Jake's View

EU fails to adapt to borderless world

PUBLISHED : Sunday, 26 May, 2013, 12:00am
UPDATED : Sunday, 26 May, 2013, 4:35am

The European Union's loss of revenue from tax fraud and evasion was €1 trillion, said the president of the European Commission, Jose Manuel Durao Barroso

South China Morning Post, May 23

I do not entirely follow the reasoning of this notable hot-air merchant. If the European Union truly has evidence that its citizens, personal or corporate, defraud it of €1 trillion a year, why do its law-enforcement agencies not take action?

The financial fugitives may have taken the money abroad, but they still made it within the EU, where EU agencies rule. If hard evidence of fraud or tax evasion exists, then the EU cops should be able to nab them in the EU or seize the EU-domiciled assets from which the money was made.

And if they do not have this hard evidence, how do they expect governments outside of the EU to enforce EU demands for payment on the basis of claims not acceptable to courts of law within the EU?

What the EU really wants, of course, is a long list of citizens who have bank accounts in Luxembourg and Switzerland. It will treat this as sufficient evidence of wrongdoing, demand a big dollop of the money from these people and then proceed to grind them down with legal processes. The torturer's approach is much favoured in Brussels.

But the EU's real problem is that it still thinks of money as geographically confined within national borders although money now ignores borders as it never has before. This makes a mockery of taxing personal income and corporate profits. Increasingly they cannot be geographically defined.

It is this difficulty that makes EU tax codes so hugely complicated. The taxmen are trying to fit a square stopper in a round drain and, not surprisingly, the sink always leaks. These leaks, however, constitute tax avoidance, not tax evasion, and it is entirely legal for people to take advantage of them. In fact, directors of public corporations have a fiduciary duty to their shareholders to do so. It is not their fault that the EU persists in the Sisyphean task of trying to define the indefinable.

But it certainly explains Barroso's evident frustration. "Give me my share of your money," he demands, and back comes the answer: "Yes, sir, every cent that, by law, we owe you. And precisely how much, by law, is that?"

And he cannot give a precise answer. He can only write a bigger book of tax codes. Yet every time it only makes things worse for him.

Let's also clear up some other misunderstandings. Revenues that the EU cannot raise may be a loss to EU governments but are generally a gain to EU economies.

In the hands of EU bureaucrats the money would only be used to buy weapons, fund the profligacy of wastrel EU member states, or translate endless memos on butterfat composition into 32 different EU languages and dialects.

Out of government hands, the money is efficiently invested to bring EU citizens the goods and services they most want at prices they can afford. It's the same reason that corruption is generally good for China. It puts the money where the money is best used. And it does not deprive the poor of their means. Efficient investment rather contributes to narrowing the income gap. An example of what widens it is overpaid bureaucrats flying back and forth, first class, to endless talk shops on solutions to poverty.

To relieve poverty, give the poor opportunity. It is best done by removing the weight of government from their shoulders, as it is the poor who invariably bear the real brunt of government revenue exactions. The rich always pass the burden to the poor. But most poor countries are poor because their economies are made inefficient through public policy measures. Shortage of money is rarely the problem. The money will come if the opportunity is present, which will generally happen if governments stop making economic choices for their people.

The best immediate advice for Barroso and his EU member states, however, is to take a leaf from Hong Kong's book. Try spending no more money than you raise, sir. It's an unusual idea in Europe, I know, but try it.