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Bureau of National Affairs

No. 228
Thursday November 29, 2001 Page G-2 
ISSN 1523-567X
Tax, Budget & Accounting

International Taxes
Compliance With International Tax Efforts
Could Damage U.S. Economy, Center Says

International efforts to implement information exchange agreements between nations and to harmonize taxation levels may derail $9 trillion in foreign investments that have entered the U.S. economy, according to a report released Nov. 27 by the Center for Freedom and Prosperity.

The report charged that ongoing tax harmonization efforts by the Organization for Economic Cooperation and Development, the European Union, and the United Nations are most threatening to the U.S. economy.

"The stakes in this battle are immense," said the report's author, Dan Mitchell of the Heritage Foundation.

"The tax burden in the United States is low compared to other industrialized nations. Equally important, [the United States] has attractive tax and privacy laws for nonresident aliens that help attract trillions of dollars from foreign investors," he said.

Comparing the United States tax burden of 28.9 percent of gross domestic product with the 41.7 percent 1998 EU average, Mitchell noted the United States has a modest and advantageous tax burden.

The shift in global capital and entrepreneurial talent to the United States and away from the European system has impacted on the job market, Mitchell said.

"Entrepreneurs and investors have created millions of jobs in the American economy," the report said. As a result, the U.S. unemployment rate has been about 5 percent over the past decade while the European Union has had little private-sector job creation and unemployment rates around 9 percent.

United States a Tax Haven?

The United States, according to Mitchell, satisfies all the criteria of a tax haven:

  • the tax regime imposes low or no taxes, particularly on the investment income of nonresidents;
  • financial privacy laws make it hard for foreign governments to tax income earned in the jurisdiction;
  • it offers special tax breaks; and
  • residents pay higher tax rates than foreigners.

According to Mitchell, countries offering low tax rates will not be tagged as "tax havens" if they agree to divulge details about the private financial affairs of foreign investors.

"High-tax nations want this information, not surprisingly, so they can then tax their residents on income they earn in the low-tax jurisdiction," he added.

U.S. Benefit From Tax Competition

In a modern economy, capital markets are not constrained by national borders and a nation with a pro-growth, competitive tax system can augment domestic sources of savings and investment by luring capital from around the world, the report said.

However, according to the report, under a worldwide taxation system, a taxpayer would lose the incentive for shifting economic activity to a lower tax jurisdiction.

"An overburdened French taxpayer, for example, would have scant incentive to shift money to a lower-tax jurisdiction if France is able to tax any resulting income at French tax rates," the report added.

"Hopefully this new report will make United States policy makers understand that the interests of the United States are not the same as the interests of countries like France or Germany," said Veronique de Rugy, a CFP board member.

As the world's largest recipient of flight capital, the United States would suffer economic harm if tax competition is curtailed, the report said.

Protocol of Worldwide System

According to Mitchell, the United States is reluctant to summarily reject international tax harmonization initiatives because, more than other nations, it seeks to tax income earned abroad.

The United States is operating with a "myopic perspective" by failing to weigh the costs against the benefits of the system, Mitchell said. "Information exchange would require the United States to divulge the U.S.-source income of nonresident aliens."

Mitchell concluded that the United States is in a quandary as it demands that other nations help the Internal Revenue Service enforce American tax law while simultaneously serving as a safe haven for international flight capital.

The report is available on the Center for Freedom and Prosperity's World Wide Web site at http://www.freedomandprosperity.org.

By Myrna Zelaya-Quesada

Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.

 

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