When the 36,000-member association of French mayors selected Corsican beautyLaetitia Casta to be France’s Marianne in November 1999, little did they howwell their choice embodied the true spirit of the Republic.
The 22‐year‐old supermodel, to whom several hundred adulatory Web sites aredevoted, made herself still more notorious last year after it emerged thatshe had moved to Great Britain in order to escape France’s punitive taxregime. In doing so, she was not alone. According to an April report issuedby France’s General Directorate of Taxation, 25,000 taxpayers leave Franceevery year for tax reasons, including many of the country’s top footballplayers. With a tax burden of 45.5% of GDP (including a top personal incometax 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 capitalflight and emigration, why hasn’t there been a taxpayer revolt? It’s not asif the French economy is doing particularly well: Unemployment has averagedabove 10% during the last five years; economic performance, though better inrecent months, has hardly been stellar. Yet not a single political party inFrance today has chosen to campaign on a platform of deep, across‐the‐boardtax cuts.
The answer, it turns out, is that there is a revolt going on — only it’s asubterranean one. As a rule, taxpayers always revolt when they are beingovertaxed. But the way they revolt depends on the institutional environmentthey face. When institutional hurdles are such that the cost is too high,they will choose to revolt privately. This means tax evasion, a largeunderground economy and emigration. On the other hand, when taxpayers feelthey can reduce their tax burden through the political process and legalcollective actions, they will choose to revolt publicly.
Take the behavior of American taxpayers. The tax take in the U.S. isdramatically lower than it is in France, as is unemployment, while economicgrowth is stronger. Yet Americans seem to be in a perpetual state of taxrevolt. Tax‐cutting initiatives are on the ballot an average of three timesa year in each of the 27 states where such initiatives are allowed.French taxpayers face a very different set of circumstances. Voterinitiatives of the sort common in America are not allowed in France, thusall but closing the door to legal public tax revolts. French bureaucracy hasalso made it very difficult for taxpayer organizations that could give voiceand momentum to a tax revolt to come into existence. According to a 1994study, there are a mere 1,000 nonprofit organizations in France, as comparedto about 15,000 in Germany and some 400,000 in the U.S. Then too, Frenchtaxpayers are given absolutely no tax incentive to donate money to thenonprofit sector, which explains why the average household contribution tononprofit organizations in France is $100 per year, as compared to $1,200 inthe U.S. Finally, French authorities have been known to spring audits onorganizations advocating tax reform.
What this means is that the French must pursue a different form of taxrevolt. According to statistics gathered last year by the InternationalMonetary Fund, the estimated level of tax evasion in France is a whopping17%, higher than in most developed countries and exactly double what it isin the U.S. Numerous studies have also demonstrated that over half ofFrance’s underground economy is tax driven. Whether employers pay theiremployees in cash, or employees ask to be paid in cash, the underlyingmotive is always to escape taxes.
How do the French tax cheats get away with it? The fact that there are fivetimes more agents working for the French FISC than there are agents workingfor America’s Internal Revenue Service should imply that the expected costof evasion is higher in France that it is in the U.S. But that’s not how itworks. The number of tax audits in France is but a third of what it is inAmerica. And the penalty for evading taxes is rather small in France. TheFrench tax system has only a three‐year statute of limitations; even thosesentenced to pay large penalties can escape the penalties by declaringbankruptcy. As a consequence, French taxpayers have a comparative advantagein using private tax revolts, rather than a collective one.
In the U.S., the trend incentives are the opposite. A strong economy and lowtaxes means there is little incentive to leave the country. The existence ofan initiative process, and the relative ease with which one can set up anonprofit organization, means that tax‐cutting fervor is directed towardlegal, democratic channels. Finally, interests on tax penalties are high,the statute of limitations is seven years, and tax evaders can be sent tojail. According to figures from the Organization for Economic Cooperationand Development, 2,900 taxpayers were convicted for tax evasion in 1996 inthe U.S., and 2,200 of them were sent to prison, and the number ofinvestigations keeps increasing.
At present, the French government is investing a great deal of effort onstomping out tax evasion — outside its borders. France has been at theforefront of European Union efforts to impose withholding taxes on savings,demand an end to bank‐secrecy laws in places such as Luxembourg, Monaco andSwitzerland, and harmonize taxes throughout Europe in order to stamp out“harmful tax competition.” So far, however, not one of these measures hasyielded fruit, nor are they likely to so long as other countries see thebenefit in preserving a tax advantage.
What would happen, one wonders, if France were to change the incentivestructure, lowering taxes to eliminate the tax‐driven black market whileimproving enforcement? To judge by the experience of other countries, thecountry’s tax base would rise pari passu with a burgeoning economy.Better yet, France may even get Laetitia Casta back.