In principle, Helga Moser doesn't have anything against paying taxes. Like all Germans, the 49-year-old Bonn medical technician has long enjoyed a generous cradle-to-grave welfare system, including a free education and good health care, clean streets, cheap public transport and the reassuring knowledge that she'll get a guaranteed pension when she retires.

FEELING THE TAX HEAT: Europeans pay higher taxes than anyone in the world. A nation-by-nation guide to the lands of lofty levies Click for full-size graphic

Yet Moser can't help noticing that her taxes keep going up. When she began her career on the medical faculty of Bonn University 25 years ago, she paid about one-third of her salary in taxes and social-security contributions. Today it's about half — far more than the 30% levied in neighboring Switzerland and the U.S., or the 27% rate in Japan.

At the same time, beginning next year, the German government will no longer pay for some dental treatment or cover Moser's salary if she falls sick and is off work more than six weeks. That means she'll have to buy her own insurance — taking another slice out of her €1,600 monthly take-home pay. "It's a slow, continual slide," she shrugs. Moser lives frugally, in a house she bought with her sisters seven years ago. Single, she tries not to spend more than €400 per month on food, household and personal expenses, including clothes, so she can pay off the mortgage and have a nest egg saved up when she retires. She enjoys traveling and takes sculpture classes, but only once in her life has she bought something on credit — a secondhand car. "I'm my own Finance Minister," she jokes. "I don't run up debt." Still, if the state didn't take such a big chunk of her income every month, she says she would spend more rather than squirreling it away.

Multiply Moser's lament across 42 million German workers and it's easy to see how high taxes hamper consumer spending and bog down the country's economy. Indeed, having to pay more taxes for less service is a common lament these days in Europe, where taxes and social charges have risen sharply over the past 30 years and are now among the highest in the world. Adding together corporate, personal, social security and value-added tax (VAT), the highest-taxing countries in the world are in Western Europe: France, Belgium, Austria, Italy and the four Scandinavian countries — Sweden, Denmark, Finland and Norway. (Germany and Britain are further down the list, but still ahead of the U.S., Japan, Canada, Mexico and Australia.) This week, a French antitax group is taking out newspaper ads to celebrate "the day of tax liberation." Given the nation's tax burden, it calculates that the French work until July 16 — more than half the year — to pay the government; it's only thereafter that the money they earn goes into their pockets.

Does it have to be that way? Increasingly, economists, financial analysts and even many governments are saying no. Across the Continent, pressure is growing to rethink tax policy to restore vitality to Europe's lackluster economy. In large and small ways, the heavily bureaucratic tax systems in place in most of the Continent are coming under attack — and even governments with the biggest budgetary constraints are being forced to respond. The Austrian parliament in May approved government plans to slash corporate taxes from 34% to 25%, beginning next year. Belgium last year cut its corporate-tax rate to 34% from 40%. Firms operating in Estonia now pay zero tax on profits they reinvest inside the country. In Italy, Prime Minister Silvio Berlusconi promised but then backed away from €12.5 billion in income-tax relief. And even recalcitrant Germany made a small cut in income tax this year as part of a package of measures agreed to in 2003.

The calls for tax cuts are likely to increase as the European economy gains strength; last week, some key forecasts for German growth were revised upward. Political leaders often have a hard time pushing through labor reforms or privatizations, but tax cuts can encourage growth while winning public approval. In some places, there's a ground swell of anger about high taxes and wasteful spending. In Britain, where taxes and spending were slashed by Margaret Thatcher two decades ago, some are outraged at a 40% rise in central-government administration costs over the past five years — more than three times the inflation rate. In France, dozens of successful businesspeople have quit the country to avoid a steep wealth tax that Eric Pichet, a business-school professor in Bordeaux, estimates has resulted in €100 billion of assets leaving France — robbing twice as much revenue as the wealth tax generates.

Among the advocates for change is Paul Kirchhof, a former judge at Germany's Federal Constitutional Court, who has sparked a national debate in Germany with his call for a massive simplification of the current system that would cut the top rate to just 25% from 45% and eliminate hundreds of exemptions. If implemented, his scheme would leave Helga Moser with far more disposable income. But Kirchhof's goals are broader. "If we change the tax system, we'll strike a liberating blow for the economy," he tells TIME.

