March 28, 2002 | Commentary on Europe
Specifically, U.S. companies that sell digital products such as
music or computer software that can be downloaded from the
Internet. European consumers who buy from U.S. companies online
avoid certain "value-added taxes" (VATs-a form of national sales
tax that can reach as high as 25 percent) that they would have to
pay if they bought from EU companies instead.
The finance ministers don't like that. So the EU is proposing
that U.S. companies be required to collect European VATs and send
the money to European governments.
If Europe's welfare states want to slap excessive taxes on sales
that take place within their borders, that's their business. But
they have no right to impose their misguided tax laws on
transactions that take place in other nations.
This isn't the first time Europe has tried to undermine our
fiscal sovereignty. The European Union already has dragged the
United States before the World Trade Organization in an attempt to
compel American lawmakers to impose higher taxes on U.S. companies.
The EU also wants American officials to weaken financial privacy
laws, so they can reach across the Atlantic and tax the money that
Europeans have deposited in our banks and invested in our stock
market. This so-called "Savings Tax Directive" could drive hundreds
of billions, perhaps even trillions, of dollars from the U.S.
The VAT collection scheme is just the latest episode in the EU's
relentless campaign for "tax harmonization." The Europeans
understand that high tax burdens are making their companies
uncompetitive and that investors and entrepreneurs are shifting
their economic activity to low-tax nations. But with exceptions
such as Ireland, which has enacted sweeping tax rate reductions and
become Europe's fastest-growing economy, European politicians think
the answer is to make low-tax governments raise taxes so that all
countries are equally non-competitive.
The United States should say no to any European-sponsored tax
cartel. An "OPEC for politicians" would be bad news for taxpayers
and even worse news for the global economy. This principle should
apply to corporate taxes, income taxes and sales taxes. Individuals
should retain the right to shift their economic activity from
high-tax nations to low-tax nations.
The EU campaign threatens U.S. economic growth. Taxes here
aren't as low as they should be, but compared to basket-case
economies such as France, America is the Cayman Islands. Taxes in
the United States (including state and local government) consume
about 29 percent of our economy's output. That's a big number, but
it's far less than the tax burden in EU nations, where governments
seize about 42 percent of GDP. No wonder our growth rate is so much
higher and our unemployment rate so much lower.
"Tax harmonization" would undermine America's competitive
position. Consumers know they can save at least 15 percent by
buying online products from U.S. businesses. This means more jobs
for America, but it's also good for Europe, as it puts pressure on
politicians in places such as Germany and Sweden to reduce tax
There's also an important privacy element to this debate. The
EU's Internet tax cartel would require companies to verify the name
and address of every online consumer. This means Europeans would
lose their privacy and have their purchases recorded in a database,
but it also means Americans would lose privacy too. After all,
businesses would have to verify that we're not Europeans simply
trying to avoid VATs.
Fortunately, the Bush administration is resisting Europe's
Internet tax harmonization campaign. But the president's team is
relying on technical arguments, rather than arguing from principle.
Worse, they want the Organization for Economic Cooperation and
Development to settle the issue. But this Paris-based bureaucracy
is dominated by Europe's welfare states, and the OECD already is
persecuting low-tax jurisdictions as part of its "harmful tax
competition" initiative. Putting the OECD in charge is like having
a fox guard the chicken coop.
We'd be better off just telling the Europeans to drop any notion of interfering with American tax policy. It's time they learned that the best way to "correct" high taxes … is to lower them.
Mitchell is the McKenna senior fellow in political economy
at The Heritage Foundation, a Washington-based public policy
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