"Tax Harmonization" = Economic Trouble

"Tax Harmonization" = Economic Trouble

Could the IRS enforce the tax laws of other countries and place a new burden on foreign investment in the US? It could happen. Check it out.

Taxing Foreign Investors Would Damage Home Economy

Income should be taxed based on where it is earned, not where a taxpayer happens to live.

That simple concept encourages governments to slash taxes to encourage investment. As my Heritage Foundation colleague Daniel Mitchell has written, “globalization is making it harder for governments to overtax, because it is increasingly easy for taxpayers to shift their productive activities to lower tax environments.” The trend toward lower taxes is something we should encourage, not stifle.

Also, the regulation is illegal. Federal agencies such as the IRS are supposed to enforce only those laws passed by our Congress, not the laws of other nations. And in this case, not only would the IRS be acting as a tax-collector for foreign governments, it would actually be ignoring the wishes of our lawmakers, who have specifically sought to attract money to our economy by not taxing interest paid to foreign-held accounts.

Finally, the regulation would endanger our economy. Again, one reason foreign capital comes here is because smart investors realize they’ll be able to pocket their gains. If we start imposing -- or even facilitating -- French and German taxation levels, investors will take their money elsewhere.

That would harm the banking industry. Investment banks currently hold hundreds of billions of dollars in foreign capital. Imagine all the money flowing out of our economy overnight to, say, Hong Kong, where the government maintains a fair, flat tax.

It also would damage our federal treasury. Foreigners hold at least a third of our debt. If they’re forced to pay tax on the interest they earn here, they won’t invest here, and we’d have to find somebody else to purchase our Treasury bills.

There are plenty of ways that we could improve our tax system. But “tax harmonization” isn’t one of them. If high-tax European countries want to succeed economically, they should start singing from the low-tax hymnal -- and begin enjoying the growth that goes along with it.