In France, dozens of small taxpayer groups have sprung up around the country to contest the way local officials spend public money, and a national organization called Contribuables Associés has started ranking members of parliament by their tax-and-spend policy records. "The change of mentality is very recent," says Bernard Zimmern, a businessman who is helping to fund the national campaign. Retired IBM engineer Michel Vergnaud founded one of the local associations in Lyons four years ago "out of curiosity," he says — and quickly

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nginx/1.14.0 (Ubuntu) discovered that local taxes in the city have been rising at three times the inflation rate. Last year his group won a landmark court case against the city and Rhône regional authorities, which forced officials in both bureaucracies to work longer hours. "They're not spending because of need, but because they have the tax revenue," fumes Vergnaud.

The pressure on governments to revamp their tax policies isn't just coming from activists. In a key ruling last September in a case involving Dutch automotive supplier Bosal, the European Court of Justice argued that national tax rules must treat business costs relating to investments elsewhere in the E.U. the same way they are treated at home. That decision gives tax authorities across Europe little choice but to overhaul their tax laws, which have traditionally taxed national operations differently from international ones. "There's a lot of tension and pressure on corporate tax systems" from the court, says lawyer Wouter Paardekooper of the Amsterdam office of Baker & McKenzie, which represented Bosal. But the newest and perhaps the biggest force for change comes from the east. Many of the new E.U. members have substantially lower rates for both companies and individuals than their Western neighbors. Consultants Ernst & Young calculate that, on average, the effective tax rate for companies is 21.3% in the new E.U. states, substantially less than the 29.4% average in the old members. The result: tax policy is suddenly high on every European government's agenda, whether they like it or not.

France, Germany and some other nations are trying to resist such pressures by calling for a "harmonization" of E.U. taxes — in other words, raising everyone else closer to their higher levels. But there's no majority in Brussels for tax harmonization, and swimming against the tide is hard, especially given the heavy impact of taxes on Europe's economy. In 1970, total tax revenue measured as a percentage of the economy was roughly on a par in Western Europe and the United States. Today, it's far higher in Europe, at about 40% of gross domestic product in the E.U. compared with about 29% in the U.S. Income taxes have jumped, but so too have taxes on social insurance contributions and vat on goods and services. "Everyone feels like they are paying too much tax — and they are," says Baudouin Velge, chief economist at the Federation of Belgian Enterprises.

Reducing that burden wouldn't just help taxpayers; it could help the entire euro zone, which is suffering from a long-term decline in economic vibrancy. While growth in the E.U. averaged about 3% per year in the 1970s, it slowed to 2% in the 1990s. In the U.S., by contrast, it has remained steady at an average of 3.2%, according to the Paris-based Organization of Economic Cooperation and Development (O.E.C.D.).

How do high taxes drag down the rest of the economy? Look at the "tax wedge" — the difference between what it costs to employ a worker (wages and social-security charges) and the worker's take-home pay. In Belgium and Germany, this gap peaked at more than 50% last year. In other words, a single person without children, like Moser, on average took home less than half of what her employers paid to employ her. France, Austria, Sweden and Italy were close behind, with tax wedges on or above 45%. Taking away such a big slice of income saps people's motivation to work, while also pushing up the cost of labor and making companies reluctant to create new jobs. "Lots of countries are concerned that Europe is losing ground — and rightfully so," says Philippe Archinard, the chief executive of Innogenetics, a Belgian biotech company with 600 employees. He says doing business is so much costlier in Belgium that "gradually all R. and D. centers are going to go abroad."

While individuals have a hard time escaping income taxes, companies can vote with their feet. The Austrian Business Agency — which deals with prospective foreign investors — says it has been inundated with inquiries after the government announced its intention to slash corporate rates; in the first three months of this year alone, it dealt with 900 requests, a 77% increase in the number in the same period a year ago. Almost 700 of them came from Germany. A growing number of international companies — including eBay and General Mills of the U.S., and Japan's Unisunstar — are choosing to bypass the E.U. altogether and base their European headquarters in Switzerland. A recent survey by Arthur D. Little of firms that have done so shows that Swiss corporate tax advantages are the leading reason for the decision, ahead of other factors such as quality of life and labor flexibility.

So it's little surprise that Europe's governments are taking a hard look at how to fix their tax mess. As the debate takes off across Europe, three potent ideas are emerging that suggest it may be possible to make a difference without tipping even further into the red.

Smarter Taxes
One "old" E.U. country that likes to boast about its tax policies is Ireland, which has over the past 15 years pared back the basic rate for personal income tax to 20% from 35% and has also slashed capital gains and corporate taxes. The tax wedge in Ireland has dropped by 18 percentage points to 24.5% over the past seven years. That means that for every €100 earned, an average single Irish person gets to take home €75.50; a Belgian earning the same, by contrast, takes home just €45.50. Introducing his 2004 budget in February, Finance Minister Charlie McCreevy boasted that this low-tax policy has driven unemployment in Ireland to a historical low, well below 5%.

