Europe needs tax competition

Back in December, the finance ministers of the European Union agreed on a new common list of so-called “tax havens”, which compete with particularly lower corporate income tax rates. On this “black list”, a total of 17 states around the globe appeared  amongst them were Mongolia, South Korea, Bahrain, Barbados and the United Arab Emirates. The consensus then was that no EU member states should come under fire for competitive tax schemes. Just a handful of months later, the European Commissioner for Economic and Financial Affairs, Taxation, and Customs seems to have changed his mind.

“Aggressive tax planning”

By asking seven countries to stop what he called “aggressive tax planning”, French EU Commissioner Pierre Moscovici sparked a debate earlier this month on tax policy within the union. The policies surrounding taxation in Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands “have the potential to undermine fairness and the level playing field in our internal market and increase the burden to EU taxpayers.” Moscovici refused to say that any of the member states were tax havens, but the Commission’s own Semester Report on the macroeconomic imbalances within countries mentions tax planning and tax avoidance in the same paragraph. It claims that: “Revenue losses from profit shifting within the EU alone are estimated at EUR 50-70 billion. Aggressive tax planning distorts the playing field among companies, and unfairly diverts resources from governments’ spending objectives.”, and ends the chapter with “By the end of 2018, Member States have to transpose the provisions of the Anti-Tax Avoidance Directive (ATAD) into their national law.”

Luxembourg’s Prime Minister Xavier Bettel rightfully fired back at Moscovici, saying that “I think the principle of the European Union is not to point out one country against another”. His country has been on the defence for its advantageous tax policies since the financial crisis of 2008 began.

An opposition however that only lasted until Tuesday when the European Council agreed on a draft directive, which states the following:

“All delegations agree on the principle that disclosure of potentially aggressive tax planning arrangements of a cross-border dimension can contribute effectively to an environment of fair taxation in the internal market and that tax authorities share the disclosed information with their peers in other Member States.”

Political opposition is seemingly only useful when talking to the press. Behind closed doors, small member states seem happy to concede that practices are apparently “aggressive”.

What does that mean anyway? The implication by the EU clearly is that the practices are not illegal, yet they should be questionable. Is the European Union claiming that it can make moral judgements about organisations that attempt to pay less in taxes? Its goal of “increasing transparency” cannot and will not be the end goal of the process. France and Germany have made it particularly clear over the last years that some countries are more attractive because of their tax policies and that they will not have it.

There can be no tax havens without tax hells

After all, what is a “tax haven” anyway. Ultimately, you can only be a haven if you’re comparably outperforming another place. Since Commissioner Moscovici is not only French, but also served as the minister of finance in the governments of former socialist president François Hollande, France should be an interesting landmark. France’s Tax Freedom Day (2017) was July 29, meaning that the République is the member state in which you work the longest period for the tax collection of the government. France’s effective corporate income tax rate is 33.3 per cent and the highest on the continent. France taxes everything from soda to millionaires to a degree unimaginable in most countries, yet believes that others are the problem. It is much like the worst student in a class continuously failed due to his own laziness, yet accused the best students in this class of cheating. It simply doesn’t work that way Mr. Moscovici.

There can be no tax havens without tax hells. There is no discernible reason for which Malta, Cyprus or Ireland shouldn’t regard France as a serious problem for the European Union. In return, they could say: For decades, the taxation policy coming out of Paris has weakened the French economy, which destabilises the continent. It would be about time to lecture the French about their aggressively counter-productive tax policies, right? The only reason that we don’t hear such words being uttered, is because France and Germany are what many EU politicians call Europe’s directory. If it goes in Paris and Berlin, then it goes in Brussels.

Tax competition makes states reasonable

This lack of support for the concept of tax competition inside the EU is a problem. If we’d presume that taxes in low-tax member states were to increase, then to whose benefit would that be? Would the continent suddenly become more prosperous, or would it not be the case that we would have to deal with massive capital flight? And then what? Will the EU target areas of the world over which its jurisdiction has no effect?

Countries with more reasonable tax legislations keep other countries in check. We should keep it that way.

This article was first published by Values4Europe.

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About Bill Wirtz

My name is Bill, I'm from Luxembourg and I write about the virtues of a free society. I favour individual and economic freedom and I believe in the capabilities people can develop when they have to take their own responsibilities.

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