Taking Its Cue From Neighbors, France Announces Major Tax Cuts

Few people, it seems, are more intimately acquainted with taxes than the French. More than 45% of the wealth generated nationwide is grabbed by the revenue man, one of the world’s biggest tax bites. The average adult works seven months of the year to pay taxes, direct and indirect.

On Thursday, the government decided enough was enough. It announced an ambitious package of tax reductions worth nearly $16.5 billion over three years, beginning in 2001.

“It is fair that the French profit directly from the good results of the country,” Finance Minister Laurent Fabius said in unveiling the measures.

Forcing the government’s hand was a wave of competitive tax cuts sweeping Western Europe, a widespread feeling among French citizens that the benefits of economic revival haven’t been trickling down fast enough, and disgruntlement over the high price of heavily taxed petroleum products.

Furious that marine fuel has nearly doubled in price in the past year, French fishermen this week blockaded the main ports on the Mediterranean and English Channel, halting service on ferries and stranding tens of thousands of Britons and other foreigners in France.

French taxi drivers were planning to snarl road traffic nationwide today to protest the high price of gasoline, up 30% this year. Farmers and truck drivers, irked at a 50% rise in the price of diesel fuel, organized their own protests.

Keeping Business Alive

Financial analysts said the newfound zeal of Western European governments for taking less of their citizens’ income is driven first by the desire to attract new industrial investment or ensure that existing businesses can compete with foreign rivals.

It’s a simple matter of “preserving the attractiveness” of France as a place to do business and work, Fabius has said.

Growth in the 11 European Union countries using the euro currency is forecast to average a robust 3.4% this year, meaning that tax receipts have hit all-time highs. In some countries, including Britain, sales of licenses for a new generation of mobile telephone have meant windfall income for governments.

But France’s finance minister has admitted that he is worried about a backlash at the ballot box from citizens not yet tasting the fruits of the boom they read about daily in newspapers or hear about on television.

In an essay in a French newspaper last week, Fabius also said high taxes are deterring employers from making additional hires, slowing the pace of economic expansion.

“A fundamental principle must be that work is always better-rewarded than not working,” Fabius wrote.

It was Germany, Europe’s largest economy, that moved first. In December, it announced a plan to slash taxes for citizens and businesses by $27.3 billion in 2001-05. The proposal was approved by Parliament in July.

“Germany had a very heavy tax system, so it was forced to reduce it,” Christel Rendu, economist at Morgan Stanley Dean Witter investment bankers in London, said in a telephone interview Thursday. “Now it has reduced it so much that it is in a privileged position. The other countries have had to follow.”

Cuts Across Europe

Economists said putting more money back in taxpayers’ pockets also is a way to keep Europe firmly on the economic upswing by stimulating greater demand for goods and services. The British government budget for 2000-01, which began in April, contains enough tax cuts and social spending increases that the average couple will have $668 more in annual disposable income, and $1,235 if they have children. The poorest families will pay no income tax starting next April.

Italian Finance Minister Ottaviano Del Turco promised recently that his nation “will not be the last to reduce taxes” and said cuts to be announced later this month might be even more generous than those in Germany and France.

Belgium, another traditionally high-tax country, on Tuesday announced a three-year reduction in income and payroll taxes totaling $2.9 billion. In Ireland, a national agreement has called for a phased tax cut of 10% overall, along with wage increases spread over 33 months and totaling 15.75%.

In Spain, the government has promised to cut taxes by 2004; to encourage savings, it already has slashed the rates on capital gains taxes. In Switzerland, the legislature is studying a government proposal for more than $1 billion in relief, including cuts in federal income tax.

Under the measures announced by Fabius, income taxes in France will be reduced progressively in all brackets, and the top marginal rate decreased from 54% to 52.5%. The tax on businesses will be scaled back from 37% to 33.3%.

To try to quell Gallic ire over petroleum prices, Fabius offered a series of proposals, including reduced levies on home heating oil and a freeze on the diesel fuel tax. To make up for that lost revenue to the government, he proposed a windfall tax on the oil companies.

To placate the fishermen, Agriculture Minister Jean Glavany on Thursday announced a reduction in payroll taxes and port fees to compensate for increases in the price of marine fuel. Afterward, the fishermen called off their protests.

Hundreds of British tractor-trailers and vacationers in cars returning home remained stuck at the French entrance to the Channel Tunnel, the only way to cross to Britain because of the fishermen’s blockade of Calais, Dunkirk and other major ports. British Deputy Prime Minister John Prescott called it “totally unacceptable” that “a knife be held to Great Britain’s throat” because of a French labor dispute.