March 15, 2001
The Wall Street Journal Europe
State of the Union:
The Laetitia Casta Model (for Tax Revolts)
By Veronique de Rugy,
a post-doctoral research fellow at George Mason University in Virginia and on the board of the Center for Freedom and Prosperity.
When the 36,000-member association of French mayors selected Corsican beauty Laetitia Casta to be France's Marianne in November 1999, little did they how well their choice embodied
the true spirit of the Republic.
The 22-year-old supermodel, to whom several hundred adulatory Web sites are devoted, made herself still more notorious last year after it emerged that she had moved to Great
Britain in order to escape France's punitive tax regime. In doing so, she was not alone. According to an April report issued by France's General Directorate of Taxation, 25,000 taxpayers leave France every year for
tax reasons, including many of the country's top football players. With a tax burden of 45.5% of GDP (including a top personal income tax rate of 54% and an average value-added tax of 19%), it's little wonder.
All this raises a question: With taxes that high, and with so much capital flight and emigration, why hasn't there been a taxpayer revolt? It's not as if the French economy is
doing particularly well: Unemployment has averaged above 10% during the last five years; economic performance, though better in recent months, has hardly been stellar. Yet not a single political party in France
today has chosen to campaign on a platform of deep, across-the-board tax cuts.
The answer, it turns out, is that there is a revolt going on -- only it's a subterranean one. As a rule, taxpayers always revolt when they are being overtaxed. But the way they
revolt depends on the institutional environment they face. When institutional hurdles are such that the cost is too high, they will choose to revolt privately. This means tax evasion, a large underground economy and
emigration. On the other hand, when taxpayers feel they can reduce their tax burden through the political process and legal collective actions, they will choose to revolt publicly. Take the behavior of American
taxpayers. The tax take in the U.S. is dramatically lower than it is in France, as is unemployment, while economic growth is stronger. Yet Americans seem to be in a perpetual state of tax revolt. Tax-cutting
initiatives are on the ballot an average of three times a year in each of the 27 states where such initiatives are allowed. French taxpayers face a very different set of circumstances. Voter initiatives of the sort
common in America are not allowed in France, thus all but closing the door to legal public tax revolts. French bureaucracy has also made it very difficult for taxpayer organizations that could give voice and
momentum to a tax revolt to come into existence. According to a 1994 study, there are a mere 1,000 nonprofit organizations in France, as compared to about 15,000 in Germany and some 400,000 in the U.S. Then too,
French taxpayers are given absolutely no tax incentive to donate money to the nonprofit sector, which explains why the average household contribution to nonprofit organizations in France is $100 per year, as
compared to $1,200 in the U.S. Finally, French authorities have been known to spring audits on organizations advocating tax reform.
What this means is that the French must pursue a different form of tax revolt. According to statistics gathered last year by the International Monetary Fund, the estimated level of
tax evasion in France is a whopping 17%, higher than in most developed countries and exactly double what it is in the U.S. Numerous studies have also demonstrated that over half of France's underground economy is
tax driven. Whether employers pay their employees in cash, or employees ask to be paid in cash, the underlying motive is always to escape taxes.
How do the French tax cheats get away with it? The fact that there are five times more agents working for the French FISC than there are agents working for America's Internal
Revenue Service should imply that the expected cost of evasion is higher in France that it is in the U.S. But that's not how it works. The number of tax audits in France is but a third of what it is in America. And
the penalty for evading taxes is rather small in France. The French tax system has only a three-year statute of limitations; even those sentenced to pay large penalties can escape the penalties by declaring
bankruptcy. As a consequence, French taxpayers have a comparative advantage in using private tax revolts, rather than a collective one.
In the U.S., the trend incentives are the opposite. A strong economy and low taxes means there is little incentive to leave the country. The existence of an initiative process, and
the relative ease with which one can set up a nonprofit organization, means that tax-cutting fervor is directed toward legal, democratic channels. Finally, interests on tax penalties are high, the statute of
limitations is seven years, and tax evaders can be sent to jail. According to figures from the Organization for Economic Cooperation and Development, 2,900 taxpayers were convicted for tax evasion in 1996 in the
U.S., and 2,200 of them were sent to prison, and the number of investigations keeps increasing.
At present, the French government is investing a great deal of effort on stomping out tax evasion -- outside its borders. France has been at the forefront of European Union efforts
to impose withholding taxes on savings, demand an end to bank-secrecy laws in places such as Luxembourg, Monaco and Switzerland, and harmonize taxes throughout Europe in order to stamp out "harmful tax
competition." So far, however, not one of these measures has yielded fruit, nor are they likely to so long as other countries see the benefit in preserving a tax advantage.
What would happen, one wonders, if France were to change the incentive structure, lowering taxes to eliminate the tax-driven black market while improving enforcement? To judge by
the experience of other countries, the country's tax base would rise pari passu with a burgeoning economy. Better yet, France may even get Laetitia Casta back.
-- From The Wall Street Journal Europe