June 19, 2002

June 19, 2002 | Commentary on Europe

America: Europe's Tax Collector?

Two years ago, politicians and bureaucrats at the European Commission announced their intention to turn the 15 nations of the European Union into "the most competitive knowledge-based economy in the world by 2010." This is a tall order. Smothered by oppressive tax rates and burdensome regulations, Europe trails the United States by a wide margin.

Thanks in large part to the Reagan tax cuts and other free-market policies, 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.

So how is Europe planning to surpass the United States? Could it be that Europe's welfare states are planning to cut tax rates? Ireland already has shown that tax cuts are a recipe for prosperity. Thanks to Reagan-style tax rate reductions, including a corporate income tax rate of just 10 percent, Ireland has become the "Celtic Tiger" and is now the European Union's second richest country.

Sadly, 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.

But if European politicians refuse to cut taxes and reduce bloated welfare states, how can they overcome America's economic lead? The answer, unfortunately, is that they want to undermine American tax policy so the U.S. economy will grow slower. In other words, Europe's socialist politicians want to make the United States more like Europe so we lose our competitive advantage in the world economy.

Already, the Europeans have dragged America before the World Trade Organization four times in an effort to compel our lawmakers to impose higher taxes on U.S. corporations. And the European Commission also is attempting to force American companies with Internet sales to pay European taxes-even if they have no operations in Europe.

Both proposals would hurt U.S. job creation, but the one that would inflict the most damage on our economy is the EU's "Savings Tax Directive." This scheme would require U.S. financial institutions to become tax collectors for Europe's welfare states. American banks would be required to compromise the privacy of their clients by reporting the money that foreigners have invested in the U.S. economy.

The EU nations want this private financial information so they can tax Europeans on income earned in America. This is an outrageous assault on American sovereignty. Every nation should have the right to determine how income earned inside its borders is taxed. France and Germany have no more right to interfere with our tax laws than we have to interfere with theirs. If they're worried that jobs and capital are fleeing Europe, maybe they should cut their tax rates instead of trying to turn American companies into deputy tax collectors.

The stakes in this battle are enormous. Foreigners have invested about $9 trillion in the U.S. economy, and most of that is financial capital-deposits in U.S. banks and investments in U.S. companies. But a significant amount of that money would leave America if the "Savings Tax Directive" is approved. The cost would be immense: With less money available, it would be harder for families to obtain mortgages and consumers to borrow money. American businesses would lose capital, making them less competitive and reducing job creation.

The good news is that America isn't obligated to participate in Europe's tax cartel. We can say no to the "Savings Tax Directive" and the proposed cartel falls apart. But news reports indicate that the IRS and the Treasury Department want the United States to join Europe's "OPEC for politicians." Never mind that this is the equivalent of economic treason: putting the interests of revenue-hungry European governments above America's economic interests.

President Bush has done a good job defending the United States against terrorism. Now he needs to protect our economy. He should order the IRS and the Treasury Department to reject Europe's "Savings Tax Directive." And if the leaders of these bureaucracies refuse to defend America's national interests, he should fire them and replace them with people who support the President's tax-cutting agenda.

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

About the Author

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

Related Issues: Europe

Distributed nationally on the Knight-Ridder Tribune wire