Either way, the proposals would end an advantage of the EU's leading tax haven, Luxembourg, which has waxed rich on secret, untaxed foreign deposits. After Germany imposed a 30 percent withholding tax on investment income in 1992, capital flight into Luxembourg is believed to have become a torrent. German tax police say they have recovered a list of clients at Commerzbank who have deposited funds in the Grand Duchy. Belgium also has stepped up the heat on Luxembourg, its partner in the long-standing Benelux money union. The police recently jailed the head of the Belgian Kredietbank's Luxembourg subsidiary before releasing him without charges.
Belgian prosecutors accuse the bank of helping wealthy clients evade taxes.
Luxembourg officials, stung by accusations of money-laundering, reportedly are considering a modest tax on investment income. They are resisting pressure to end banking secrecy, which could drive deposits to less regulated environments, such as the Cayman Islands. European Commission officials suggest that economic growth and the galvanizing effect of the single currency will combine to get the euro off to a good start. But the problems with Luxembourg, many experts suggest, are but a foretaste of the difficulties that may arise unless Europe brings its taxes more closely into line. And unless there is a serious attempt to reduce punishing tax rates, particularly on labor, the experts say, havens like Luxembourg will continue to flourish.