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Posts Tagged ‘France’

As part of my collection of honest leftists, I have a bunch of columns highlighting how some advocates of big government (including, to their credit, Bernie Sanders and Andrew Yang) don’t hide from reality.

I’m unalterably opposed to their policies, but at least they openly admit that huge tax increases on ordinary people are needed in order to finance a European-style welfare state.

Now we have two more honest statists to add to our list.

In a column for the Washington Post, Eric Harris Bernstein and Ben Spielberg openly embrace huge tax increases on Americans with modest incomes.

They start by complaining that the tax burden is lower in the United States compared to other western nations.

A no-new-middle-class-taxes pledge…is seriously misguided. Middle-class taxes are a necessary and desirable part of a comprehensive, progressive policy framework… Democratic presidential candidates should make the case for middle-class taxes, not run from them. Here is a basic fact: The United States is a low-tax country. In 2018, the most recent year for which data is available, the United States ranked fourth-lowest in the Organization for Economic Cooperation and Development (a consortium of 36 economically developed countries) in terms of tax revenue collected as a percentage of the economy — behind nations like Germany, Israel, Latvia and Canada. The gap between U.S. and average OECD revenue has widened over time, from 1.3 percentage points of gross domestic product in 1965 to 10 percentage points more recently. That’s nearly $2 trillion per year in forgone revenue from lower tax rates.

Interestingly (though not surprisingly), they don’t acknowledge that Americans are far richer than people in other advanced nations.

So maybe, just maybe, there’s a relationship between tax policy and economic outcomes.

The authors then complain that Reagan triggered an era of lower taxes for the non-rich. Oh, the horror!

In 1979, the year before Ronald Reagan was elected president, the average household in the middle quintile of the income distribution paid 19.1 percent of its income in federal taxes, according to data from the Congressional Budget Office. By 2016, that rate had dropped 5.2 percentage points, more than a quarter, to 13.9 percent. The story is similar for the second and fourth quintiles, which saw their rates decline by 5.6 and 3.8 percentage points respectively over the same period.

Here’s a graphic that accompanied the column.

As you can see, readers are supposed to conclude that the United States is “below average” compared to other developed nations.

What would it mean if politicians reversed all the tax cuts that started under Reagan?

The most revealing factoid from the column is their calculation that middle-income families should be paying $3800 more to the IRS every year.

In 2016, middle-quintile families paid $3,800 less in taxes than they would have at 1979 rates… Low middle-class taxes in the United States stand in stark contrast to the approach in other developed countries, which raise more revenue from the middle class through some combination of taxes on goods and services, payroll taxes, and income taxes.

And don’t forget that the authors don’t just want to go back to 1979 tax rates.

They want America to become another France.

Somehow, I suspect America’s middle-class does not want to be pillaged like their European counterparts.

Amazingly, it gets even worse. The authors want more debt-financed spending and they even endorse the perpetual motion machine of “modern monetary theory.”

Of course, middle-class tax increases are not the only means of providing these public goods. Trillions of dollars can be raised through various taxes on the rich… And funding public investments with government debt, which modern monetary theory’s adherents recommend, is a far better approach than requiring every program to have a designated “payfor.” The government is uniquely positioned to borrow money, and we shouldn’t let unsubstantiated, theoretical concerns about debt levels prevent us from addressing the concrete and urgent needs of today.

I could end the column at this point and simply observe that it’s good to find honest folks on the left, even if they’re wildly wrong.

But the authors of the column unintentionally have given me an excuse to make a key point about taxes, growth, the economy, and the Laffer Curve.

Their graphic inserted above reveals that the overall tax burden in France consumes 46.1 percent of GDP in France, nearly twice as high as the United States.

But high tax rates don’t necessarily produce high tax revenues.

Indeed, I crunched data from the International Monetary Fund and found that per-capita revenues in France are only about 10 percent higher than they are in the United States.

I’m sure Art Laffer won’t be surprised by these results. Neither would Ibn Khaldun.

