I stumbled upon an amusing Reuters video about France's decision to cut sales tax for restaurants. It shows restaurant workers expressing delight that -- surprise! -- lower taxes have helped their business. Here's the short clip:
The clip explains:
Value added tax (sales tax) will fall to 5.5% from 19.6%.
That's a drastic cut, and it shows. Customers are coming more often and ordering more food. Restaurants are planning on hiring more people.
Perhaps France is getting a glimpse of what lower taxes can do. This is basic economics, but it's nice to see theory in action. I hope this lesson -- that lower taxes for business create jobs, increase revenue and provide consumers with greater purchasing power -- is noted there and abroad.
That's a great theory - but one that ignores the specifics of the situation.
French restaurants didn't suffer a loss in business just because sales taxes were high. They suffered because chains like McDonalds registered as take-out establishments, even though 70% of French customers dine-in. And (guess what!?) take-out establishments are only levied a 5.5% tax rate by the French government.
That's the point that every libertarian/conservative/Laffer curve theorist has missed since the beginning of time. It's not just tax brackets that matter - it's RELATIVE tax brackets. French restaurants LOST business to the fastest growing McDonalds chain in the world because they were forced to charge RELATIVELY usurious tax rates - and they lost business to local competitors as a result.
It's not basic bloody economics that lower tax cuts lead to greater wealth. After a certain point, when you've eliminated tax disparities, you are chasing diminishing returns. And that's what we've seen time and time again - governments that lower tax rates from those excessive to their immediate neighbors and competitors see a boost in production (Russia a great example) - those that lower tax rates past a threshold of competative advantage see a dramatic drop in government tax revenues.