Could bigger countries adopt the Irish model? Many argue that Ireland's remarkable economic performance in the '90s was due at least as much to E.U. subsidies as to any fiscal policy. Moreover, Irish growth has slowed, and lower tax revenues now mean budget deficits. But the appeal of the Irish experience is that simpler taxes, as well as lower taxes, can have an impact. Twenty years ago, Ireland had six different income-tax brackets; today it has just two.

That's hugely appealing to tax reformers like Kirchhof in Germany, who believe that many of his nation's problems stem from a tax system that has grown too convoluted, with exemptions and loopholes that are counterproductive or even contradictory. Published last fall, his scheme would amount to a massive simplification of the tax system, eliminating all tax breaks and introducing a top 25% rate on annual income of more than €20,000, with a small number of standardized deductions. Kirchhof believes it could bring about a cultural shift as people are rewarded rather than penalized for success. "We have a system that is riddled with privileges. One benefits at the expense of another," he says. "It's completely unequal."

Kirchhof reckons his proposals are tax neutral — meaning that they won't cost the government anything. Not everyone agrees with the calculations, but his paper nonetheless stirred up a flurry of imitators. The opposition Christian Democrats as well as the Free Democrats have both since published their own tax-simplification plans. And most significantly, the German government's own Council of Economic Experts, nicknamed "the Five Wise Men," last November attacked German tax rules as "chaotic" and proposed a comprehensive fiscal overhaul that would cut the top rate for income tax to about 35%. To help pay for the cuts, the Wise Men proposed eliminating €25 billion of annual tax breaks.

Another common complaint about European taxes is that they send the wrong economic signals. In much of Europe, labor and consumption are taxed — through social-security contributions and vat — at far higher rates on average than in the U.S., where property and corporate income taxes tend to be higher. That's at odds with the stated goals of many E.U. governments to boost consumer spending, employment and innovation. Some governments are already tinkering with their policies. In Belgium, for example, the government recently approved measures that would halve the social-security burden on firms that employ scientific researchers. France has gone even further. This year it established a new category of small company, the "Young Innovative Enterprise." These are completely exempt from tax on profits in the first three years and given a 50% reduction for two further years.

Unlike the U.S., Europe has a powerful, Continent-wide tax instrument at its disposal: vat. (Sales tax in the U.S. is administered by states, and thus can't be coordinated for economic effect.) Many economists argue that consumption taxes such as vat are inherently fairer than other types of taxation because you only pay the tax if you buy something. Some even argue that vat rates — which are now largely aligned in the E.U. — could be raised and lowered depending on how the economy is doing, just as the European Central Bank raises interest rates to prevent overheating, and lowers them in a downturn. University of Delaware economist Laurence Seidman advocates setting up an automatic mechanism under which cuts in vat are triggered by, say, rising unemployment. Other economists call for a one-year cut in vat to provide a short-term stimulus to the euro-zone economies. A study by economists at the European Commission shows that a 1% vat cut could boost the economies of major E.U. nations by about 0.5% — or more than double the impact of a similar-sized reduction in income tax or corporate taxes. But the idea faces stiff opposition.

Better Budgets
Jon Blondal says it's no coincidence that nations currently running budget surpluses, such as Canada, New Zealand, Finland, Sweden and Australia, also happen to be the ones that have modernized and reformed their budgets. "The process is key," says Blöndal, an Icelander who regularly confers with treasury officials from around the world in his role as a budget expert at the O.E.C.D. in Paris.

What does modernizing a budget mean? Consider Sweden, which made the switch a decade ago during a deep economic crisis. The government slashed spending and adopted a "top-down" budget process. Previously, ministries and

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nginx/1.14.0 (Ubuntu) government agencies would submit requests for increased funding, which would then become the focus of a tough debate inside the government and in parliament. Almost inevitably, the budget would grow from its initial projections, and no ministry or department had an incentive to reduce spending.

Under the new procedure, the government and parliament set a ceiling for total spending. They allocate a portion of that total to ministries and agencies who then decide how it should be spent. So if there's a new project that needs financing, the funds have to be taken from elsewhere. The Finance Ministry gives wide leeway to the departments to make their own spending decisions. In Sweden, Knut Rexed, who was chief adviser to the Ministry of Finance during the budget process changeover, says the change allowed the government to cut spending by about 11% without most people noticing — except within ministries and agencies. He adds: "All of Europe is now taking steps in this direction."