The bottom line is that most people in Europe are subject to much higher tax rates, which leads to lower living standards and weaker economies, which means there’s not even a lot of tax revenue to spend.

Would your family be willing to give up $10,000, $15,000, or $20,000 of income just so politicians could spend an extra $2,000 per household?

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The Tax Foundation churns out lots of good information, but I especially look forward to their International Tax Competitiveness Index.

It shows how nations rank based on key tax variables such as corporate taxation, personal income tax, and international tax rules.

The latest edition shows good news and bad news for the United States. The good news, as you see in this chart, is that the 2017 tax reform improved America’s ranking from 28 to 21.

The bad news is that the United States is still in the bottom half of industrialized nations.

We should copy Estonia, which has been in first place for six consecutive years.

For the sixth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions. …For the sixth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, a net tax on real estate wealth, a financial transaction tax, and an estate tax. France also has high, progressive, individual income taxes that apply to both dividend and capital gains income.

Here are some other important observations from the report, including mostly positive news on wealth taxation as well as more information on France’s fiscal decay.

…some countries like the United States and Belgium have reduced their corporate income tax rates by several percentage points, others, like Korea and Portugal, have increased them. Corporate tax base improvements have been put in place in the United States, United Kingdom, and Canada, while tax bases were made less competitive in Chile and Korea. Several EU countries have recently adopted international tax regulations like Controlled Foreign Corporation rules that can have negative economic impacts. Additionally, while many countries have removed their net wealth taxes in recent decades, Belgium recently adopted a new tax on net wealth. …Over the last few decades, France has introduced several reforms that have significantly increased marginal tax rates on work, saving, and investment.

For those who like data, here are the complete rankings, which also show how countries score in the various component variables.

Notice that the United States (highlighted in red) gets very bad scores for property taxation and international tax rules. But that bad news is somewhat offset by getting a very good score on consumption taxation (let’s hope politicians never achieve their dream of imposing a value-added tax!).

And it’s no big surprise to see countries like New Zealand and Switzerland get high scores.

P.S. My only complaint about the International Tax Competitiveness Index is that I would like it to include even more information. There presumably would be challenges in finding apples-to-apples comparative data, but I’d be curious to find out whether Hong Kong and Singapore would beat out Estonia. And would zero-tax jurisdictions such as Monaco and the Cayman Islands get the highest scores of all? Also, what would happen if a variable on the aggregate tax burden was added to the equation? I’m guessing some nations such as Sweden and the Netherlands might fall, while other countries such as Chile and Poland (and probably the U.S.) would climb.

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I admired the Tea Party because it was made up of people who were upset by the bipartisan waste and corruption of Washington. And I think they even had a positive – albeit only temporary – effect.

But the “Yellow Vest” protesters in France, as I explain in this interview, are much less coherent.

Needless to say, I’m glad the Yellow Vests are upset about France’s oppressive tax regime. In that sense, they are like the Tea Party in America.

But the Tea Party also wanted smaller government. That doesn’t seem to be the case in France.

Which means the Yellow Vests are either ignorant or hypocritical. After all, the burden of government spending is very onerous in France, and the country also has high levels of debt. So how is the government supposed to lower taxes unless there’s at least some degree of spending restraint?!?

Some of the Yellow Vests seem to think that class-warfare taxes on the rich could be a silver bullet, but that didn’t work for Francois Hollande and there’s no reason to think it would work for Emmanuel Macron.

Ironically, some American politicians think America should copy France.

Veronique de Rugy, who was born and raised in France but is now an American, explained for FEE why her former nation is not a role model.

…what Sanders and AOC actually have in mind is a regime more like that of France. …That’s because there is one aspect in particular that the AOCs and Sanders of the world fail to mention to their followers when they talk about their socialist dream: all of the goodies that they believe the American people are entitled to receive in fact come at a great cost—and so the only way to pay for these goodies is with oppressive and regressive taxes (i.e., taxes heaped on to the backs of the middle class and the poor). …Paris relies disproportionately on social-insurance, payroll and property taxes. …In France, VAT and other consumption taxes make up 24% of revenue… Consumption taxes often fall hardest on the poor and middle class, who devote a greater proportion of their income to consumption.

