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Taxes Around the World - The European Union and United Nations are working to make sure that the whole world is sharing the pain of taxation.

If you think taxes are high in the United States, don't even consider getting a tax break in any of the European Union nations. The EU imposes dramatically higher taxes than does the United States. While U.S. taxes average about 30 percent of GDP, EU tax levels average about 42 percent of GDP and can exceed 50 percent. This means that all Europeans bear a heavy tax burden, but businesses and middle- or upper- income individuals bear crushing tax burdens. These high taxes have had a pronounced adverse impact on European economies. They are a key reason why disposable incomes and economic growth rates in Europe consistently lag behind those in the United States and why Europe has suffered high unemployment rates for nearly two decades.

Ireland, however, is a shining exception. It has steadily reduced its tax rates over the past decade, particularly for businesses. This year its corporate tax rate will fall from 16 to 12.5 percent. Most manufacturers are eligible for tax rates as low as 10 percent. As a result of these low tax policies, Ireland's real annual GDP growth rate was spectacularly high (generally in the 6 to 11 percent range) during most of the 1990s. Employment has grown rapidly. Unemployment in Ireland is about one-half of the EU average (4.5 instead of 9 percent). Even during the present economic difficulties, Ireland continues to grow faster than its EU neighbors.

Irish success has bred complaints from other EU countries about unfair competition. The EU went so far as to issue a formal reprimand to Ireland, denouncing its low tax policies. To date, Ireland has refused to relent to the pressure and seems destined to become one of the few centers of economic dynamism in Europe.The Irish finance minister, Charlie McCreevy, has responded to the EU reprimand: "It is very difficult for me in the light of the comparative performance of the Irish economy, to see that any recommendation is warranted." During the past decade, Europeans have launched major international initiatives through the EU, the Organization for Economic Cooperation and Development (OECD), and the United Nations designed to enable them to collect even more taxes. Specifically, these plans raised taxes around the world by increasing information flow to European tax collectors, levying global taxes, and imposing sanctions on low-tax countries. Many of these initiatives are beginning to bear fruit. The Clinton administration supported many of these initiatives. Although by no means systematically opposing them, the Bush administration has adopted a more ambiguous posture.

The September 11 terrorist attacks have served to renew focus on obtaining information about the global financial activities of terrorists and criminals. Indeed, the needs of law enforcement officials to combat serious crimes, prevent terrorism, and protect national security are of great concern. Many OECD governments, however, are exploiting the present political climate to promote information exchange policies that have much more to do with limiting tax competition than enhancing international efforts to apprehend terrorists and criminals.

'Harmful tax regimes'

The OECD is an international organization composed of 30 countries, including the United States, Canada, Japan and most European countries. In May 1996, financial ministers of the participating nations instructed the OECD to "develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases." In April 1998, the OECD issued the report "Harmful Tax Competition: An Emerging Global Issue," in which it proposed a collective international effort to stop tax competition by "harmful tax regimes."

The OECD is worried that low-tax countries would attract too much capital from high-tax countries. It considers a country a "harmful tax regime" if it (1) has low or no income taxes, (2) allows foreigners investing in the country to do so at favorable rates, and (3) affords financial privacy to its investors or citizens. The OECD identified 41 countries (mostly developing countries) as harmful tax regimes. Although the United States meets all these criteria, it is not, for now, listed as a harmful tax regime.

A jurisdiction must have made a commitment by February 2002 to eliminate harmful tax practices to avoid being blacklisted as a noncooperating jurisdiction. The OECD has persuaded over 30 jurisdictions to become committed jurisdictions. Seven small countries have been blacklisted (Andorra, Liechtenstein, Liberia, Monaco, Marshall Islands, Nauru, and Vanuatu).

Sanctions proposed by the OECD against low-tax countries include terminating tax treaties, denying income tax deductions for purchases made in low-tax countries, withholding taxes on payments to residents of these countries, and denying the foreign tax credit for taxes paid to such governments. The OECD also proposes to explore measures designed to disrupt normal banking and business operations. These proposed sanctions are more draconian that those imposed on states that engage in the most egregious human rights violations.

