Economic murder-suicide

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On June 3, 2003, the European Commission adopted measures to "tackle harmful tax competition." If the term "harmful tax

competition" sounds to you like an oxymoron, you are thinking clearly. The EU's measures are designed to make it easier for them to tax savings but, in reality, will largely destroy the small amount of remaining legal savings by EU citizens.

Because of confiscatory levels of taxation, many of those who reside in the EU have moved their savings to the United States and other relatively low tax jurisdictions. For the last several years, many economic scholars and public policy organizations have warned the EU that attempts to reach beyond their borders to tax this so-called flight capital would end in disaster.

To understand the problem, assume you are a citizen of France. You save $1,000 and receive an interest payment of $60 (6 percent). Inflation is 3 percent, so your real interest earnings are only $30. However, you must pay a 59.7 percent tax, or $35.82, on the $60 of interest, plus the $30 inflation tax. (Remember, inflation is caused by government producing too much money.) This leaves you a net loss of almost $6 on each $1,000 saved. (In those EU countries where inflation is 3 percent or more and maximum tax rates are 50 percent or more, many savers have effective tax rates on interest of more than 100 percent.)

People quickly figure out they are worse off rather than better off by saving; hence, they either move their savings out of the country to a more tax-friendly jurisdiction or stop saving. The EU will receive virtually no increase in tax revenue from these new measures. They will only succeed in driving their citizens to find legal or illegal loopholes.

Any reduction in savings rates in the EU will be a disaster. Most of the EU countries are suffering from very low birthrates and rapidly aging populations, plus increasing demands for welfare, medical and retirement benefits. Without high levels of saving, there is no way these benefit payments can be met.

It is bad enough that the EU is imposing such measures on its own citizens, but the EU is attempting to go even further by imposing it on non-EU members such as Switzerland, Liechtenstein and dependent and associated territories of the United Kingdom and the Netherlands, for which it will be economic death.

The EU has even had the audacity to try to get the U.S. to go along with this unsavory scheme (some former Clinton administration officials and Treasury bureaucrats thought this was a good idea).

The EU bureaucrats realize that if they don't get most of the world to go along with their scam, it will not work. The real world fact is, of course, it will not work no matter what they do. To sell the scam, the EU had to agree to many loopholes, in part so the lawyers and accountants could still sell tax shelters to their well-off clients.