Saturday, 13 November 2004

Tax Europa

Yet another scandal is brewing in Belgium. No, it doesn’t have to do with a pedophile-murder ring, nor with dioxin-contaminated chickens nor supposedly tainted Coca-Cola — all of which have brought the small country international infamy in recent years. Neither does it involve a government suddenly becoming paralyzed over the seemingly mundane issue of how many flights go in and out of Brussels airport every night — though it is interesting watching politicians held captive by a few rabble-rousing neighborhood activists as they try to keep DHL and 1,200 jobs from moving to Germany.

Rather, it has to do with a Belgian bank whose directors allegedly set up a scheme to help its customers evade income tax and, presumably, tax on savings by setting up accounts in its Luxembourg subsidiary. Several of the bank’s directors are under indictment — although not much is likely to happen to them because legal proceedings in the case have become mired in the inevitable procedural quagmire. Moreover, most of the customers caught using the scheme got off with a slap on the wrist. The case against all of them was fairly clear — and no one is very surprised that Belgians would be involved in some form of tax evasion. It is, to be sure, the national pastime.

The real scandal, then, is that these bank officials and their customers would have to resort to potentially criminal activity to get around an oppressive and counterproductive tax regime — one that hurts the Belgian economy and keeps its citizens from improving their lives.

Investing and saving can be tough in Belgium. Want to buy a house? You’ve got to pay a tax of as much as 17 percent of the purchase price up front. This isn’t a down payment. It’s money that goes straight to the government, never to return. Want to save money in the hope of, say, coming up with that ludicrous front-end tax on a home purchase? Your interest earnings on a savings account, if you have any money left after social security and income taxes, etc., is also taxed. It’s no wonder people are socking their cash away in Luxembourg, the Channel Islands or just about anywhere else with less onerous fiscal constraints (Germans were famous for stashing it at home, foregoing any interest but a least avoiding the tax).

The EU, hoping to do something about what it maddeningly insists on calling “harmful tax competition” between national savings-tax rates, is “harmonizing” them across the Union, with new rules to take effect in 2005 that will require banks abroad to report interest earnings to depositors’ home tax authorities. Harmonizing is a misnomer — a pleasant-sounding word that disguises an economic cacophony. Tax competition is “harmful” only to ministries of finance. Everyone else benefits. And, in fact, competition needn’t be harmful even to them. Eastern European governments have shown that by lowering tax rates, and especially by going to flat-tax schemes, they can actually increase revenue. It can foster growth, expand the tax base and there is less incentive to cheat.

In an effort to combat tax evasion, Belgium has taken some semi-laudable actions. Its prime minister has fought to lower the tax burden on individuals, to around 50 percent — and even doing that has earned him the nickname Baby Thatcher from friends and foes alike. Also, the country recently offered a tax amnesty, giving individuals the chance to declare all previously hidden money and pay a lower tax on it, plus a minimal penalty, before the new, “harmonized” rates kick in.

It’s unclear how many people will take advantage of this loophole, and how many more will continue to hide their money abroad or under the mattress. In the late 1980s Ireland had a tax amnesty that repatriated an unexpectedly high €650 million. Dublin had the good sense to follow up this policy by lowering tax rates on both individuals and businesses so that the money stayed in Ireland. Until Belgium and the rest of Europe follow suit and simplify their tax codes, they’ll be watching a lot of money fly out the window.

And you can take that to the bank.

By Craig Winneker

This article first appeared on http://www.techcentralstati…