IPI Publication Opinions/Editorial
IPI Policy Report - # 171
Related Publication Title:
Tax Reform: The Key to Preserving Privacy and Competition in a Global Economy
Released by Dan Mitchell, Ph.D on 02/07/2002
IPI Policy Report - # 171
Related Publication Title:
Tax Reform: The Key to Preserving Privacy and Competition in a Global Economy
Released by Dan Mitchell, Ph.D on 02/07/2002
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Tax rates in America are too high, but the United States is a low-tax country compared to welfare states like France, Germany, and Sweden. This gives us a competitive advantage in the global economy – and the Bush tax cut will help America open up an even bigger lead over Europe’s overtaxed economies.
But there is much room for improvement. After all, it is damning with faint praise to say that America’s tax system is more competitive than the tax systems of nations like France. The United States needs to reduce marginal tax rates and desperately needs to eliminate the tax bias against income that is saved and invested.
Fundamental tax reform is the answer. A flat tax, for instance, would solve all of the major problems caused by the internal revenue code. Discriminatory and excessive marginal tax rates would be replaced by a single, low tax rate. Saving and investment no longer would be double-taxed. And tax reform would significantly improve the competitiveness of U.S. companies by scrapping the taxation of worldwide income and instead taxing only income earned inside America’s borders.
All of these changes would increase economic growth, but an improved standard of living is just one of many reasons why the internal revenue code should be put in the garbage can. We also should replace the IRS with a flat tax (or a national sales tax) because taxpayers no longer would have to divulge intimate details of their personal finances to the government. In other words, tax reform is the single best way to protect the financial privacy of law-abiding citizens.
Under a flat tax, for instance, you don’t have to tell the government how much money you have in your bank account and the amount of interest generated by that account. Why? Because there is no tax on interest under the flat tax since tax reform is designed to eliminate the bias that punishes people who save income instead of consuming income.
Likewise, tax reform means you don’t have to tell the IRS how much stock you own and the amount of dividends you get. The reason, once again, is that the flat tax is designed to create a level playing field between income that is consumed and income that is invested. And because there is no death tax or capital gains tax in a flat tax system, there is no reason for the government to know how much property you own and no reason to know what happens to that property when you sell it or give it away.
Tax reform would be a big boost for privacy, but the pendulum could swing the other direction if international bureaucracies like the Organization for Economic Cooperation and Development (OECD), the European Union (EU), and the United Nations (UN) are able to implement tax harmonization. These organizations, acting at the behest of Europe’s welfare states, want to gut financial privacy laws so that high tax governments can track – and tax – funds that their oppressed citizens invest in the economies of low-tax nations like America.
The European Union, for instance, wants our government to force U.S. financial institutions to help enforce foreign tax law by helping nations like France tax income earned in America. The
Europeans call their scheme a “savings tax directive,” but it really is a tax cartel – an OPEC for governments.
More importantly, it is a threat to our economy and an outrageous assault on our sovereign right to govern activity inside our borders. Foreigners have invested more than $5 trillion of capital in America, creating millions of jobs and boosting our financial markets. Yet if our banks and brokerage houses have to become tax police for foreign governments, a substantial portion of that money will flee the U.S. economy. An oppressed French taxpayer is unlikely to shift capital to the United States, after all, if the French government is able to impose French tax rates on any income earned in America
The European Union’s plan to create a new OPEC is a threat to privacy and a threat to tax reform. All tax reform plans eliminate excess layers of tax on income that is saved and invested, but the “savings tax directive” is explicitly designed so that high-tax governments can more easily impose a second layer of tax. Tax reform plans also are territorial, meaning they do not seek to tax economic activity in other nations. But this “good neighbor” policy would be tossed out the window if the international bureaucracies win the battle.
This is why the Bush Administration must tell the European Union that America has no interest in participating in the “savings tax directive.” We don’t want international bureaucracies to rewrite the rules of taxation and interfere with our right to reform our tax system.
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Daniel Mitchell, Ph.D., is a McKenna senior fellow at the Heritage Foundation and author of the recent Institute for Policy Innovation study, “Tax Reform: The Key to Preserving Privacy and Competition in a Global Economy.” The study is available at www.ipi.org.
Nothing contained herein should be construed as an attempt to influence the passage of any legislation before Congress.
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