Taming Taxes In Europe

Germany and France are cutting taxes, finally. Countries such as Britain and the Netherlands realized years ago that high taxes were driving jobs and capital elsewhere. They cut their tax levels and today enjoy the benefits. The Netherlands' 2.6% unemployment rate is less than a third that of Germany and France.

In contrast, Europe's two biggest economies have sat by as jobs and capital fled to more favorable locales. They bear much of the blame for the euro's recent plunge to below parity with the dollar. Ironically, it has taken socialist governments in both countries to finally deliver relief. They've been motivated less by ideology than by necessity. If France and Germany waited much longer, they would have risked a disastrous slide in global competitiveness.

Now, though, they have to get tax reform right. France, whose tax-relief plan is still vague, seems likely to give most of the money back to individuals. As painful as it would be for France's socialists, they should also cut top tax rates, which are now as high as 60%. Otherwise, France won't be able to retain high-tech professionals, an increasingly mobile and multilingual workforce that goes where the money is.

Germany's plan to cut its top tax rate to 45% by 2005, from 53%, marks a step in the right direction. Cuts in corporate taxes that will bring the effective rate, including local taxes, to 38.6% by next year, from 51.8%, are also good. But the tax plan will impose a higher levy on small startup companies than on big corporations. That's the wrong approach for a country just starting to enjoy an entrepreneurial boom. If France and Germany can show a little courage and pragmatism, and apply tax reform in a way that will maximize growth, they may even begin to attract high-tech investment from the Silicon Valley.

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