In Canada the government fixes its initial budget number according to economic growth estimates by private-sector forecasters. In Finland, under a freedom of information act, the internal budget submissions from departments to the Finance Ministry are public. The fear of being publicly shamed is a powerful incentive not to put in exaggerated demands. "We're pretty satisfied how the money is spent," says Teemu Lehtinen, who heads Finland's 190,000-member Taxpayers' Association.

Cut Waste, Fraud and Abuse
Last year the French justice ministry set up several homes for teenage delinquents. For one of the first, it acquired an 18th century château in Normandy with a big park and swimming pool, where it employs 27 people to oversee eight young multiple offenders (one of whom recently escaped). The annual cost to French taxpayers: €1.7 million, not including €610,000 for the château. The acquisition prompted the resignation of all 11 members of the Saint-Denis-le-Thiboult council — and became a cause célèbre among antitax campaigners. Contribuables Associés claims the French government wastes about €100 billion annually. That may be high, but it's indisputable that the French public service has swollen by about 30% since 1980, to the point where 1 in every 4.3 French citizens now works for the government and the salaries of these fonctionnaires now eat up 43% of the national budget. Finance Minister Nicolas Sarkozy says reducing government employees is "a major objective," and has already announced plans to axe 5,000 tax inspectors.

For an élite group of French men and women, the most egregious tax is the "solidarity tax on fortunes," probably the world's broadest tax on wealth, rather than income. Enacted in its current form in 1988 under François Mitterrand, the tax is a levy on anyone whose worldwide assets exceed €720,000. That means the values of stock and bonds, bank accounts, real estate — even personal belongings. About 300,000 French citizens and residents are subject to it, and it causes some talented taxpayers to flee.

Take entrepreneur Denis Payre. In 1990, he co-founded a French software company called Business Objects. The company quickly took off, and was listed on the nasdaq in 1994. By 1997, Payre was looking to withdraw from the day-to-day business. "I had to travel around the world constantly, and I had married and wanted to get to know my kids," he says. That's when the troubles started. As long as he was actively managing the firm, he was exempt from the wealth tax. When he retired, he became liable. But his money was tied up in Business Objects' very volatile stock.

With a stake in the firm that fluctuated in value around €25 million, his wealth-tax bill alone amounted to half a million dollars every year. On top of that, he also had to pay tax on the capital gains he made from selling the stock, which he needed to do to pay the wealth tax. It was time to leave the country.

Leaving "was painful. There are very few tech success stories in Europe and I felt I was penalized because I had done good things for my country," Payre says. As for France, "it's shooting itself in the foot," he contends. "The average French person thinks the rich have to pay. They don't realize that the rich are also the job and wealth creators. If you tax them like crazy they won't do it anymore." Today, Payre lives in and does business out of Belgium.

In Germany, the Taxpayers' Federation regularly generates headlines by publishing a "black book" of wasteful practices. "We've pretty much reached the limit," rages Michael Jäger, who helps run the federation's Bavarian chapter. Among recent examples in Jäger's backyard: an artificial lake near Munich airport that's costing almost €20 million to build instead of the budgeted €11 million; a €76,500 traffic light in Garmisch Partenkirchen that only worked for a day before it was dismantled; and a gas station on the grounds of the Bavarian Economics Ministry reserved for government functionaries that makes an annual loss of €40,000. The authorities responsible have noted the complaints, but have not so far moved to resolve them.

Elsewhere, however, such grassroots activism is bringing about small victories. Ask Gabriel Levy. He's a retired doctor in the southern French town of Aubagne, near Marseilles, who has filed a stream of suits against the local mayor and city council in an effort to stop them spending money inappropriately. One of his recent victories was against the mayor for taking out ads in the local paper last year that urged President Jacques Chirac to veto a U.N. resolution on war with Iraq. "That's not the job of a mayor," Levy says. "In the future, they'll have to be more careful." Back in Bonn, Helga Moser doesn't take part in any taxpayers' groups or file suits against local authorities — but that doesn't mean she's indifferent when she sees her tax money going down the drain. She's still cross about a TV program she watched the other day showing how money is being wasted in parts of eastern Germany. "Shame on them," she says. "I am ready to pay taxes, but not to see that the money is spent stupidly." It's a message that may finally be getting across.

• PETER GUMBEL
• Governments across the Continent are finally asking: Can lower taxes revive their economies?