Euro Vision: The Inexorable Euro Tax Creep

The push won't be stopped.
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The euro, to be launched in just eight days, is supposed to usher in a new era of transparency and competition for businesses operating in Europe.

But with the single currency in the bag,

European Union

leaders have turned their focus to unifying fiscal policy. EU leaders, over the opposition of the U.K., have begun to campaign against tax rates they deem to be too

low

. And they are pursuing the familiar tactic of exploiting nebulous E.U. laws to ram through their agenda.

Before the last EU summit, held in Vienna Dec. 11 and 12, a row over tax harmonization blew up in Britain, which, for the most part, has lower taxes than most of its fellow EU members. That made the German

Finance Minister Oskar Lafontaine

the target of Euroskeptic anger after he suggested that the ability for any one nation to veto tax harmonisation policy in the EU should be revoked.

The argument became so heated that U.K. Prime Minister

Tony Blair

co-opted German

Chancellor Gerhard Schroeder

to issue a joint statement claiming that there were no plans to harmonize either personal income tax or corporate taxes in Europe. However, they argued in the same breath that they wanted only to eradicate "harmful tax competition" within the EU. This clarifies nothing.

The Fine Art of Bribery

To be sure, special tax loopholes granted by one country in order to entice foreign companies to register there are unfair, especially if the loopholes are exceptions to a country's own tax code. Germany is especially frustrated at smaller countries, like Ireland, that are net recipients of EU aid and yet grant special tax incentives to persuade German companies to domicile there.

This sounds like a legitimate area for EU action. After all, such special tax exemptions are effectively subsidies. And the EU already has rules in place governing the subsidies that its member states are allowed to pay to their companies.

The only trouble is that -- as is so often the case in the EU -- the existing rules on subsidies are not observed. On Dec. 9, for instance, the

European Commission

approved a subsidy to

DaimlerChrysler

(DCX)

to build a new factory in Germany instead of in neighboring Poland.

The subsidy of 218 million marks represented a whopping 33% of the total investment costs, even though the Commission's own rules place a ceiling of 28% on such subsidies.

It is difficult to see how Germany can legitimately complain about other countries poaching companies away with tax exemptions, when it does exactly the same thing itself with direct subsidies. But it is even more difficult to see why Europe should obtain new powers over "harmful" tax competition when its own existing rules on subsidies are so systematically flouted.

Don't Forget the Bailouts

For years, the Commission has regularly allowed mammoth bailouts for some of Europe's state airlines -- for example,

Air France

and

Iberia

-- on condition that they are the last such payments. They never are.

This continues although

Article 92 of the

Treaty on European Union

declares state aids that "distort or threaten to distort competition" to be incompatible with the common market and thus illegal.

However, the treaty then enumerates eight categories of exception to this rule, including everything from subsidies "having a social character" to "aid to facilitate the development of certain economic activities and of certain economic areas."

And because new exceptions can be approved by majority vote, the treaty in fact creates an almost infinitely flexible discretionary power structure.

One jurist has described EU jurisprudence on state aids as "the law of the jungle." This is why any apparently reasonable calls to give the EU new powers to wipe out "harmful tax competition" must be regarded with the greatest skepticism.

Lots of Wiggle Room

The omens are already bad. The Code of Conduct on tax competition, which was drawn up in December 1997 -- and to whose transformation into European law EU heads of government are committed -- does not define "harmful" tax competition at all clearly.

The Code's main target is savings taxes, and the Commission has now indeed called for a 20% withholding tax to be levied on all investments in the EU.

The British government is currently determined to exempt

Eurobonds

from this tax, for fear that it would drive that market out of London. Britain insists that it can simply veto any attempt to override its concerns -- for now.

However, there are numerous European measures now in force -- not least of which is the single currency itself -- that Britain did not like but that it felt unable to veto because of other pressures. It is politically inconceivable that a British government that supports EU action against "harmful" tax competition could successfully resist, over time, the introduction of general tax harmonization in such important areas.

Indeed, Britain shows little sign of vetoing the imminent introduction of sales tax on art imports, which the Commission wants to impose on all art sales. This is in spite of the fact that the

British Art Market Federation

is convinced that these two measures of European harmonization will simply drive the art market -- which currently employs some 40,000 people in Britain -- straight out of London and into New York. Nor has London expressed any opposition to the long-standing plans to introduce a European "eco-tax" on energy.

In any case, the British government will by definition be unable to oppose the voluntary introduction of harmonised taxes among the 11 member countries adopting the euro on Jan. 1. It is an old European ploy to say to the British, "If you don't join us, we will just go ahead without you" and this is precisely what the Euroland countries will do if Britain pretends to be intransigent.

The British government has even supported a campaign to remove tax havens in territories that are not even in the EU. For example, the

Channel Islands

and

Monaco

are already coming under pressure to harmonize their taxes with the EU, and a study published by the commission this spring described them as "an obstacle to the European single market."

And a recent editorial in France's paper of record,

Le Monde

, suggested that France cut off electricity to Monaco if it refused to fall in line.

But as a former Governor of Bermuda said in a recent debate in Britain's

House of Lords

, if the U.K. accepts that taxes must be harmonized in places outside the EU, then the EU will very soon deploy exactly the same arguments to change any tax regime within its own borders that it judges "harmful."

Having supported the principle that the EU should enjoy the right to judge what is harmful and what is not, the British government will have abandoned any means of resisting the commission when it turns its sights on London. The price of admission to the EU, it seems, is only going up.

John Laughland is a London-based author of The Death of Politics: France Under Mitterand and, most recently, The Tainted Source: The Undemocratic Origins of the European Idea. He is also European Director of the

European Foundation

and contributes to Wall Street Journal Europe, Financial Times and the Times, London.