Schröder tax plan dubbed ‘economically illiterate’

By Peter Chapman

Date: 29/04/04

GERMAN Chancellor Gerhard Schröder's bid to stop new member states charging attractively low rates of corporate tax could damage the EU's wealth, a leading American tax expert has warned.

Kevin Hassett, the director of economic policy of the American Enterprise Institute, a Washington think-tank, said the US "envies" the EU system which currently allows countries to compete for investment by setting their own corporate tax levels.

But he told European Voice that listening to Schröder and getting rid of tax competition in the Union would wipe out one of its advantages at a stroke - and would rob new member states of any chance of competing by attracting capital away from the EU's economic powerhouses.

At the same time, it would help to drive capital away from the continent, towards more receptive regions such as Malaysia, Singapore, Taiwan or China.

"Schröder's idea is about as bad as any other idea I have seen from that government," said the former Federal Reserve Bank economist. "It is economically illiterate.

"If you are going to harmonize taxes upwards, then newcomers [to the EU] would have no advantage - and competition in Europe would be on infrastructure, where Germany has a clear advantage.

"But it is not going to help France or Germany, because capital is not going to go to Latvia. It is going to go to countries such as Malaysia. They are going to chase the capital away."

Hassett said Berlin is worried that the influx of new countries from 1 May will exert enormous pressure for change inside the EU's biggest, and arguably most rigid, member state.

"This is a crucial moment in history. What happens on tax competition will be a good indicator of things to come. Will they [the new member states] be allowed to work themselves out of poverty or will they have the same uncompetitive methods foisted upon them?

"We are going to see central European countries become one of two things. Like Asian tigers or like Germany,

only at a lower level. Germany wants them to become a poor Germany. Europe wants them to become Asian tigers. If they become Asian tigers they will pull everyone along."

To drive his point home, Hassett said the dangers of policies that would render Europe less competitive are worse than imagined by many Europeans.

He said empirical data shows that the US would currently be on a par with Mexico had its economic growth over the last century been a percentage point per year lower.

EU growth has lagged the "freer capitalist countries" by a similar margin over the past decade, he warns. "If you let that continue you are going to wake up one day and have a gap similar to what we have with Mexico today."

Calls by German politicians on the new member states to stop "unfair" tax competition have stirred controversy, on the eve of the Union's historic enlargement eastwards.

Schröder told Focus magazine: "In the central and eastern European countries there's a certain expectation from enlargement - "we have low tax rates and wages, but infrastructure projects which we cannot finance ourselves, will be funded by the EU". That is not the way to go forward. We need a sensible balance."

Hans Eichel, the German finance minister, supported Schröder in an interview with Der Spiegel magazine, claiming "it was completely obvious that there is an urgent need for discussion [in the EU] on whether we should support low tax rates in the new members through EU subsidies".

Eichel criticized tax "dumping" by eastern European countries and dubbed Estonia's policy of waiving corporate taxes entirely for certain companies "a problem".

Germany and France together have long argued that tax competition is unfair and should be eliminated across Europe. But EU rules on taxation can only be changed if all member states agree.

Paris and Berlin have battled to replace the unanimity requirement with qualified majority voting on corporate tax issues in the European constitution, which is due to be adopted on 17 June.

But Britain, Ireland, Poland and other new member states insisted on keeping their national vetoes intact.

As a next-best solution, France and Germany are working with the European Commission on a plan under which a group of countries could act as pioneers for tax harmonization.

Report of comments from an American tax expert, Kevin Hassett, of the American Enterprise Institute. He is critical of proposals from the German Chancellor to stop new EU Member States competing for investment by setting different corporate tax levels.

• Primary Source

http://www.aei.org/default.asp?filter=all http://www.aei.org/default.asp?filter=all

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