The United States and the European Union (EU) have two completely different approaches to taxation.
To make American companies more competitive, President Donald Trump kept his electoral promise and cut taxes on corporate profits significantly. To prevent the rest of the world from outcompeting European producers, the EU served notice it would renew and intensify its fight against tax evasion (violations of tax laws), tax avoidance (exploiting loopholes in the tax legislation), and unfair tax competition.
To that end, the European Commission prepared a blacklist of 17 countries. According to the commission, each of these countries represents a serious threat to fiscal and commercial order worldwide. The list includes South Korea, Mongolia, Tunisia, the United Arab Emirates, and smaller states such as St. Lucia and Samoa; it excludes EU members themselves.
Growth Versus Welfare
The principles of the American and EU approaches to taxation are clear. According to the current U.S. administration, the best way of solving economic problems is growth. High rates of economic growth make public expenditure sustainable, keep unemployment low, eliminate the need for monetary somersaults to stimulate demand, and ultimately serve to defuse social tensions. In this light, by reducing the tax burden, Trump showed the way to encourage entrepreneurship and create wealth.The EU’s take is manifestly different. From the European perspective, the main policy goal is to avoid cuts in the public expenditure necessary to maintain a large welfare state and engage in redistribution. Thus, tax revenue must stay high and possibly rise.
A Simple Question
On second thought, however, it is hard to believe that those 17 countries could present a serious threat to any EU policy, no matter how bad the policies might be. Growth has recently picked up in Europe as well, and economic forecasts admit some optimism.
If so, why has the commission reverted to its focus on tax evasion and tax avoidance, targeting a handful of harmless countries, when it could simply relax and enjoy the expanding tax base that economic growth delivers?It is theoretically possible for a company with substantial operations in France to set up its headquarters in, say, Ulan Bator and demand that Paris and Brussels respect Mongolian tax rules. Yet that would not deter the national tax authorities and the EU from extracting taxes and possible fines from the offender, even without a tax treaty with Mongolia.
The simple answer is that the commission does not believe that Mongolia, Tunisia, or Samoa are fearsome competitors that will soon attract swarms of European companies seeking tax havens. The real purpose of this EU tax crusade, I would suggest, is to keep some of its member countries—for example, Malta, Ireland, and the Netherlands—in line.
Now that entrepreneurialism is on the rise worldwide, countries and regions hostile to entrepreneurship have much to lose. If some EU countries were to take this opportunity to follow in Trump’s footsteps, the EU’s own cherished project of centralization would be doomed.
It emphasizes a more centralized vision of economic policymaking at all levels, along with a unique tax strategy that nurtures a large welfare state and rampant state intervention and would not work if some smaller states chose to go the opposite way.
Foolish Pride
With this in mind, the commission has chosen to act preemptively. Its priority is to enforce discipline within its own ranks, while reminding EU members about their duty to enforce tax compliance, and punish those who dare to cut taxes.The renewed efforts to combat low-tax regimes are thus not directed at tax havens but at those who might disrupt the tax cartel already operating in Europe today.
If this assessment is accurate, should we expect growing tensions within the EU, as some countries resist the strategy imposed by Brussels?
In the short run, the commission will probably succeed in enforcing fiscal discipline within the EU bloc and foolishly feel proud about it. In the long term, the outlook could be considerably darker. Europe may have reason to brag about the sharpness of its fiscal claws. But the excessive tax burden will only help kill growth, while other parts of the world keep forging ahead.
Enrico Colombatto is a professor of economics at the University of Turin, Italy, and a senior fellow at Geopolitical Intelligence Services. This report was first published by GIS Reports Online.
