Europe Needs Tax Competition

Europe’s perennial recession is depriving the welfare state of revenue. This in turn is causing frustration, especially among those who still defend the welfare state and the big, redistributive government it represents. And the welfare statists are getting vocal, as shown by a contribution from Klaus Heeger, Secretary General of the European Confederation of Independent Trade Unions. Heeger does his best to blame the welfare state’s revenue starvation on corporate tax planning:

What the recent tax scandals in Luxembourg have shown is that governments are stripping back public services, while at the same time encouraging companies to engage in complex tax schemes. The promotion of tax evasion has deprived public services of crucial resources at a critical time.

No, it is not tax planning that “deprives” government of “crucial resources”. It is the recession. A government spending program is a promise, or a bundle of promises, to a designated segment of the population. Government defines that segment as “entitled” to a cash or in-kind government service, specifies the quality and quantity of that entitlement and then starts pouring out the money. There is almost never a funding source tied to the entitlement – funding comes out of general revenue – and on the rare occasions when there is a dedicated funding source, the entitlement is not conditioned on available tax revenue.

This is, in essence, like me promising my children a flat screen TV each for Christmas without first looking at my bank account. (And never mind the risk of spoiling them to the point where they won’t work for what they want…) But somehow this aspect of the welfare state is lost on its fervent proponents, Klaus Heeger being one of them.

He does, however, make one interesting point:

This public financing has been critical for the banking sector in the past 5 years and is now critical for citizens and workers. Lost revenue means less means of financing public services used by citizens and companies alike, and less redistribution towards a fairer and more sustainable society.

If we forget about the programmatic rhetoric about “fairer and more sustainable”, the argument about the banks is not without merit. But the problem, again, is that elected officials think that it is perfectly fine to use government – and thereby tax revenue – for everything and anything. But corporate welfare is not a government function in a free society.

Heeger’s little jab about businesses taking tax money is of course aimed at getting them to give back in the form of higher taxes:

Concrete measures need to be implemented now in order to put the spotlight on tax justice across Europe. The [recent] G20 summit shows that solutions exist; there is just a lack of political will in Europe to put them in place. While Europe is still hesitating on how to approach the sensitive issue of tax rulings, the G20 have underlined the need to fight these “harmful tax practices”.

There is a sense of desperation in calling tax planning “harmful”. Businesses that create jobs, provide people with products that improve their standard of living; businesses that produce medicine and high-quality food, that build safe and comfortable ways for us to travel; businesses that produce power to we can warm our homes; those businesses need to make sure they can make their ends meet and have enough money for future investments. They need to be able to compete, to improve their products, to pay their workers more.

When they take steps to reduce an already onerous tax burden, they are not engaging in “harmful” activities. They are trying to avoid harm to their own operations, their employees and their customers.

The harm is done by over-reaching governments extending their taxation beyond what is economically sustainable.

Unfortunately, union leader Klaus Heeger does not see this side of the issue. On the contrary, he wants the EU and its member states to further tighten the tax noose around the corporate neck. The goal, says Heeger, is “a common tax base”:

Starting with more transparency on tax ruling, Europe then needs to push ahead with legislation on a directive on a common tax base with binding harmonisation at the heart of the proposals. A single tax base will ensure profits are taxed once and redistributed amongst countries hosting the company.

Today, companies in Europe can choose a country of residence where they file their taxes. What Heeger and other proponents of a perpetually large government are pushing for is, simply, the elimination of that ability. Exactly how this would happen is not clear at this point, but there are two options: either the EU takes over the taxation of corporations, eliminating the member-state corporate income tax; or the EU dictates to member states what tax rate – or bracket of rates – they can tax at.

Either solution is frankly a bit brutal. Today the member states of the EU and the two remaining countries within the former EES system, Switzerland and Norway, compete for corporate headquarters with competitive taxes; in a future Europe where all tax competition is eliminated it will be the continent that competes against the rest of the world.

It is a safe bet to predict that a “tax harmonized” Europe will maximize its “common tax base”, thus making itself uncompetitive against a resilient United States, a steadily improving Canada, an increasingly industrialized Africa and, of course, the entire pack of Asian Tigers.

Heeger suggests a slew of other measures to squeeze more taxes out of corporations. While motivating his rhetoric with fairness and transparency, the real goal is to eliminate tax competition and to monopolize fiscal policy aimed at paying for the welfare state. That can only deprive Europe’s workers of yet more jobs and opportunities. It will most certainly drive yet another generation of Europeans into perennial dependency on government and destroy yet more of the prosperity generators in what was once a world-leading economy.