Dodging Taxes in the Old World

In the lore of tax collecting, there is nothing more enduring than the image of the wily French farmer hiding his earnings in his mattress or the Italian maintaining a separate set of books to deceive the state treasury. The stereotype is at best only partly true. As a percentage of gross domestic product, European taxes are substantially greater than those in the U.S.

A society as diverse as Europe's naturally produces many variations. The payments needed to support Sweden's welfare benefits would strike most Americans as confiscatory--a worker earning $ 10,800 a year is likely to be hit with taxes of 55%--but compliance is high. In Italy, on the other hand, tax dodging is a national tradition to rival pasta and grand opera. Roughly 20% of Italy's potential taxes go uncollected. While its stockbrokers declare an average annual income of only $6,900, Italy is one of Europe's leading importers of Rolls-Royces and caviar. The unofficial estimate is that 6 million Italian workers, one-third of the labor force, are employed in the underground economy. The latest attempt at a crackdown: a law to make cash registers compulsory in the 800,000 (out of 1.2 million) retail stores that now keep their money in a drawer.

European taxation evolved historically according to different customs. In France, for example, no aristocrats paid any taxes until the Revolution of 1789; it was considered vulgar. Even today there is no tradition of computing one's own tax. That is the responsibility of the neighborhood tax collector, and what he doesn't know won't hurt anyone. Instead of relying on income taxes, French authorities in the '50s introduced the value-added tax, which collects anywhere from 5% to 33% on most commercial transactions. Like any sales tax, it implicitly discriminates against the poor, but the Socialist regime under President Franc,ois Mitterrand is trying to balance that with special new taxes--on jewelry, yachts and country chateaus--that apply almost exclusively to the rich.

Britain too has a tradition of tax evasion, as King George III saw in 1773, when some of his disrespectful colonial subjects resisted the royal tax collectors by dumping British tea into Boston Harbor. But it has a much stronger tradition of paying the crown what is due. Though rates are high, from an average of 30% to as much as 75%, the opportunity for mischief is limited: more than 90% of all British income taxes are withheld as payroll deductions.

In Germany too an elaborate welfare system that can take up to 60% of an average worker's pay tempts many to cheat. Says a Finance Ministry official: "The imagination of the German taxpayer knows no bounds." One fertile field involves the 2 million foreign workers, who are often paid in cash for construction jobs. All told, the "shadow economy" costs the authorities an estimated $10 billion in unpaid taxes, but the less imaginative Germans dutifully pay far more: $156 billion.

When one compares the major economies, those who pay the least are not the Europeans but the Japanese. Their total tax payments amount to only 26.1% of gross domestic product, and the Japanese resist even those with tenacity and skill. They still maintain a largely cash economy (checks are almost unknown), particularly at the retail level, where Japan has about 100,000 more stores than the U.S.

Japanese tax laws are fairly lenient. Doctors, for example, are allowed to deduct 72% of their incomes, and the first $13,000 invested in postal-savings accounts earn tax-free interest. But whenever the authorities start investigating, they make sad discoveries. An audit of 50 people who had registered new luxury cars worth $40,000 or more, for instance, found that eleven reported having no income at all. Of 116 cram schools that help Tokyo children pass their exams, 109 were discovered to be concealing income. And last week the national Tax Administration Agency said it had audited 24 prosperous Tokyo dentists. Their average concealed income: $225,000. This file is automatically generated by a robot program, so viewer discretion is required.