If there's one thing big-spending countries can't stand, it's a neighboring nation with the audacity to entice businesses with reasonable tax rates. The European Commission took action Thursday to stamp out this practice. The eurocrats presented a "30 point action plan" aimed directly at Switzerland, and European Union members Ireland and Luxembourg, which offer comparatively low tax rates. Private companies that legally take advantage of these existing laws also find themselves in the crossfire.
The scheme would substantially raise the tax obligations of companies like Amazon, Google and Microsoft. These firms smartly parked their regional headquarters in areas where they would get the best deal from the taxman. Under current EU laws, digital products like ebooks, apps and online music are considered services rather than goods when sold to consumers. As such, the value added tax (the widely used form of consumption tax in Europe) is calculated based on where the seller is headquartered, rather than where the purchaser is located. Amazon, unsurprisingly, chose to locate in Luxembourg where the tax is 3 percent, as opposed to England, where the VAT is a hefty 20 percent. This decision saves both Amazon and its customers a great deal of money.
Allowing people keep the money they earn is anathema to eurocrats who condemn this perfectly legal practice as "evasion." EU countries feign outrage over the revenue "lost" to government, demanding these giant companies pay their "fair share" of taxes. France's President Francois Hollande is leading the charge to close the "loopholes" that allow companies to reduce their tax burden and offer consumers goods at a lower price.
As Adam Smith Institute senior fellow Tim Worstall points out, there are no loopholes. The EU tax system was designed so that a company had to have a presence in one EU country if it wanted to sell to all EU members. Tax competition acts as a check on a government's tendency to overspend, because jurisdictions are penalized if they raise taxes too much to pay for overly lavish expenditures.
Global tax competition has reduced the top rate on personal income from 67 percent in 1980 to just over 40 percent now. Corporate rates have tumbled in the same period from close to 50 percent to about 25 percent today. The European Commission's recommendations, which involve naming and shaming low-tax jurisdictions, would encourage bloated EU member state governments to tax and spend with abandon.
As a 2010 study from the Istituto Bruno Leoni showed, tax competition is effective when labor and capital are mobile. Capital is particularly mobile in the case of providers of digital content. Entrepreneurs will be looking to escape the "soak the rich" measures.
The problem in the European Union, as in the United States, is that governments spend too much. Instead of demonizing Luxembourg, Ireland and Switzerland, eurocrats -- and Democrats -- ought to try emulating them.
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