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The anguish across Europe as the year starts is no longer just about Iraq, American unilateralism, or even George Bush himself. It's about the Grand Canyon-sized gap in tax policy that's opening up between Europe and America. Just as Europeans saw the U.S. and themselves softly sliding into economic stagnation, Bush pulled a fast one in one of the few places where Europe had an advantage, the taxes on corporate dividends.
Many European countries do not tax dividends twice as the U.S. does. That's an exception to Continental Europe's overall socialist view on tax policy, and it has long been regarded as an important offset to other corporate disadvantages, particularly Europe's very high payroll taxes. Bush's plan not only levels the playing field on dividend taxes, it also throws some $100 billion stimulus into the U.S. economy this year by advancing personal income tax cuts. This double whammy comes at a time when the Germans, the French, and the Dutch are trying to raise corporate taxes. If the U.S. move gives them pause, then that provides some reprieve for European companies.
What Europe really needs to do is to promote more competition on both income and corporate taxes. The Irish, with a low 15% corporate tax rate, are stoking a high growth economy in the European Union. If the Bush cuts work, lagging Europe will have a lot more to chew on than U.S. foreign policy.