Amen.

Big government means stifling taxes on lower-income and middle-class taxpayers. This is the point I’ve made, over and over again.

But Veronique notes that France also suffers from excessive regulation and other forms of intervention.

France has all sorts of labor regulations on the books: some preventing firms from firing workers and, hence, creating a disincentive to hire workers in the first place. …the French also have all sorts of “generous” family friendly laws that end up backfiring and penalizing female employment. …All of these policies make the lives of lower and middle-class people harder… The bottom line is this: All those people in America who currently fall for the socialism soup that AOC and Sanders are selling need to realize that if their dream came to pass, they, not the rich—not the bankers and politicians—will be ones suffering the most from the high taxes, high unemployment, and slow growth that go hand in hand with the level of public spending they want.

Interestingly, Bloomberg recently reported that the French want tax cuts.

The French want to pay less tax. That was the clear message that emerged from a two-month “Great Debate” that saw voters present their grievances and suggest remedies to President Emmanuel Macron. …Prime Minister Edouard Philippe said…“The clear message is that taxes must fall and fall fast.” …Macron announced the “Great Debate” in December to respond to the Yellow Vest protests… Among the findings, valued added tax and income tax were the levies that most people listed as needing reduction. …For 75 percent of the participants, the lower taxes must be accompanied by cutting government spending, though they were vague about where the cuts should come, with 75 percent citing “the lifestyle of the state.”

This is all good news. And it does echo polling data I shared back in 2013.

But I’m nonetheless skeptical. I suspect the French (including the Yellow Vests) would be rioting in the streets if the government proposed to curtail the nation’s bloated welfare state.

Though I hope I’m wrong.

In any event, there are signs that President Macron actually does want to move policy in the right direction.

He’s already gone after some bad tax and regulatory barriers to prosperity.

And the Wall Street Journal recently opined about his effort to trim the country’s massive bureaucracy.

The French President is still reeling from months of “yellow vest” protests against his poorly conceived fuel-tax hike, but now he has a much better idea to take on France’s infamously bloated civil service. …Bureaucrats would lose much of their extra time off and instead work the 35-hour week that’s standard in the private economy. The plan would streamline staff reassignments within the civil service and make it easier for local officials to reorganize government departments. …if the reforms happen, they’ll still be a long-overdue step in a country where 5.5 million government employees out of a population of 67 million consume around 13% of GDP in wages. …The political test will be whether Mr. Macron can dust himself off from his fuel follies and persuade French voters to embrace another crucial reform.

I’ll close with the pessimistic observation that France may have passed the tipping point.

Simply stated, government is so big and there’s so much dependency that real reform is politically impossible.

Heck, I worry the United States is on the same trajectory.

P.S. Veronique has a must-watch video explaining why America shouldn’t become another France.

P.P.S. While I’m sympathetic to Macron’s domestic agenda, he’s very bad on European-wide policy issues.

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Much to the consternation of some Republicans, I periodically explain that the Trump Administration is – at best – a mixed blessing for supporters of limited government.

It’s not just that Trump is the most protectionist president since Herbert Hoover, though that’s certainly a damning indictment.

The Trump White House also has been very weak on government spending, and the track record on that issue could get even worse since the President supports a new entitlement for childcare.

Yes, there are issues where Trump has been a net plus for economic liberty.

The overall regulatory burden is declining (though the Administration’s record is far from perfect when looking at anti-market interventions).

And the President gets a good mark on tax policy thanks to the Tax Cut and Jobs Act.

But Trump’s grade on that issue may be about to drop thanks to horribly misguided actions by his Treasury Secretary, Steven Mnuchin. Here are some excerpts from a report by France 24.

US Treasury Secretary Steven Mnuchin said Wednesday that the US supported a push by France for a minimum corporate tax rate for developed countries worldwide… “It’s something we absolutely support, that there’s not a chase to the bottom on taxation,” Mnuchin said in Paris after talks with Finance Minister Bruno Le Maire. Le Maire said last month a minimum tax rate would be a priority for France during its presidency of the G7 nations this year. …France in particular has railed against Amazon, Google and other technology giants that declare their European income in low-tax countries like Ireland or Luxembourg.

