France pays high price for tax code

Like a skilled dentist, Richard Van Ham deadens the pain of paying taxes. Juggling volumes of US and French tax codes in his study near the Etoile, with mordant humour but in a reassuring Jimmy Stewart drawl, Van Ham has delivered the bad news to his expatriate clients for more than two decades. The fact that US citizens resident in France must file to Philadelphia as well as Paris gives him a unique perspective.

"I had a dream the other night; the rich came back to France," Mr Van Ham writes in his annual tax season newsletter. Nineteen of 22 players from the World Cup-winning French football team have gone abroad, mostly to Italy, Britain and Spain, where they pay less tax. The top model Laetitia Casta, a bust of whom stands in town halls across the country - depicting "Marianne", the symbol of France - announced last spring that she was moving to London for tax reasons. And a recent edition of Capital magazine estimates that more than half of France's 100 wealthiest families and at least 50,000 rich individuals have also left the country.

If President-elect George W. Bush keeps his promise to eliminate all federal estate taxes, Mr Van Ham predicts many Americans living in France will choose the US as their permanent tax home. Belgium is already a favourite haven for wealthy French people. Brussels charges no tax on stock options and no inheritance tax. But you must really live there.

"French tax inspectors will have a close look at water and phone bills at your `secondary' residence in Paris," Mr Van Ham warns. "You can't keep 300 square metres in the avenue Foch and give them a hotel address in Brussels."

A single person earning 790,000 French francs (#120,430) in France pays nearly 60 per cent of his income in tax. "So you can see why it's hard to keep top management here," Mr Van Ham says. The Finance Minister Laurent Fabius recently reduced the top rate by 0.75 per cent, and there is talk of lowering it to 52.5 per cent by 2003.

But Mr Van Ham advocates a far more radical measure. If France would reduce its maximum flat rate to 33 per cent, he says, the rich would rush back. Rolls Royces, Jaguars and Bentleys would ply the Champs-Elysees and the cafes would fill with celebrities. "Taxes have to be reasonable," Mr Van Ham explains. "If you can keep two-thirds of what you make, you're willing to work." He cites the 1980s Reagan administration. By reducing the top rate from 70 per cent to 28 per cent, Ronald Reagan tripled US tax revenue.

Not only does high taxation drive the rich out of France, it leads to massive cheating within the country. By some estimates, 40 per cent of cafe and restaurant earnings go undeclared. Landlords often request payment in cash. So do plumbers, electricians and cleaners.

"It will be interesting to see what happens when we switch to the euro," Mr Van Ham says. "All that cash has to come out of the woodwork. By mid-February 2002, it has to be changed at the bank - and anyone going in with huge amounts of cash will be looked at. This year, France is going to have a lot of consumption."

Close to half of all French people pay no income tax at all, because they declare earnings below the threshold - Ffr143,000 for a married couple with two children last year.

There are plenty of incentives to remain below the taxable threshold, ranging from free metro tickets to cheaper school meals for children to exemption from the taxe d'habitation.

Most of the creative accounting would be stopped if the government adopted a PAYE system. "It's the biggest single mistake France makes," Mr Van Ham says. "France is the only country in the modern world that does not withhold income tax at the source."

The US and French tax administrations each employ 100,000 people - but the US population is five times that of France. An attempt to streamline the French system last year ended with the resignation of the finance minister. "France survives in spite of its tax policies, and after 20 years as an independent tax accountant, I'm still trying to figure out how it does," Mr Van Ham says. "It's the most inefficient system in the world."

Ultimately, Mr Van Ham admits, the fundamental difference between the US and French systems is one of attitude. The French believe in solidarity and social protection. Indeed, he claims, France is far too generous with the education and health care financed by all that taxation. Ageing foreigners often move to France shortly before retiring to take advantage of the pension system. "This is a culture where money is not a motivator," Mr Van Ham concludes. "For me as an American, it's strange."