(William Moloney,Boston) Democrats and Republicans are in full agreement that the recently passed Tax Reform has huge historical significance: President Trump calls it the “greatest tax reform in History” while Nancy Pelosi calls it the “worst bill in the History of the U.S. Congress”. Both are rather sweeping judgments but both can’t be right.
For a more objective opinion it is interesting to note that there is an emerging consensus across the Atlantic that this U.S. Tax Reform will be very good for the American economy but very bad for Europe’s economy. This conclusion is well exemplified by the title of a just released report from Germany’s highly respected Center for European Economic Research (CEER): “Germany Loses Out In U.S. Tax Reform”.
The reasoning behind this report- echoed by several prominent European economists- is that this U.S. law will decisively shift a current European competitive advantage to a future American competitive advantage as regards trade and economic development generally.
The stark truth of this judgment can be easily seen in the dramatically changed comparative tax rates. While the U.S. has slashed its top corporate tax rate from 35% to 21% the average of major European countries such as Germany, France, Italy, and Spain remains at 30%. The CEER report illustrates the implications of this new disparity by citing a question that many German executives will be asking themselves in the very near future: “Why build our next factory in Germany with a 31% statutory corporate rate, more onerous labor regulation, and an aging population while America beckons with a 21% rate, less restrictive labor regulations, better demographics, and the world’s largest market?”
What is most disturbing to European policymakers is that the American initiative directly challenges their long-standing commitment to ever increasing taxation. For decades Europe has defined its’ tax problem around the belief that companies weren’t paying enough. This attitude reflects a conviction that the purpose of taxation is to fund a strongly redistributive welfare state regardless of the consequences for economic growth and job creation.
In recent years the European Union (E.U.) has creatively interpreted its anti-trust laws in a manner that defines lower taxes as “illegal state subsidies”, and strongly discourages investment in low tax countries. It has also aggressively moved to penalize U.S. corporations doing business in the E.U., while attempting to draw American economic policy into an international web of regulatory restraint.
The main problem with the centralized and restrictionist economic policies promoted by the major E.U. nations is that they can only work in the long term if the industrialized nations outside the E.U. play along.
Herein lies the dilemma for the E.U. First Britain- long the economic outlier with its 17% corporate tax rate- jumped ship via the Brexit vote motivated in considerable part by a desire to escape the suffocating embrace of E.U. taxation and regulation. Despite the depressing and at times spiteful spectacle of the current U.K.-E.U. divorce negotiations in the end Britain will emerge stronger and the E.U. weaker by virtue of losing its’ most entrepreneurial major economy.
Now the United States has defied all the gloomy predictions of endless political gridlock and by a single dramatic vote (51 to 48) cast off the shackles of a long dysfunctional tax structure to re-emerge not only as the largest and most dynamic global economy but also as the world’s primary engine of growth and job creation.
It will, of course, be some time before the full effects of this remarkable turn around will be felt and acknowledged but already for Europe The Handwriting On the Wall is clearly visible.
It will not be easy for the powers that be in Brussels to step back from their long commitment to sacrificing growth on the altar of income redistribution, but if they do not do so they will soon find that they will have a lot less income to redistribute.
Fortunately for the future of Europe there are some political leaders who recognize their peril, and a few- notably French President Emmanuel Macron- who are willing to strongly advocate for aggressive tax cuts to revitalize their own economies.
It is a moment of historic opportunity that should not be missed.
William Moloney’s columns have appeared in the Wall St. Journal, USA Today, Washington Post, Washington Times, Philadelphia Inquirer, Baltimore Sun, Denver Post and Human Events.