Needless to say, it’s utterly depressing that a Republican (in name only?) Treasury Secretary explicitly condemns tax competition.

Politicians and their flunkies grouse about a “race to the bottom” when tax competition exists, not because tax rates would ever drop to zero (we should be so lucky), but because they don’t like it when the geese with the golden eggs have the ability to fly away.

They like having the option of ever-higher taxes.

In reality, the world desperately needs tax competition to reduce the danger of “goldfish government,” which occurs when vote-seeking politicians can’t resist the temptation to destroy an economy with too much government (see Greece, Venezuela, Zimbabwe, etc).

I’ll close with a remarkable observation.

The Obama Administration supported a scheme that would have required American companies to pay a tax of at least 19 percent on income earned in other jurisdictions, even if tax rates were lower (as in Ireland) or zero (as in Cayman).

This was very bad policy, completely contrary to the principle of “territorial taxation” that is part of all market-friendly tax reforms such as the flat tax.

Yet Trump’s Treasury Secretary, by prioritizing tax revenue over prosperity, is supporting a proposal for global minimum tax rates that is much worse than what the Obama Administration wanted.

And even further to the left compared to the policy supported by Bill Clinton.

P.S. I’m sure the bureaucrats at the European Commission and Organization for Economic Cooperation and Development are delighted with Mnuchin’s policy, especially since American companies will be the ones most disadvantaged.

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My multi-part series on Socialism in the Modern World has featured Venezuela, the Nordic nations, and Greece.

But no discussion of dirigiste policy would be complete without a look at France.

After all, not only does France have a history of imposing 100-percent-plus tax rates, it also hold the dubious honor of being Europe’s biggest welfare state.

And it has the highest overall burden of government spending.

These are not good numbers, especially when you consider the demographic changes that are happening in Europe.

Sadly, there’s a long history of French statism. Andras Toth of the Carl Menger Institute explained some of the France’s grim economic history.

If there is an example of a dirigiste, interventionist state, then that is France in Europe. France was the birthplace of the mercantilist, absolutist monarchy in the early modern period. …the practice of mercantilist protection and monopolization of key industries, including the state-mandated “industrial development policies” …Under the rule of the famous finance minister, Jean-Baptiste Colbert… France sank into a series of crises and lost her preeminent position in Europe. …The modern French state is the stepchild of the political culture of the Bourbons. It is the prime example of dirigisme. It redistributes as much as 56 percent of annual GDP and imposes the highest tax burden in Europe. The French state directly manages key industries and sustains one of the largest welfare states in Europe. It also imposes complicated bureaucratic red tape on economic actors, trailing way behind the Scandinavian states and Germany as far as ease of business is concerned.

Though he also explains that the current president seems to understand that France needs less government and more economic freedom.

Macron was the first French politician to build his election campaign on reform and competitiveness in order to keep up France’s position in the world. Those who voted for him knew what to expect. As a member of Hollande’s team, he proposed increasing the work week from 35 to 37 hours to lessen the tax burden on higher incomes, and the competitiveness package he developed aimed to lessen the protection of workers and companies in order to promote growth. …France is again at a crossroads: She has to choose between the policies of Jean-Baptiste Colbert and those of Anne-Robert-Jacques Turgot, the great French liberal economist who was the economic minister of France between 1774 and 1776 and who argued for free trade, less taxation, and less regulation.

I also sympathize with what Macron is trying to achieve (at least with regard to domestic reforms).

But I fear it may be too little and too late.

Especially since the New York Times reports that Macron is increasingly unpopular.

…attacks…that Mr. Macron is a self-seeking servant of society’s fortunate… The undisguised hostility has made clear that, less than a year into this new presidency, anti-Macron sentiment is emerging as a potent force. It is being fueled by a pervasive sense that Mr. Macron is pushing too far, too fast in too many areas — nicking at the benefits of pensioners and low earners, giving dollops to the well-off and slashing sacred worker privileges.

