one EU official puts it:
Erosion of national tax bases through unrestrained tax competition for mobile factors represents a threat to the tax revenues of EU states . . . and leads to a sub-optimal provision of public goods. This is at a time when the reduction of budget deficits is not only a necessary end in itself but is also needed in order to comply with the Stability and Growth Pact and because of the EMU.12
EU officials never think to balance their budgets through spending cuts. What’s the result? Since the 1970s, 30 million new jobs were created by U.S.-based businesses, while only 3.5 million new jobs (mostly government jobs) were created in Europe. The EU knows full well that this is largely the result of its high tax burdens. Mario Monti, when he was a tax commissioner at the EU,13 conceded that:
Taxes — and particularly labor taxes — are rightly highlighted as one of the main culprits of high unemployment in Europe. The structural development of taxation systems (taxes and social security contributions) has been unfavorable to employment creation in EU member states. The implicit tax rate on employed labor has increased steadily on average in the EU member states, from 35% in 1980 to over 42% in 1996. The rise in labor taxes is responsible for about one-third of the unemployment rate in the EU.14 (emphasis added)
Nevertheless, EU tax officials have no interest whatsoever in lowering those burdens – on capital or labor. Instead they want other, lower-tax nations to impose them to the extent Europe has. Of course, to reduce such burdens as social security taxes would mean a reduction in the welfare state and the sure bankruptcy of Europe’s state-run, Ponzi-pension schemes — which are in even greater arrears than the U.S. system (because they’re about forty years older).
Consistent with its big-government aims, the EU has issued a directive “to ensure a minimal level of taxation of cross-border interest on savings.” According to Monti’s Orwellian logic, “the proposal on taxation of cross border income from savings aims to tackle the problem of erosion of the tax base — it does not aim to impose an additional tax burden but to eliminate preferential tax treatment.” Amazingly, Monti believes that the removal of a tax-saving device does not represent a tax-incurring policy shift. He then has the audacity to add that “it is precisely by reducing tax avoidance that EU members can reduce overall tax rates.” By what magic trick?
The EU’s assault on one of its low-tax members — Ireland — is instructive of the ominous, oppressive trend in international taxation. In early 2000 Ireland adopted a 10% corporate income tax on foreign companies. This policy has led to an economic-financial boom in Ireland that’s envied by the tax-crazed Europeans. In 1999 Ireland’s equities had underperformed other European equities by 23% points (measured in U.S. dollars); but by mid-2001 they were outperforming those in Europe by 34% points. Ireland also has been attracting entrepreneurs, foreign investment — and brains. It’s now the largest exporter of software in the EU. And today its unemployment rate is down to 3.8% — well-below Britain’s (5.1%) and less than half the jobless rates in high-tax nations like Germany (9.6%), France (9.1%) and Italy (9%).
Thus through tax cuts, the land of pubs and drunks has been “miraculously” transformed into one of high-tech firms and entrepreneurs. Nevertheless, Pedro Solbea, the EU commissioner for economic and monetary affairs, says “The Irish government has to face the problem of an excess of success.” (emphasis added) Mary Harney, Ireland’s deputy prime minister has responded, “It’s amazing that our EU partners want to punish the most successful economy in Europe.” Ireland’s finance minister Charlie McCreevy accurately characterized the EU’s anti-wealth attitude when he said it is “casting green eyes of envy” on Ireland’s success.15
Investors, who don’t normally familiarize themselves with the world’s philosophical-psychological trends, should recognize that envy (and the punitive tax burdens it eventually causes) represents a kind of cancer — and is the greatest, fundamental threat to investment returns. Those who doubt this fact need only observe the 60% decline in the stock price of Microsoft (and the destruction of more than $250 billion in market value) plus the vast collateral damage that followed its envy-inspired antitrust conviction in April of 2000.
References:
8 OECD, “Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices” June 2000 (available at www.oecd.org/daf/fa/harm_tax/Report_En.pdf). Hereafter referred to as “OECD, 2000 Report.”
9 Stephen J. Entin, “Treasury’s Qualified Intermediary Regulations and the OECD Tax Haven Initiative: Threats to International Capital Mobility and Investment,” IRET Congressional Advisory #116, Institute for Research on the Economics of Taxation, June 28, 2001, p. 5 (available at www.iret.org).
10 “European Union, “Savings Tax Proposal,” July 18, 2001 (available at http://www.europa.eu.int/comm/taxation_customs/publications/
official_doc/IP/ip011026/memo01266_en.pdf).
11 The EU Council began this effort in December 1997. The EU now requires a minimum value-added tax (VAT) of 15% and a minimum corporate income tax rate of 30%.
12 Michel Vanden Abeele, “Tax Competition Within Europe,” October 1, 1999 (available at www.europa.eu.int/taxation_customs/speeches/vda_dublin_en.htm).
13 Monti is now the EU commissioner in charge of antitrust enforcement and has extended EU controls to U.S. corporations, notably Microsoft and General Electric, where he blocked its proposed merger with Honeywell. See “GE and the EC’s Trustbuster-Extortionists,” Investor Alert, InterMarket Forecasting, Inc., June 18, 2001.
14 Mario Monti, “EMU, Taxation and Competitiveness,” November 27, 1998, p. 5 (available at www.europa.eu.int).
15 “Ireland’s Economy Too Good?” Richmond-Times Dispatch, January 26, 2001.
