On August 31, Bill Clinton vetoed a cut in the estate tax passed by a bipartisan majority in Congress. He called it unfair and fiscally irresponsible. Interestingly, that same day, the Socialist government of France announced plans for one of the largest tax cuts in that nation's history.
This is only the latest case in which one of Clinton's liberal pals have pushed through major tax cuts in their countries, while he strenuously fights all efforts to cut taxes here. As a result, the United States risks falling behind in the international race to attract and keep capital, highly-skilled workers and other essential components of today's high-tech economy.
The wave of European tax cutting began with Clinton's good friend, Prime Minister Tony Blair of Great Britain. When Blair and the British Labor Party threw the cConservatives out of power three years ago, he was immediately embraced by Clinton as a soul mate. Like Clinton, Blair has sought to modernize his party by abandoning its more left-wing elements. However, for Blair, unlike Clinton, this has included tax cuts.
Last year, Britain lowered its bottom tax rate to 10 percent -- a move that has also been proposed by George W. Bush, but is opposed by Al Gore, who favors keeping the bottom tax rate at 15 percent. Blair also cut the basic tax rate paid by most Britons to 22 percent. By contrast, most taxpayers in America are in the 28 percent federal income tax bracket.
On the business side, Blair lowered the corporate tax rate to 30 percent. Clinton and Gore, on the other hand, raised the U.S. corporate tax rate to 35 percent in 1993, and oppose any reduction. Even more impressively, Blair has slashed the maximum capital gains tax rate in Britain from 40 percent when he took office to just 10 percent now. Of course, Clinton and Gore oppose any cut in the 20 percent tax rate Americans pay on capital gains.
Equally impressive has been the tax cuts instituted by German Chancellor Gerhard Schroeder, another Clinton soul mate, whose social democrats threw out Helmut Kohl's long-serving conservatives in 1998. Although Schroeder initially tilted toward the left, he quickly reversed course and began pushing tax cuts in Germany.
It took almost two years of fighting, mostly with his own party, to get the tax cuts enacted, but Schroeder achieved victory two months ago. His tax cut will reduce the top German income tax rate from 51 percent to 42 percent, and the bottom rate from 23 percent to 15 percent. The top corporate tax rate will fall from 52 percent to 39 percent, and the capital gains tax on shares owned by corporations in other companies is completely abolished.
Schroeder's effort has been hailed across the board. Abolition of the capital gains tax is especially important because it will encourage restructuring of German industry, which all economists believe is necessary. And the lower tax rates on individuals and businesses will greatly improve Germany's competitive position, reducing both the export of capital and emigration of highly-skilled technology workers.
The French tax cuts are a direct response to those in Germany. While much more modest in size, they are significant because Prime Minister Lionel Jospin is much more left-wing than Blair or Schroeder. He did not come into office, as they did, as some sort of "new democrat," but as a hard-line socialist of the old school. After taking power in 1997, Jospin initially pushed tired socialist nostrums such as cutting work hours in a vain effort to reduce unemployment. However, he eventually realized that a more market-friendly approach was needed if France was to compete in today's increasingly integrated world economy.
Jospin's tax cuts are heavily tilted toward those with low incomes. However, he is also reducing the corporate tax rate and lowering the top income tax rate on individuals from 54 percent to 52 percent. While admittedly minuscule, it is of great symbolic importance that France's Socialist Party would support any cut in the top rate whatsoever. It is a testament to the power of tax competition and economic integration that the Socialists felt that they had no choice but to cut taxes for France's richest citizens. This is a lesson Clinton and Gore still have not learned.
The tax cuts in Britain, Germany and France are not the last. Finance Minister Didier Reynders announced a proposal on August 29 that would cut tax rates in Belgium, including a reduction in the top income tax rate from 55 percent to 50 percent. Italy is expected to announce a package of tax cuts this month that would keep it competitive with France and Germany.
It is important to note that these liberal governments, which are all far to the left of America's Democrats, have all justified their actions on the need to stay internationally competitive and sustain economic growth. Gore and Clinton reject these arguments. They continue to say that tax rates must not be cut and that only small, narrowly-targeted tax cuts are acceptable. Moreover, under no circumstances may the "rich" receive a tax cut because they simply don't deserve it.
The irony is that there is a stronger case for cutting taxes here than in Europe. While it is true that European taxes are much higher than here, and will stay higher even with the new tax cuts, taxes are rising more rapidly in the U.S. than in Europe. According to the Organization for Economic Cooperation and Development, in the last 8 years, taxes as a share of the gross domestic product have risen more in the U.S. than in any other major country. Unless this trend changes, the U.S. could quickly find itself losing the race for talent and capital as both become more and more mobile.