Though he does deserve some of his unpopularity. He imposed green taxes late last year that triggered nationwide riots from motorists and other unhappy citizens.

But he’s also unpopular for some of his good policies, which leads me to fear that France may be past the tipping point, meaning that genuine and meaningful reform no longer is possible because too many voters are on the government teat.

I hope that’s not the case. France used to be one of the most wealthy and powerful nations in the world. But now its living standards are barely average according to the OECD’s AIC numbers.

Because of the ongoing debate about what the term actually means, it’s unclear whether France’s tepid economic performance can be blamed on socialism.

But we shouldn’t doubt that the country is paying a considerable price for having too much government.

P.S. My favorite cartoon about French socialism actually features Barack Obama.

P.P.S. One of the world’s greatest economists was French, but politicians in France obviously ignored Bastiat just like they ignored Turgot.

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Maybe there’s hope for France. When Greeks, Belgians, and the Brits riot, it’s because they want more handouts.

The French, by contrast, have taken to the streets to protest higher taxes. And they have plenty of reasons to be upset, as the Wall Street Journal reports.

France became the most heavily taxed of the world’s rich countries in 2017… The Organization for Economic Cooperation and Development’s annual review of taxes in its 36 members published on Wednesday showed the French government’s tax revenues were the equivalent of 46.2% of economic output, up from 45.5% in 2016 and 43.4% in 2000. The Danish government’s tax take, which was the highest among OECD members between 2002 and 2016, fell to 46% of gross domestic product from 46.2% in the previous year and 46.9% in 2000. …The rise in French tax revenues was in line with a longstanding trend… The average tax take across the organization’s members edged up to 34.2% of GDP in 2017 from 34% in 2016 and 33.8% in 2000.

I suppose we should applaud Denmark for no longer being at the top of this list.

The tax burden on Danes is still absurdly high, but at least there is a small bit of progress (presumably because of a modest amount of long-overdue spending restraint).

Shifting back to France, the WSJ story mentions that the French president had to retreat on his plan for higher fuel taxes.

President Emmanuel Macron backed off a fuel-tax increase that enraged much of the nation and sparked a grass-roots protest movement against his government. …Before Tuesday’s climb down, Mr. Macron’s government had planned to raise fuel taxes in an effort to cut automobile pollution. …But the planned move sparked the worst riots to hit Paris in decades on Saturday, leaving the city’s shopping and tourist center dotted with burning cars and damaged storefronts. Protesters vandalized the Arc de Triomphe, rattling Mr. Macron’s administration and the country.

For what it’s worth, I’m glad Macron backed down. He actually has some good proposals to liberalize the French economy. That’s where he should be focused, not on concocting new ways to fleece citizens.

To be sure, over-taxation is not limited to France. Here are the most heavily taxed nations according to the OECD report.

Income taxes and payroll taxes generate most of the revenue, as you can see. But keep in mind that all of these countries also have onerous (and ever-increasing) value-added taxes, as well as other levies.

If I was in France (or any of these nations), the first thing I would point out is that people are getting ripped off.

A huge chunk of their income is seized by tax collectors, yet they’re not getting better services in exchange.

Are schools, roads, and healthcare in France better than they are in Switzerland or New Zealand, where the burden of government is much lower?

Or are they better in France than they are in Hong Kong and Singapore, where the fiscal burden is much, much lower?

The European Central Bank confirms that the answer is no.

Here is the data on taxes and spending for OECD member nations. For some reason, not all countries in the OECD’s tax database are included in the OECD’s spending database. Regardless, the obvious takeaway is that big welfare states require confiscatory tax regimes (with the middle class getting pillaged).

A few closing observations on this data.

