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CFP Strategic Memo, December 21, 2001

Center for Freedom and Prosperity Strategic Memorandum

Date: December 21, 2001

To: Supporters of tax competition, financial privacy, and fiscal sovereignty

From: Dan Mitchell, Heritage Foundation Senior Fellow

Re: A Christmas present from Europe
__________________________________________________________________

What a nice way to end the year. The European Union's infamous Savings Tax Directive is in disarray. It may not be clinically dead, but it is in a coma, kept alive only by a respirator, artificial heart, and the desperate wails of greedy politicians from high-tax nations.

First, some background: The EU Savings Tax Directive seeks to mandate automatic and unlimited exchange of information between nations with regards to nonresident savings. That is the bad news. The good news is that EU tax harmonization schemes require unanimous support from all member nations, meaning that the handful of EU nations with some respect for financial privacy Austria, Luxembourg, and Belgium have veto power. Moreover, the EU's proposed cartel is contingent on the participation of six non-EU nations, including Switzerland, the U.S., Liechtenstein, and Monaco (plus U.K. territories).

A strong and principled stand by just one nation is enough to kill this anti-growth initiative. The "veto" can be cast by an EU member nation, or it can be cast by one of the six nations that the EU has targeted. Actually, victory does not even require a strong and principled stand. It only requires that one nation do the right thing, even if it is for the wrong reason.

In any event, the right thing is happening. The EU cannot get an agreement. The initiative has been shelved for "further study." Translated into real world English, the proposal is "road kill." There are three elements of this issue that warrant further discussion:

    1. Do not let this proposal climb out of its grave. As sure as the sun rises in the East and sets in the West, we can rely on high-tax nations like France to engage in a vigorous campaign to resuscitate this anti-growth initiative. Indeed, our friends in various Treasury Departments and Finance Ministries from high-tax nations have reported that their bosses already are scheming on how to make this happen. The best way to forestall this foolish effort is for one nation to unambiguously reject the proposal. We know that most low-tax jurisdictions think the best strategy is passive resistance, but this keeps a bad idea alive.

    2. Low-tax jurisdictions being persecuted by the OECD should exploit the EU's failure. We have never been big fans of the we-will-support-information-exchange-when-OECD-members-do-the-same-thing strategy. After all, jumping off a cliff just because someone else is doing the same thing hardly strikes us as an intelligent choice. Nonetheless, now is an ideal time to employ this rhetoric. Leaders from low-tax jurisdictions being pressured by the bureaucrats in Paris should point to the collapse of the EU initiative and state that they will not even begin to consider surrendering to the OECD until and unless the EU Savings Tax Directive is implemented. After all, sauce for the goose should also be sauce for the gander (even if the sauce is poisoned).

    3. The United Kingdom must realize that the collapse of the Savings Tax Directive does not mean a rebirth of withholding tax proposals. When the Savings Tax Directive was first being contemplated, there also was discussion of instead relying on a mandatory withholding tax on nonresident savings. This was completely unacceptable to the City of London, so the U.K. was a big advocate of the Savings Tax Directive and used its influence to obtain that outcome. Some people from the U.K. have sought our opinion on this dilemma. Specifically, they ask whether the Savings Tax Directive is the lesser of two evils (from the narrow perspective of the City of London). The answer may be yes, but the question assumes that one of the two proposals must be implemented. This is not true. Just as various nations presently are blocking the EU's Savings Tax Directive, the U.K. could use its veto to block future discussion and/or implementation of an EU-wide withholding tax. In other words, the City of London should reject both alternatives and instead seek to preserve the status quo.

Inconclusion, victory has been achieved, but we would not advise that anyone celebrate by drinking too much champagne. One of America's Founding Fathers, Thomas Jefferson, properly observed that "Eternal vigilance is the price of liberty."

 

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