Time For The Biggest Fair Tax Reform In European History

Paul Tang

In the dying seconds of his first 100 days in office, President Donald Trump published his ‘biggest tax cut in American history’. The spectacular cut on corporation tax shows that he wants to make America great again in the ill-fated game of international tax competition. To resist, Europa should speed up efforts for a joint tax on profits.

The combination seems hard to square: The man who puts himself forward as a champion of the American people proposes to slash tax rates for entrepreneurs and multinationals from 35 percent down to 15 percent. At the same time, he is repealing inheritance tax and giving tax relief to those who are the best-off. To spare the rich and not the middle class is deception of his electorate, reinforced by Steve Mnuchin – treasury minister and former Goldman Sachs banker – saying that the tax cut will pay for itself by prompting higher investment and growth. It resembles the voodoo economics of Ronald Reagan, based on the logic that fewer/lower taxes generate more growth – but ultimately, in fact, they brought more debt.

The proposal can be fitted on a single page, a form that bears resemblance to the A4 party program of Dutch populist Geert Wilders: rich in expectations and promises, poor in details. A not so minor detail featured in the document is that the US intends to move to a system in which American companies no longer pay tax on their global revenues – a so-called territorial system. Twinned with the strikingly low tariff of 15 percent, it should incite companies to move activities and revenues back to the states. That means the US is aiming for pole position in the race for lower and lower profit tax.

It is doubtful whether the bill will make it through both Houses. Republicans are uncomfortable about the lack of financial justification and Democrats of course disagree at a more fundamental level. On top of that, filling in the details of the plan will take time.

If completed, the proposal will not only inflict damage on the US, where inequality is rising – the rest of the world will be hit as well. It fits the pattern of renewed protectionism and beggar-thy-neighbor policies. In the 1930s this was pursued through competitive devaluations, nowadays – with highly mobile capital – corporate taxes are the main buttons to push.

Tax protectionism

International platforms have tried to stop the spiral of protectionism. The G20 has urged the OECD to act on tax avoidance. The OECD agreements, implemented in Europe via an anti-tax avoidance directive, have helped to stem excessive routes to divert untaxed revenues. However, the measures fail to address competition between regimes on tariffs and on deduction possibilities.

Therefore, a firm European answer to the unilateral US approach is paramount, especially in the light of Brexit. In the United Kingdom, ultra-low corporation tax has been advocated by some as part of a strategy to become Europe´s Singapore. Europe can give in to the logic of ´how low can you go´, but that will be at the expense of public revenues and, ultimately, of taxpayers. It can also choose to set an example by stopping the race-to-the-bottom within our own borders and by introducing a tax system that demands a fair contribution from all companies within and outside Europe.

The latter approach is highly preferable. Already today, SMEs pay over 30 percent more tax than multinationals and this amounts to an unlevel playing field. Already today, employees have to contribute a growing share of the tax pie. A level playing field and fair competition demand an end of tax avoidance.

Forthcoming European proposals on a common consolidated tax base ensure that companies only have to be in touch with one instead of 28 authorities. On top of that, profits can no longer be made via shady transfer pricing practices, but by real factors such as turnover, employment and capital. This stops the game of profit shifting. If we also introduce a lower limit, i.e. a minimal effective profit tariff – absent in the current proposals – it will be virtually impossible to seek competition for the wrong reasons. It will make Europe lead by example.

Europe can and should formulate a proper answer to Trumpian rhetoric and refuse to join the chorus baying for protectionism and lower corporate taxes under the false promise of growth and jobs. The response should be a common tax on profits. It is time EU member states start working to attain – to paraphrase Trump – ‘the biggest and fairest tax reform in European history’.