March 28, 2002

March 28, 2002 | Commentary on Europe

The EU's Tax Attack

You don't have to be an economist to know that when tax collectors from the European Union complain about "certain distortions of competition" and announce a need to "correct" it, a blueprint for higher taxes can't be far behind. This normally wouldn't concern most Americans, but notice who the EU has in its crosshairs this time: U.S. companies.

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. economy.

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 rates.

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.

Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

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