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Saturday, January 29, 2005

Tax Harmonisation by the Back Door?

I want to share with you a recent mail I received from a reader:

I am a tax attorney in the U.S., and have been watching with anxiety the development of tax policy in the EU. Instead of embracing tax competition as a mechanism to ensure that individual nations spend their tax dollars wisely in the face of competition from other nations, the EU has instead chosen to take the "cartel" approach to determine what are EU appropriate tax regimes. Tax competition among nations disciplines governments for the benefit of all taxpayers in the same way that price competition disciplines local firms for the benefit of consumers. Many EU member states are considered "welfare states" that provide social protection and welfare to their citizens. Preventing tax competition allows these countries to maintain their high tax burdens without having to face competition from less leftward leaning countries in the EU. However, by restraining tax competition, I believe the EU has chosen a route that will have a negative impact on the economic welfare of the EU since it will reduce the efficiency gains that could be achieved through tax competition. Even worse, the EUrocrats are now pushing this same agenda on an international level (OECD, UN etc.). By all indications, it seems that the U.K. tax system will probably be the next target for a challenge. I have attached a recent article from a U.S. tax journal that discusses possible E.U. challenges to the U.K. tax system. While the article is fairly technical, the gist of the article is that the U.K. can expect challenges related to its tax credit mechanism. Sam Tax Attorney

For those who did not read the article, or didn’t understand it, the essence is that British tax law can be over ridden when it interferes with the basic principles set out in the EU treaties. So regardless of whether we are in favour of those principles or not, the upshot is that UK tax law can be changed by decisions taking by the European Court of Justice. Bearing in mind the integrationist bias built into that institution, there is no telling what the limits might be. Another of Tony’s red lines turns out to be a mirage.

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