Escape From Tax Hell

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Unlike the U.S., Europe has a powerful, Continent-wide tax instrument at its disposal: vat. (Sales tax in the U.S. is administered by states, and thus can't be coordinated for economic effect.) Many economists argue that consumption taxes such as vat are inherently fairer than other types of taxation because you only pay the tax if you buy something. Some even argue that vat rates — which are now largely aligned in the E.U. — could be raised and lowered depending on how the economy is doing, just as the European Central Bank raises interest rates to prevent overheating, and lowers them in a downturn. University of Delaware economist Laurence Seidman advocates setting up an automatic mechanism under which cuts in vat are triggered by, say, rising unemployment. Other economists call for a one-year cut in vat to provide a short-term stimulus to the euro-zone economies. A study by economists at the European Commission shows that a 1% vat cut could boost the economies of major E.U. nations by about 0.5% — or more than double the impact of a similar-sized reduction in income tax or corporate taxes. But the idea faces stiff opposition.

Better Budgets
Jon Blondal says it's no coincidence that nations currently running budget surpluses, such as Canada, New Zealand, Finland, Sweden and Australia, also happen to be the ones that have modernized and reformed their budgets. "The process is key," says Blöndal, an Icelander who regularly confers with treasury officials from around the world in his role as a budget expert at the O.E.C.D. in Paris.

What does modernizing a budget mean? Consider Sweden, which made the switch a decade ago during a deep economic crisis. The government slashed spending and adopted a "top-down" budget process. Previously, ministries and

	They're not spending because of need, but because they have the tax revenue — MICHEL VERGNAUD, Lyons taxpayers' group

government agencies would submit requests for increased funding, which would then become the focus of a tough debate inside the government and in parliament. Almost inevitably, the budget would grow from its initial projections, and no ministry or department had an incentive to reduce spending.

Under the new procedure, the government and parliament set a ceiling for total spending. They allocate a portion of that total to ministries and agencies who then decide how it should be spent. So if there's a new project that needs financing, the funds have to be taken from elsewhere. The Finance Ministry gives wide leeway to the departments to make their own spending decisions. In Sweden, Knut Rexed, who was chief adviser to the Ministry of Finance during the budget process changeover, says the change allowed the government to cut spending by about 11% without most people noticing — except within ministries and agencies. He adds: "All of Europe is now taking steps in this direction."

In Canada the government fixes its initial budget number according to economic growth estimates by private-sector forecasters. In Finland, under a freedom of information act, the internal budget submissions from departments to the Finance Ministry are public. The fear of being publicly shamed is a powerful incentive not to put in exaggerated demands. "We're pretty satisfied how the money is spent," says Teemu Lehtinen, who heads Finland's 190,000-member Taxpayers' Association.

Cut Waste, Fraud and Abuse
Last year the French justice ministry set up several homes for teenage delinquents. For one of the first, it acquired an 18th century château in Normandy with a big park and swimming pool, where it employs 27 people to oversee eight young multiple offenders (one of whom recently escaped). The annual cost to French taxpayers: €1.7 million, not including €610,000 for the château. The acquisition prompted the resignation of all 11 members of the Saint-Denis-le-Thiboult council — and became a cause célèbre among antitax campaigners. Contribuables Associés claims the French government wastes about €100 billion annually. That may be high, but it's indisputable that the French public service has swollen by about 30% since 1980, to the point where 1 in every 4.3 French citizens now works for the government and the salaries of these fonctionnaires now eat up 43% of the national budget. Finance Minister Nicolas Sarkozy says reducing government employees is "a major objective," and has already announced plans to axe 5,000 tax inspectors.

For an élite group of French men and women, the most egregious tax is the "solidarity tax on fortunes," probably the world's broadest tax on wealth, rather than income. Enacted in its current form in 1988 under François Mitterrand, the tax is a levy on anyone whose worldwide assets exceed €720,000. That means the values of stock and bonds, bank accounts, real estate — even personal belongings. About 300,000 French citizens and residents are subject to it, and it causes some talented taxpayers to flee.

Take entrepreneur Denis Payre. In 1990, he co-founded a French software company called Business Objects. The company quickly took off, and was listed on the nasdaq in 1994. By 1997, Payre was looking to withdraw from the day-to-day business. "I had to travel around the world constantly, and I had married and wanted to get to know my kids," he says. That's when the troubles started. As long as he was actively managing the firm, he was exempt from the wealth tax. When he retired, he became liable. But his money was tied up in Business Objects' very volatile stock.

With a stake in the firm that fluctuated in value around €25 million, his wealth-tax bill alone amounted to half a million dollars every year. On top of that, he also had to pay tax on the capital gains he made from selling the stock, which he needed to do to pay the wealth tax. It was time to leave the country.

Leaving "was painful. There are very few tech success stories in Europe and I felt I was penalized because I had done good things for my country," Payre says. As for France, "it's shooting itself in the foot," he contends. "The average French person thinks the rich have to pay. They don't realize that the rich are also the job and wealth creators. If you tax them like crazy they won't do it anymore." Today, Payre lives in and does business out of Belgium.

In Germany, the Taxpayers' Federation regularly generates headlines by publishing a "black book" of wasteful practices. "We've pretty much reached the limit," rages Michael Jäger, who helps run the federation's Bavarian chapter. Among recent examples in Jäger's backyard: an artificial lake near Munich airport that's costing almost €20 million to build instead of the budgeted €11 million; a €76,500 traffic light in Garmisch Partenkirchen that only worked for a day before it was dismantled; and a gas station on the grounds of the Bavarian Economics Ministry reserved for government functionaries that makes an annual loss of €40,000. The authorities responsible have noted the complaints, but have not so far moved to resolve them.

Elsewhere, however, such grassroots activism is bringing about small victories. Ask Gabriel Levy. He's a retired doctor in the southern French town of Aubagne, near Marseilles, who has filed a stream of suits against the local mayor and city council in an effort to stop them spending money inappropriately. One of his recent victories was against the mayor for taking out ads in the local paper last year that urged President Jacques Chirac to veto a U.N. resolution on war with Iraq. "That's not the job of a mayor," Levy says. "In the future, they'll have to be more careful." Back in Bonn, Helga Moser doesn't take part in any taxpayers' groups or file suits against local authorities — but that doesn't mean she's indifferent when she sees her tax money going down the drain. She's still cross about a TV program she watched the other day showing how money is being wasted in parts of eastern Germany. "Shame on them," she says. "I am ready to pay taxes, but not to see that the money is spent stupidly." It's a message that may finally be getting across.