[A-List] Europe/US rivalry: taxation

[Keaney Michael]

Outlook: A taxing matter the Bush Administration can ill afford to can
Jeremy Warner
The Independent, 26 July 2002

According to an opinion article in yesterday's Wall Street Journal , which essentially claimed to speak for the Bush Administration, the US is about to torpedo the European Union's "Savings Tax Directive" (STD) by announcing it won't participate in the information sharing arrangements required to make the directive work. It is to be hoped that the article is wrong, for actually the STD is one of the more sensible pieces of legislation to have come out of Brussels in years, and it will benefit no one, least of all the US, to have it flushed down the pan.

The origins of the STD go back to a separate proposal to impose a withholding tax on all investment income within the European Union. Tax evasion on investment income is a big problem in certain parts of Europe, and the idea was that it could be tackled if all member states taxed the income at source. Gordon Brown, the British Chancellor, fought the proposal hard on the grounds that one effect of a withholding tax would be to drive the eurobond market, which is a big source of jobs and wealth in the City, offshore to places where there was no such tax. Other investment products would plainly have followed suit, making the tax positively harmful to European interests.

The compromise proposed by Britain, and eventually accepted by others, was the STD, which requires banks and other savings institutions to collect information on non-resident investors and share it with the tax authorities in the countries where the investors are domiciled. So far so logical. The only trouble is that in order to work effectively, everyone has to participate. If the US or Switzerland refuse, then it breaks down. If the writers of the Wall Street Journal article, Daniel Mitchell of the Heritage Foundation in Washington, and Andrew Quinlan of the Centre for Freedom and Prosperity, also in Washington, are as well informed as they claim, then that is precisely what is about to happen.

According to the writers, the main reason for opposing the directive is not that the US has become a home for a huge amount foreign capital - self interest in other words - but that the STD is just bad legislation on libertarian grounds. It's an invasion of privacy, they say, and it runs counter to the idea that money earned from income which has already been taxed once shouldn't be taxed again. It also runs counter to the notion of territorial taxation - ie that nations should tax within their own borders and leave others to do the same.

No doubt Paul O'Neill, the US's free-market thinking Treasury Secretary, shares these views, but is he really about to take the axe to an international agreement which is the best chance we've got of dealing with the growing problem of global tax evasion? The WSJ article starts from the premise that tax is just a lousy thing anyway, which may or may not be true. If there wasn't any tax, then there wouldn't be any problem. Er, right. But the fact of the matter is that there is tax, even in the land of the free, where in some states it is in the round higher than in Britain. We all know that the Bush Administration has a big problem with international agreements, but just what are the writers proposing? That the US condones tax evasion? Even Mr O'Neill might have a problem with that one.

As things stand, virtually all developed countries tax investment income to some extent. Nobody yet has a "flat tax", where income is taxed once but is then home free to earn as much as it likes without being taxed again. Furthermore, because the US itself has a big tax evasion problem, it already has bilateral arrangements with Switzerland and others which are very similar in their effect to what the STD proposes. It will be a bad day for everyone if the STD is canned, and if it leads to the withholding tax proposal rising Frankenstein like from the slab once more, it will be a particularly bad day for Britain.