by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The latest issue of Fortune magazine features an article detailing efforts to smack Luxembourg for its favorable tax policies.
If politicians in the U.S. and Europe get their way, things in this pinprick of a country could get even quieter. Luxembourg, to state the obvious, is small—so tiny that if you drive a half-hour out of the capital, Luxembourg City, you are likely to hit Belgium, France, or Germany. Much of its population of 550,000—about the same as Tucson—is clustered around a centuries-old hillside capital, where the world’s last remaining Grand Duke (the country is a Grand Duchy) lives in a palace. Its stone fortifications have been fought over through the ages, from the time of ancient Rome to the Napoleonic wars.
Now the country is facing a fresh battle for empires—this time, multibillion-dollar conglomerates. Some European as well as U.S. politicians are accusing Luxembourg of acting as a haven for egregious corporate tax dodgers, and they are demanding reform. At stake is the legal ability of companies, including hundreds of U.S. corporations, to park sizable chunks of their business outside their home countries, cutting billions from their tax bills. …
… The strategy has paid off, and then some. Luxembourg-based mutual funds now have more than $3 trillion under management, up from about $760 billion in 2001. Only funds in the U.S. have more assets. There are 148 banks from 27 countries in the capital city, and more than 40,000 companies are registered in the country (about one for every eight residents), including more than 200 U.S. companies, with household names like PepsiCo PEP -2.34% and Heinz. Direct U.S. investment in 2013 was $416 billion. Buy a book on Amazon AMZN 13.71% in Europe, and the legal page announces the company address in Luxembourg. Download a song on iTunes anywhere in Europe, and a small-type notice says you have just done business with a company situated on Luxembourg’s Rue Sainte-Zinthe. …
… The serene atmosphere might have lasted for years had it not been for two events. First there was the global recession, which forced governments to hunt for more tax revenue.
Governments could have turned toward growth-enhancing public policies: lowering their own tax rates and reducing regulatory barriers. Instead they picked on Luxembourg and other “tax havens.”