Eastern Europe as Conservative Tax Paradise?

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Tax reform devotees in the U.S. are looking to formerly Communist nations of eastern Europe for the realized joys of a flat tax. Others in the E.U. think it just isn't fair. From a Christian Science Monitor report:

Last January, Slovakia became the sixth Eastern European country to adopt a flat tax, which means all income-earners pay the same rate. Since then, Romania and Georgia have followed suit, creating a global proving ground for the concept. In the process, flat-taxers have moved Eastern Europe from a Communist backwater to an investment spring—pressuring its higher-taxed Western neighbors to adapt to the new environment.

…..Eastern Europe's cheaper labor market and growing reliance on flat taxes leave Western European economies struggling to compete.
……
Leaders such as Chancellor Gerhard Schroeder say that the Eastern European countries steal business with their low tax rates while at the same time benefiting from European Union (EU) aid.

Last year, former French Finance Minister Nicolas Sarkozy said that if the new states were "rich enough" to introduce a flat tax they wouldn't need EU funds. France and Germany want to harmonize tax rates within the EU, and bring flat-tax rebels under a unified code.

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  1. Considering how much France and (primarily) Germany benefit from owning the huge portions of Eastern European industry they grabbed in the early 90s, the idea of them “struggling to compete” is pretty funny.

    former French Finance Minister Nicolas Sarkozy said that if the new states were “rich enough” to introduce a flat tax they wouldn’t need EU funds.

    If Western European countries are rich enough to afford hiring brain damaged Finance Ministers as part of some equal opportunity initiative, they probably aren’t hurting too much in the labor sector.

    All the more ridiculous in the case of Slovakia, which is probably the most piss poor country in the Eastern Bloc. God forbid the army of unemployed Roma should have something to do besides sell raspberries by the road.

  2. Pavel,

    Renault has a bunch of factories in Eastern Europe; several of them are in the countries set to enter the E.U. in 2007 – Romania and Bulgaria. I’m guessing Carrefour has expanded aggressively in Eastern Europe as well.

  3. I don’t see anything wrong with Sarkozy’s point. I’m all for tax competition, but I’m not in favor of tax competition with countries to which my tax money is being sent.

  4. Other peoples money should only be sent to countries that have poor economic planning and poor tax systems. That way they can just keep sending them money and then Bono can write a song about how they should forgive the loans. I’m for low taxes and no more Bono myself.

  5. France and Germany are crooks plain and simple. They just plain ignored the Stability Pact they forced the EU to implement, obstensibly to protect themselves from “subsidizing” the poorer countries. And the EU being what it is, even let them get away with it. The French and the Germans basically said the EU has to punish any member country that deficit spends over 3% GDP…except when France and Germany do it every single year.

    Now it’s the same thing. Somehow Eastern Europe making sensible tax legislation is hurtful to France and Germany, who will gladly take money from Eastern Europe for themselves, to help cover the costs of their foolhardy economics, but god forbid Eastern Europe actually receives any benefit from its smart policies.

    They not only want to have their cake and eat it too…they want to eat everyone else’s cake as well.

  6. Stretch,

    They just plain ignored the Stability Pact they forced the EU to implement, obstensibly to protect themselves from “subsidizing” the poorer countries.

    The Pact was largely the work of the Germans, and they were hardly the first offenders. Portugal and a couple of other countries broke ranks on the Pact before they did.

    The French and the Germans basically said the EU has to punish any member country that deficit spends over 3% GDP…except when France and Germany do it every single year.

    Has the EU actually punished any of the countries that have broken the Pact? No.

    Somehow Eastern Europe making sensible tax legislation is hurtful to France and Germany, who will gladly take money from Eastern Europe for themselves…

    What money are they taking from Eastern Europe? If anything, Western Europe is doing the exact opposite.

  7. Gary, I am by no means suggesting the France and Germany are the only or even first offenders, but it was largely on their insistence (especially the Germans as you point out) that the Pact was introduced. They talk a good game, but when push comes to shove, they cave and the EU follows. I didn’t mean to suggest that France and Germany are alone, or necessarily exceptional, in being crooks, after all, that’s the basic nature of gov’t.