OECD member countries such as the United States, the United Kingdom, and Switzerland are currently exempted from this initiative, but they are already under pressure from the high-tax EU. The United Sates engages in classic tax-haven behavior by imposing no tax on most foreigners who earn interest or capital gains in the United States while imposing substantial taxes on U.S. citizens who earn interest or capital gains here.

These provisions, originally enacted into law in the 1980s, have attracted over $1 trillion to U.S. capital markets and fueled economic growth. By targeting certain countries while exempting the United States and others, the OECD initiative is inconsistent with national treatment and Most Favored Nation treaty commitments made by members of the WTO.

The OECD initiative provides for the abolition of financial privacy in the 41 targeted countries with respect to the 30 OECD member countries. The targeted countries would be under an obligation to routinely share banking, tax, credit card, and other financial information with member countries. There is no requirement for the recipient country to show probable cause that a crime had been committed in either country.

There is not even a requirement to show that some civil wrong has been committed or suspected. The information would simply be sent on a regular and automatic basis to any OECD country that asked for it. Nor are there any restrictions on the use to which the information may be put. For instance, nothing in the OECD proposal prevents member countries from sharing this kind of information with their own private companies or non-OECD countries. Once the OECD plan is implemented, there would be no principled reason to prevent the exchange of information so that any government in the world would be entitled to it.

Unfortunately, the United Nations has adopted the logic of the OECD proposal and is seeking to generalize its provisions to all UN member states. This effort was launched by the UN High Level Panel on Financing for Development, whose report was given to the General Assembly on June 25. Secretary-General Kofi Annan considers the report a "solid piece of work" and commends the panel for the "energy, imagination, and effort that they brought to their task." The panel recommended the creation of a UN International Tax Organization (UNITO) in its 2001 report to the General Assembly, which was considered at the Monterrey, Mexico, UN conference that President Bush addressed last March.

The panel's report states:

"The taxes that one country can impose are often constrained by the tax rates of others: this is true of sales taxes on easily transportable goods, of income taxes on mobile factors (in practice, capital and highly qualified personnel) and corporate taxes on activities where the company has a choice of location. Countries are increasingly competing not by tariff policy or devaluing their currencies but by offering low tax rates and other tax incentives, in a process sometimes called "tax degradation.""The proposed organization would engage in negotiations with tax havens to persuade them to desist from harmful tax competition. It contemplates restraining the tax competition designed to attract investment by multinationals in developing countries.

The once and future tax

Another task that would fall to UNITO would be arranging for the taxation of emigrants. At present, emigrants pay taxes only to their new country once they have changed nationality, exposing high-tax countries to the risk of economic loss when their most capable citizens emigrate to escape confiscatory taxation.

The idea that a government should be able to impose taxes on the future income of people who have left its jurisdiction is repugnant and a violation of fundamental human rights. It rests on the premise that the state retains a permanent right to the fruits of the future labor and investment income of its former nationals. It should be viewed as a violation of Article 13 of the Universal Declaration of Human Rights, adopted by the UN General Assembly in 1948, which states that "everyone has the right to leave any country."

The proposed UNITO would result in governments using the information they receive not only for tax purposes but for intelligence purposes, with the potential of oppressing minorities and political opposition. Corrupt government officials can be expected to provide the information to criminal elements. It is extraordinarily naive to believe that governments, particularly those known to be corrupt or to systematically violate human rights, will not use this sensitive information to achieve their own political objectives. If the United Nations enables them to track the financial activities of their political opponents, it will be much easier for repressive governments to identify and oppress their oppositions.

A potential countermeasure

The Task Force on Information Exchange and Financial Privacy was composed of leading law enforcement officials, tax attorneys, and economists. It has developed a program that would enhance the ability of Western governments to fight terrorism and organized crime while enhancing the financial privacy of ordinary, law-abiding citizens.

