In today's modern economy, it is increasingly easy for jobs and capital to migrate from high-tax nations to low-tax nations. This forces lawmakers to control taxes and spending lest they drive too much economic activity to lower-tax jurisdictions. This process is known as tax competition, and it is a liberalizing force in the world economy.
But not everybody approves of tax competition, especially high-tax European governments such as France and Germany. Using the European Union as their vehicle, these uncompetitive nations are seeking to replace tax competition with tax harmonization--sort of an "OPEC for politicians." There already is a requirement that all EU-member nations have a value-added tax of at least 15 percent, and the Brussels-based bureaucracy is seeking to harmonize taxes on corporate income, tobacco, energy, and digital products. And politicians like French Prime Minister Lionel Jospin and German Chancellor Gerhard Schroder openly assert that the EU should determine tax policy in member states.
But European taxpayers should not give up hope. European nations that benefit from tax competition--such as the United Kingdom, Ireland, and Luxembourg--likely will use their EU veto to block any meaningful proposals to further harmonize tax systems. And even if the U.K., Ireland, and Luxembourg agree to surrender their fiscal sovereignty, high-tax nations will not stop the exodus of jobs and capital so long as non-EU jurisdictions offer a more attractive economic climate. In other words, a cartel will not work unless every nation participates in the cabal.
This is why the European Union's latest tax harmonization initiative--the "Savings Tax Directive"--seeks to include non-EU nations, such as Switzerland and the United States, in the cartel. Under the proposed Directive, (1) all participating nations would be expected to collect and swap confidential financial data about the investments of nonresidents. If this assault on privacy succeeds, an overburdened French taxpayer no longer would be able to escape oppressive French tax rates by shifting his savings to another jurisdiction.
It is quite likely, though, that the EU's Savings Tax Directive will fail. Any EU member nation has the right to veto the proposal, and Luxembourg, Austria, and Belgium clearly are not interested in changing their privacy laws just so other nations can tax income earned inside their borders. An even bigger obstacle is that the Directive is contingent on the approval of Switzerland, Liechtenstein, the United States, Monaco, Andorra, and San Marino. These are all capital-inflow jurisdictions that are among the world's biggest beneficiaries of tax competition. It is difficult to imagine, for instance, Switzerland voluntarily surrendering its competitive advantage in the global economy.
But little nations should not be the ones to kill the EU Directive. The United States should take that role, if for no other reason than to antagonize the French government. But annoying European elites is just a fringe benefit. The real reasons to oppose tax harmonization include:
Threat to tax reform. Tax reform proposals generally are based on important principles such as taxing income only once and taxing only income earned inside national borders …