Escape From Tax Hell

By PETER GUMBEL Sunday, July 11, 2004

TAXES AT WORK: This subsidized gas station for Bavarian bureaucrats loses €40,000 a year.

ROBERT FRANCOIS/AFP

In principle, Helga Moser doesn't have anything against paying taxes. Like all Germans, the 49-year-old Bonn medical technician has long enjoyed a generous cradle-to-grave welfare system, including a free education and good health care, clean streets, cheap public transport and the reassuring knowledge that she'll get a guaranteed pension when she retires.

FEELING THE TAX HEAT: Europeans pay higher taxes than anyone in the world. A nation-by-nation guide to the lands of lofty levies Click for full-size graphic

Yet Moser can't help noticing that her taxes keep going up. When she began her career on the medical faculty of Bonn University 25 years ago, she paid about one-third of her salary in taxes and social-security contributions. Today it's about half — far more than the 30% levied in neighboring Switzerland and the U.S., or the 27% rate in Japan.

At the same time, beginning next year, the German government will no longer pay for some dental treatment or cover Moser's salary if she falls sick and is off work more than six weeks. That means she'll have to buy her own insurance — taking another slice out of her €1,600 monthly take-home pay. "It's a slow, continual slide," she shrugs. Moser lives frugally, in a house she bought with her sisters seven years ago. Single, she tries not to spend more than €400 per month on food, household and personal expenses, including clothes, so she can pay off the mortgage and have a nest egg saved up when she retires. She enjoys traveling and takes sculpture classes, but only once in her life has she bought something on credit — a secondhand car. "I'm my own Finance Minister," she jokes. "I don't run up debt." Still, if the state didn't take such a big chunk of her income every month, she says she would spend more rather than squirreling it away.

Multiply Moser's lament across 42 million German workers and it's easy to see how high taxes hamper consumer spending and bog down the country's economy. Indeed, having to pay more taxes for less service is a common lament these days in Europe, where taxes and social charges have risen sharply over the past 30 years and are now among the highest in the world. Adding together corporate, personal, social security and value-added tax (VAT), the highest-taxing countries in the world are in Western Europe: France, Belgium, Austria, Italy and the four Scandinavian countries — Sweden, Denmark, Finland and Norway. (Germany and Britain are further down the list, but still ahead of the U.S., Japan, Canada, Mexico and Australia.) This week, a French antitax group is taking out newspaper ads to celebrate "the day of tax liberation." Given the nation's tax burden, it calculates that the French work until July 16 — more than half the year — to pay the government; it's only thereafter that the money they earn goes into their pockets.

Does it have to be that way? Increasingly, economists, financial analysts and even many governments are saying no. Across the Continent, pressure is growing to rethink tax policy to restore vitality to Europe's lackluster economy. In large and small ways, the heavily bureaucratic tax systems in place in most of the Continent are coming under attack — and even governments with the biggest budgetary constraints are being forced to respond. The Austrian parliament in May approved government plans to slash corporate taxes from 34% to 25%, beginning next year. Belgium last year cut its corporate-tax rate to 34% from 40%. Firms operating in Estonia now pay zero tax on profits they reinvest inside the country. In Italy, Prime Minister Silvio Berlusconi promised but then backed away from €12.5 billion in income-tax relief. And even recalcitrant Germany made a small cut in income tax this year as part of a package of measures agreed to in 2003.

The calls for tax cuts are likely to increase as the European economy gains strength; last week, some key forecasts for German growth were revised upward. Political leaders often have a hard time pushing through labor reforms or privatizations, but tax cuts can encourage growth while winning public approval. In some places, there's a ground swell of anger about high taxes and wasteful spending. In Britain, where taxes and spending were slashed by Margaret Thatcher two decades ago, some are outraged at a 40% rise in central-government administration costs over the past five years — more than three times the inflation rate. In France, dozens of successful businesspeople have quit the country to avoid a steep wealth tax that Eric Pichet, a business-school professor in Bordeaux, estimates has resulted in €100 billion of assets leaving France — robbing twice as much revenue as the wealth tax generates.

Among the advocates for change is Paul Kirchhof, a former judge at Germany's Federal Constitutional Court, who has sparked a national debate in Germany with his call for a massive simplification of the current system that would cut the top rate to just 25% from 45% and eliminate hundreds of exemptions. If implemented, his scheme would leave Helga Moser with far more disposable income. But Kirchhof's goals are broader. "If we change the tax system, we'll strike a liberating blow for the economy," he tells TIME.

In France, dozens of small taxpayer groups have sprung up around the country to contest the way local officials spend public money, and a national organization called Contribuables Associés has started ranking members of parliament by their tax-and-spend policy records. "The change of mentality is very recent," says Bernard Zimmern, a businessman who is helping to fund the national campaign. Retired IBM engineer Michel Vergnaud founded one of the local associations in Lyons four years ago "out of curiosity," he says — and quickly [an error occurred while processing this directive] discovered that local taxes in the city have been rising at three times the inflation rate. Last year his group won a landmark court case against the city and Rhône regional authorities, which forced officials in both bureaucracies to work longer hours. "They're not spending because of need, but because they have the tax revenue," fumes Vergnaud.

The pressure on governments to revamp their tax policies isn't just coming from activists. In a key ruling last September in a case involving Dutch automotive supplier Bosal, the European Court of Justice argued that national tax rules must treat business costs relating to investments elsewhere in the E.U. the same way they are treated at home. That decision gives tax authorities across Europe little choice but to overhaul their tax laws, which have traditionally taxed national operations differently from international ones. "There's a lot of tension and pressure on corporate tax systems" from the court, says lawyer Wouter Paardekooper of the Amsterdam office of Baker & McKenzie, which represented Bosal. But the newest and perhaps the biggest force for change comes from the east. Many of the new E.U. members have substantially lower rates for both companies and individuals than their Western neighbors. Consultants Ernst & Young calculate that, on average, the effective tax rate for companies is 21.3% in the new E.U. states, substantially less than the 29.4% average in the old members. The result: tax policy is suddenly high on every European government's agenda, whether they like it or not.