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The Wall Street Journal

April 6, 2001

Editorial: The Next Kyoto?

     It's an international agreement that will increase the power of government over the individual, is based on faulty numbers and hasn't got a chance unless the United States signs on. If President George W. Bush does the right thing and says no, he will earn the wrath of European socialists, but make life infinitely better for silent millions across Europe and elsewhere. Is this a description of the Kyoto Protocol on global warming before Mr. Bush put it out of its misery? No, something else just about as full of hot air: the current attempt by the European Union to make the U.S. agree to innocuous-sounding financial information exchange. Now that Mr. Bush has tasted what it's like to strike a blow for common sense, he might want to make a habit of it.

     The EU's banking information exchange agreement was born in the Portuguese town of Feira at an EU summit last June. After years of trying unsuccessfully to convince Britain, Luxembourg, Austria and other (relatively) low-tax EU members to slap on a withholding tax on all savings, the EU happened on the information exchange concept.

     The idea was to stop the citizens of high-taxers such as Germany and France from taking what little the state allowed them to keep and depositing it in accounts in places like London or the Grand Duchy. If Chancellor Gordon Brown would not gladly stop this practice with a tax, because it would kill the City of London's 3 billion pounds a year business in Eurobonds, would he then at least have his government collect information on foreigners saving there, and send it to their home countries?

     After much wrangling, the low-tax countries agreed, but extracted one condition: other havens such as Switzerland and U.S. would have to follow suit. It seemed like a small compromise back then. Switzerland is small and surrounded almost on all sides by three of the biggest taxers in Europe: France, Germany and Italy. It could soon be made to see reality. Across the Atlantic, Vice President Al Gore looked like the kind of reasonable chap who would like that sort of thing. And, riding on a boom, he seemed destined to win the American presidency.

     Already under President Bill Clinton, the U.S. Internal Revenue Service last year browbeat many banks around the world into doing just that, sending the I.R.S. information about their U.S. clients. Protests that such practices encroached on individual freedom went unheeded. But now a different political party is in power in Washington.

     Europe has mounted an intense propaganda campaign aided by the Paris-based Organization for Economic Cooperation and Development, which is pursuing a parallel "harmful tax competition" initiative. The EU supporters of information exchange often refer to their targets as "money launderers."

     This is not just stretching the truth, but turning it on its ear. It's not cocaine traffickers they're worried about, but their own citizens. When tax burdens approach 60% of income, people flee for their lives.

     Governments that won't sign on also are accused of abetting tax evasion. Except that the savers in question are taking money they have earned legally and parking it in locations where there is no withholding tax on savings.

     Why should other countries be asked to enforce the laws of Germany and France, especially when they do not agree with them? It may be a crime to hear a Catholic Mass in China, but the New York police should not be expected to arrest Chinese worshipping at St. Patrick's. A territorial system of tax laws in which each country taxes only activity within its own borders makes the problem go away.

     It's no surprise that high-tax countries want to avoid tax competition or that the OECD, at European instigation apparently, now has deemed such competition "harmful." This issue would look like a shoo-in for a Bush Nyet.

     But the administration, involved in getting its tax package across, could overlook this issue, allowing it to become the plaything of Treasury bureaucrats. Treasury Secretary Paul O'Neill has been ambiguous himself.

     The governments that were forced to sign in Europe clearly wanted a U.S. veto -- Austrian Finance Minister Karl-Heinz Grasser, who was against it, said at the time, "We'll be really surprised if all these countries and territories agree." We would be, too.

 

 ~ Copyright, The Wall Street Journal

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