Offshore News Article: The Going Broke Blame Game

Frits Bolkestein, a senior bureaucrat for the European Commission, just visited the United States in an effort to convince the Bush administration to join the European Union's proposed savings tax cartel. This plan, known as the "Savings Tax Directive," is designed to stop money from escaping Europe's high-tax economies and fleeing to low-tax economies. And since the United States is a low-tax country (compared to places like France), the plan would require U.S. financial institutions to collect private financial data on non-resident investors so it can be turned over to foreign tax collectors.

The United States is the best tax haven in the world. Low taxes and a strong commitment to financial privacy combine to attract more that US$9-trillion of foreign capital to the U.S. economy. This inflow of money is a key determinant of U.S. prosperity because this money is put to work for the nation and produces more jobs, higher standards of living and general prosperity. America is the Cayman Islands compared to Europe. Tax revenues consume more than 40% of GDP in Europe, much higher than the U.S. burden, which is less than 30%. Moreover, the U.S. Congress repeatedly decided, with few exceptions, not to tax the investment income of foreigners and not to report this income to foreign governments. And since European politicians are too greedy to cut taxes, European workers and investors are wise to invest their money in the United States.

Obviously, high-tax nations resent this competition, which is why they are lobbying the U.S. government to support the "Saving Tax Directive." The EU initiative seeks to protect uncompetitive European nations from the discipline of market forces. In particular, it is an effort to preserve bad tax policy because it assumes that there should be multiple taxation of income that is saved and invested -- particularly if the money is invested in the United States. The EU Directive would give countries like France or Sweden the power to impose oppressive tax rates on income earned in places like America.

The European politicians claim that their true goal is to reduce tax evasion. As such, they claim that the complete destruction of financial privacy is the only way to address widespread tax evasion. Yet real world evidence shows that lower tax rates and tax simplification are much more effective tools to prevent tax evasion. European governments should try tax reforms instead of trying to force other nations to adopt their bad tax policies. In the words of Commissioner Bolkestein, both the EU and the U.S. need to work much more closely together to frame legislation that can help capital flow more freely between the EU and the U.S. However, empirical evidence shows that capital does not have any problem flowing from Europe to the United States. European politicians are upset because capital is reluctant to flow from the United States to Europe, with the exception of low-tax Ireland. Frits Bolkestein is really trying to negotiate a directive that would reduce the amount of capital coming to America.

The EU tax cartel would have a terrible effect on the U.S. economy. If the Savings Tax Directive was implemented, the U.S. economy would lose capital, which would mean fewer jobs and lower wages. Equally important, an EU victory would have a big impact on America's ability to reform its tax system in the future. The EU scheme, for instance, would make a flat tax or some other tax reform plan impossible. In reality, Commissioner Bolkestein wants U.S. financial institutions to serve as vassal tax collectors for Europe's welfare states. If implemented, the EU savings tax cartel initiative would undermine the right of U.S. policy-makers to determine the tax treatment of income earned inside U.S. borders.

EDITORS NOTES: Finally we see that here is the rub or the exact problem or issue. Which is to say, both the US and EU are seeing their middle class feeling with their money to escape both high taxes and high cost of living (compounded by companies moving manufacturing, jobs and operations elsewhere as well). As a result, a mad dash to fill up the government coffers in the US and Europe by chasing down all those terrible so-called tax havens or low tax jurisdictions. How? By attempting to convince the other nations in the world to act as a tax reporting and tax-collecting agency, thereby eliminating the benefit or incentive for someone (or a company) to relocate. HOWEVER, while we can see the very one-sided issue of doing this with the smaller developing nations that do not currently have such an internal problem (excessive socialist programs and high tax burdens on its citizens), it is another matter altogether when it involves two high tax nations cannibalizing each others tax revenues. Stated another way, what now happens when France, for example, starts asking the US to collect and send tax payments to France (and we can say vice-versa)? What happens when we find out that the end result is the US collecting and sending US$20 Million to France, yet the tax payments coming back to the US is only US$1 Million? What about the reverse of France seeing more money going to the US than what it takes back in? Here is where it really starts to get very interesting politically. Also, how ironic is it really that the US is considered to be somewhat of a Tax Haven for Europeans ?

All nations are in competition with each other, and this is both normal and a good thing as well. Meaning, Canada would like to see new investors, new companies, and new jobs come their way, as would the US, as would Europe, as would any country. How do they do that? Simply by providing for a variety of incentives, lower taxes being just one, to encourage this to happen. What would be the case and the result when the new jobs and the new investors stop coming? It is easy enough to beat up on China, Panama, Guatemala, Singapore, The Dominican Republic, etc., etc., because these countries have very attractive business and tax incentives in place (or lower labor costs) as a very general statement, but what happens when the US and Europe start going after each other?

We have said this before and it cannot be stressed enough. The agenda of the OECD and the US is to somehow, someway stop themselves from going broke. Fair enough, but at the same time, they are looking to stop competition in world markets and take away the very incentives from the smaller developing nations that they themselves had in the past (meaning the economic growth environment that previously existed in the US, Canada and nations in Europe). All while stating they are trying to encourage FREE MARKETS, fairness and transparency. HOWEVER, at the same time, such nations refuse to balance their budgets, cut back on excessive spending and refuse to see the real problem for what it is. In other words, many so-called modern and developed nations are in denial.

In brief, it comes down to both an economic and political struggle between the Socialists and everyone else. We can also say, between those that truly believe in the Free Market System and competition vs. those that think excessive government is the answer. Those that believe in and cherish freedom vs. those that wish to be managed by some government agency that supposedly knows more about your own best interests that you do. It comes down to those that think government handouts are the answer vs. those that wish to find a more permanent non-government solution through economic prosperity in the private sector. There is an old saying that sums it all up. Give a starving man a fish and he starves off hunger for a day (waiting for the next handout). Teach a man to fish and he has the where with all to solve his hunger problem on his own permanently. How do you apply that for a country? By putting the proper economic, tax and business incentives to encourage new jobs and new investment, thereby creating an upward tidal wave that carries the citizens of a society to a better standard of living in the end. This has already worked in many smaller developing countries and the proof is in the results (the Dominican Republic is only one example where we can see this). Not everyone likes this idea, because if China, for example, offers lower labor costs and lower taxes, that means that jobs will be lost elsewhere (due to company relocation or the shifting of manufacturing from the US to China, or we can say from Europe to China also as a direct illustration).

However, since ALL nations have the opportunity and ability at their disposal to offer incentives for foreign investors (and they already do, such as tax-free capital gains for foreigners with US stock brokerage accounts) then it cannot be argued that one particular nation is engaging in unfair competition. Is it then so unfair for countries such as Panama or the Dominican Republic to offer tax-free banking when the US themselves does the same thing (with regards to capital gains on brokerage accounts)??? Or is it that all economic competition is unfair? How you answer that will tell you if you are a socialist or not, and might also tell you if you would rather stay and pay or expatriate to someplace more in line with your thinking.