3/28/2005

Le Tax: Do the French have it right?

I learned something new in an article at money.com about the dual tax code that was first established by the French and has since been adopted by nearly all developed nations out there, except the U.S. The article offers a simplified overview of how the system works and how it could be adopted by President Bush if the correct tweaks are made.

So basically what is potentially being proposed is to have a 25% tax on all income above $100k (less than that is tax-free), and then there is a secondary federal tax on all consumer goods or a consumption tax. This type of tax is intended to encourage people to save more of their money and allows the government to operate with an extremely efficient tax code.

Opponents to these ideas say it is an unfair tax burden on the poor because a greater percentage of their income is spent on consumer goods. They also point out that it has been difficult for European countries to have restraint when it comes to keeping the consumtion tax at a constant and reasonable rate, since it is so easy to increase by 1% which then cranks up government revenues substantially.

3 comments:

scott said...

I wonder what the tax rate under this system would have to be to generate the same tax revenue as the US goverment is currently collecting under its present tax code. It could easily be more than 50%. That would have an enormous effect on the economy. For example, if I knew that I had to pay out more than half of the money I made over $100k to the government, I might take a job that doesn't require as much work (assuming I get paid for the amount of effort I put into my job) and enjoy other non-monetary benefits. This would kindof work against the whole system, wouldn't it?

Fred said...

The French have a few things right, it's for sure, but I'm not so sure that this is one of them. Just like Scott said, I think many people would try and work the system by not making as much so that all of the taxes wouldn't have to be paid. If this were to happen, we would be hindering some of our greatest money producers (who boost the economy.) That is something none of us want because it is those guys who help increase "our" standard of living. Besides, do we really want the government to have much more money than it already does? We see with ease how many times our tax dollars have been unwisely spent.

Dr. Tufte said...

The reporter in this article is underinformed. The U.S. already has a system like this - with an income tax and a sales tax.

One difference is that in the U.S. the sales tax is predominantly local, whereas it is predominantly funding national government in other countries. If the decentralization and federalism of the U.S. system has value, then this is a bad idea.

Another difference is that these consumption taxes in other countries are primarily value-added rather than sales taxes. This makes them a little easier to hide from voters.

In general though, this "French" system is a better one. The reason is that income is either consumed or saved - for later consumption. So an income tax punishes savers, while a VAT does not.

Scott's figure of 50% is way out of line. A national VAT in the range of 25-30% could probably cover all the taxes currently collected by the Federal government.