    If Eastern Europe is so “rich” as to be able to institute a flat tax (never mind that this has historically increased tax revenues), then obviously Western Europe has been benefiting all along. Sarkozy suggests that under a flat tax, less money will come in, and therefore less money should go out to them. But what happens when the flat tax out-performs the complicated and costly alternative? Will Sarkozy then suggest that Eastern Europe receive more EU funding? Of course not.

    France’s only major export these days is diplomatic influence (if it can be called such anymore). They are second only to the US in presence around the world (and are on the decline…useless embassy’s are costly). The bottom line is France is losing control and relevance, except in the EU where they are a major player. Eastern European countries increasing their own economic freedom run directly counter to France’s interest in the EU. Sarkozy is dangling the threat of being essentially “exiled” from the financial goodies of the EU as a means to retain and gain more control.

    Basically, France and Germany wish to create the same type of bureaucratic income tax shit-storm we have in the US, with them playing the role of DC. The wise and benevolent collector and provider of tax money, redisributed for the benefit of the common good…with a nice “handling fee” taken off the top.

    Really, from a political standpoint, it’s a good move for them, but that doesn’t mean it’s the right thing to do.

  8. I don’t see anything wrong with Sarkozy’s point. I’m all for tax competition, but I’m not in favor of tax competition with countries to which my tax money is being sent.

    The mabe your real problem is with the fact that your tax money is being sent to other countries.

  9. The problem with the damn Europeans is that they each find different policy spheres in which to be rational. Someone needs to find a country that combines Romanian income tax laws; German highway regulations; French traffic regulation enforcement; Irish business regulations; Swiss gun laws, capital gains tax laws, and banking/finance regulations; and Dutch drug, prostitution, and euthansia laws.

    Then we can all move there and consider our journey complete (well, almost).

  10. Stretch,

    Don’t trust anything R.C. Dean says about the E.U.; he thinks Switzerland is a member state. 🙂

    Anyway, the E.U. is now a bunch of shifting alliances; it differs from the past when the “core countries” drove its policies. That change is probably a good thing.

    France’s only major export these days is diplomatic influence (if it can be called such anymore).

    Yeah, right. France is a major exporter of machines, industrial products, electronics, aeronautical products, pharmaceutical products, etc. I happen to own some stock in a variety of French corportions and am relatively familiar with France’s prominence in a number of fields of economic endeavour.

    Eastern European countries increasing their own economic freedom run directly counter to France’s interest in the EU.

    That likely depends on the circumstances.

    The wise and benevolent collector and provider of tax money, redisributed for the benefit of the common good…with a nice “handling fee” taken off the top.

    Except in this case both France and Germany put far more into the E.U. coffers than do Eastern European countries (indeed, than do countries like Ireland or Spain do as well).

  11. Eric II,

    Well, that just makes the E.U. far more federalist in nature than the U.S. The E.U. is undergoing all the growing pains, etc. that one might expect of such a project. The addition of ten (twelve by 2007) new countries to the original fifteen is bound to be contentious, etc.

  12. This is a wonderful development. Hopefully the nations of Western Europe won’t be able to use the EU, via statutory force or by threat to withhold EU funds, to get these Eastern European nations to give up their better tax policy.

    This speaks to the threat of any international tax such as the one that I presume is the source of EU funds.

    The threat to withhold EU funds is another type of force, although maybe not as irresistible as statutory law, if the people of these nations are forced to pay EU taxes from which the EU funds that could be withheld as punishment (for adapting good economic policy!) come.

  13. Rick Barton,

    Well, Chirac has promised a 35% reduction in the income tax (at its highest it is around 50%) by 2007; so how much of this grumling is mere political theatre or a stalking horse for something else is yet to be seen.

  14. Leaders such as Chancellor Gerhard Schroeder say that the Eastern European countries steal business with their low tax rates while at the same time benefiting from European Union (EU) aid.

    Note that at least some of this is based on Poland’s recent WWII reparations claims (never mind Poland abrogated such claims during the Cold War and that Germans poured millions into food aid, etc. for Poland in the 1970s and 1980s). I think its pretty easy for those with the inclination to bash the Germans, etc., but there is more than meets the eye here.

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