On Taxes, the French Show the Way

By May 7, 2007Economy

In our study* last year on structural costs, “The Escalating Cost Crisis,” corporate taxes represented the largest percentage of the 31.7 percent cost disadvantage manufacturers in the U.S. face compared to our nine major foreign competitors. Only Japan reported a higher statutory corporate tax rate than the United States.

Other countries had been cutting taxes, making their manufacturers more competitive, while the U.S. stood still. As NAM President John Engler likes to say, “By standing still, we’re falling behind.”

And soon to be further behind, if France’s new president, Nicolas Sarkozy, is able to follow through on his campaign pledges to reform his country’s statist, stagnant economy. Given his electoral mandate, we expect he will. From Bloomberg:

Provided his party wins June parliamentary elections, lawmakers’ first task will be to vote on Sarkozy’s 10 billion euro plan ($14 billion) to scrap payroll charges and income taxes on overtime hours. It would also eliminate inheritance taxes for all but the richest 5 or 10 percent and introduce a tax deduction for mortgage-interest payments.

“If Sarkozy lives up to his promises, this could be the beginning of long overdue structural reforms for the French economy,” said Eric Chaney, chief European economist for Morgan Stanley and a former French finance ministry forecaster.

*The study was conducted by NAM, the Manufacturing Institute, and Manufacturers Alliance/MAPI.

UPDATE (2:10 p.m.): John Fund, On the Trail:

It’s certainly true that Mr. Sarkozy styled himself as a reformer who wants to arrest the pessimism gripping a country where polls show 70% of voters think their country is in decline. He advocated tax cuts, allowing overtime, and shrinking the central government’s bloated bureaucracy by filling only half of the slots opened up by retirement. “The best social model is one that gives work to everyone,” he would tell audiences in calling for more dynamism in the economy. “That is no longer ours.”

But at the same time the former interior and finance minister has shown a willingness to bail out failing French companies and to embrace greater protectionism. Mr. Sarkozy is certainly no heir to Margaret Thatcher or even Tony Blair, but he is someone that free-market advocates can at least do business with.