In a report released last March, the task force recommended the creation of an international Convention on Privacy and Information Exchange, composed of democratic governments that respect the rule of law. This convention would improve the exchange of information for law enforcement, national security, and antiterrorism purposes and establish enforceable restrictions on the uses of collected information. Moreover, it would establish a private right of action to enforce individual legal rights under the convention.

The task force also proposed that money-laundering laws be better targeted. Rather than bury investigators in a mountain of transactions or reports relating to law-abiding citizens, a more effective system would monitor the activities of only persons on government watch lists. Persons could be placed on a watch list only if the government has a reasonable and significant suspicion of unlawful behavior.

The future of the numbered account

The European Union Savings Tax Directive was proposed at the European Council meeting in Feira, Portugal, in June 2000 and approved by the EU's Council of Finance Ministers in November 2000. The directive would require nations to automatically exchange information on the investment earnings of foreign investors. This pact would apply to all EU member nations, as well as six non-EU nations (the United States, Switzerland, Liechtenstein, Andorra, Monaco, and San Marino). In principle, the directive was supposed to have received unanimous support from all EU member nations, and all six non-EU jurisdictions were to have adopted "equivalent measures" by the end of 2002. This did not happen.

In January 2003, a deal was tentatively struck under which, in return for keeping their banking confidentiality, Luxembourg, Austria, and Belgium would have to tax at up to 35 percent the income from savings that nonresidents hide in these countries. Switzerland may become a party to the arrangement. The U.S. position is unclear.

The U.S. bank deposit interest

Days before the Clinton administration left office, it issued a proposed regulation designed to be equivalent to the EU Savings Tax Directive. Under the proposed rule, the United States would require its banks to collect and report information on foreigners earning interest on bank deposits here, even though the United States does not tax the interest and the information is unnecessary to enforce U.S. law. Its only purpose would be to help foreign governments. The Bush administration has reissued the proposed regulation in slightly revised form. The regulation, if implemented, would possibly cause hundreds of billions of dollars to leave U.S. banks, endanger the safety and soundness of U.S. banks, reduce the amount of available capital, and have an adverse impact on U.S. capital markets.

In December 2002, the IRS held a hearing on the ruling. Witnesses, who included small- business associations, banking organizations, free- market organizations, and banking regulators, all opposed the rule. The rule exceeds the authority of the IRS, since the authority of the IRS is limited to issuing rules that enforce U.S. law. Moreover, the rule overrides congressional policy, which, in turn, is based on the sound economic policy of attracting foreign capital to the United States.

The Bush IRS has ignored a host of procedural requirements set forth in law and executive orders. These mandate cost-benefit analysis and impact studies for any new fiscal proposals. The IRS will violate the Regulatory Flexibility Act, the Administrative Procedure Act, Executive Order 12866, and Office of Management and Budget Circular 94-A if it allows this measure to go forward.

Last May, the EU adopted new rules that require for the first time that suppliers of products downloaded digitally from outside the EU charge value-added tax (VAT) on sales. Non-EU suppliers must register with a VAT authority in any one EU member state of their choice and levy VAT at the rate applicable in the member state where the customer is a resident. The tax will become effective July 1, 2003.

A steep price

Recent European tax initiatives are not only anticompetitive but constitute a gross violation of privacy. Moreover, they foreshadow a process of centralization that will exact a steep price in terms of reduced economic freedom and limits on national sovereignty.

Information is power. Given the propensity for harm that the modern state has demonstrated time and again during the last century, is it prudent to trust governments with the power to identify, defund, and cripple their political opponents, suppress religious freedom, and control the lives of their citizens? The UN, OECD, and EU initiatives should give pause to anyone who attaches even the slightest value to financial privacy and the benefits of tax competition.n

David R. Burton is a partner in the Argus Group, a Washington, D.C.-- based law and public policy firm.
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Publication:World and I
Date:Apr 1, 2003
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