  • Governments also have non-tax revenues, so red ink is only a partial explanation for the gap between spending and taxes in various nations.
  • Because of somewhat distorted GDP data, the actual tax burden in Ireland and Luxembourg is worse than shown in these numbers.
  • From 1965-present, the tax burden has increased the most in Greece. Needless to say, that has not been a recipe for economic or fiscal success.
  • The U.S. has a modest fiscal burden compared to other industrialized nations, which helps to explain why living standards are higher in America.
  • Mexico is not a low-tax nation. Like many developing economies, its government is simply too incompetent and corrupt to enforce onerous tax laws.

Circling back to our main topic, I joked years ago that the French national sport is taxation. It’s so bad that thousand of taxpayers have faced effective tax rates of more than 100 percent. Indeed, taxes are so onerous that even EU bureaucrats have warned taxes are excessive.

P.S. I guess we shouldn’t be surprised that more than half the population would flee to America if they had the opportunity.

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Assuming elected officials care about the consequences of their actions, the obvious answer to a question isn’t always the right answer.

  • Q: Why should a (sensible) politician oppose the minimum wage, especially since some workers will get a pay hike?

A: Because the bottom rungs of the economic ladder will disappear and marginally skilled people will lose a chance to find employment and develop work skills.

  • Q: Why should a (sensible) politician oppose so-called employment-protection legislation, especially since some employees will be protected from dismissal?

A: Because employers will be less likely to hire workers if they don’t have the freedom to fire them if circumstances change.

  • Q: Why should a (sensible) politician oppose class-warfare taxation, especially since they could redistribute money to 90 percent of voters?

A: Because the short-run benefits of buying votes will be offset by long-run damage to investment, competitiveness, and job creation.

Many politicians are not sensible, of course, which is why bad policy is so common.

So it’s worth noting when someone actually makes the right decision, especially if they do it for the right reason.

With that in mind, President Emmanuel Macron deserves praise for gutting his country’s punitive “exit tax.” The U.K.-based Financial Times has the key details.

French president Emmanuel Macron said that he would remove the so-called exit tax as it was damaging for France’s image as a place to do business. The tax requires those entrepreneurs or investors who hold more than €800,000 in financial assets or at least 50 per cent of a company to pay capital gains up to 15 years after leaving France.  …A finance ministry spokesperson on Saturday confirmed “the removal of the exit tax as it existed.” …”The exit tax sends a negative message to entrepreneurs in France, more than to investors. Why? Because it means that beyond a certain threshold, you are penalised if you leave,” Mr Macron had said… “I don’t want any exit tax. It doesn’t make sense. People are free to invest where they want. I mean, if you are able to attract [investment], good for you, but if not, one should be free to divorce,” added the French president.

Kudos to Macron. He not only points out that such a tax discourages investment and entrepreneurship, but he also makes the moral argument that people should be free to leave a jurisdiction that mistreats them.

To be sure, the proposal isn’t perfect.

Mr Macron has now decided to introduce a new “anti-abuse” tax targeted at assets sold within two years of someone leaving the country. …“The new system will henceforth target divestments occurring shortly after leaving France — two years — to avoid letting people make short trips abroad in order to optimise tax efficiencies,” added the spokesperson.

This is why I gave the plan two-plus cheers instead of three cheers.  Though I understand the political calculation. It would create a lot of controversy if a rich person moved for one year to one of the several European nations that have no capital gains tax (Netherlands, Belgium, Switzerland, etc), sold their assets, and then immediately moved back to France the following year.

The right policy, needless to say, is for there to be no capital gains tax, period.

But let’s not get sidetracked. Here are a few additional details from Reuters.

France imposed the so-called “Exit Tax” in 2011 during the presidency of Nicolas Sarkozy. …Its aim was to stop individuals temporarily changing their tax domicile in order to skirt French taxes but pro-business President Emmanuel Macron says it damages France’s attractiveness as an investment destination.

Yes, you read correctly, the class-warfare policy wasn’t imposed by the hard-left Francois Hollande, but by the Nicolas Sarkozy, the supposed conservative but de-facto leftist who preceded him.

What’s particularly bizarre is that Macron was a senior official for Hollande, yet he is the pro-market reformer who is trying to save France.

P.S. I’m embarrassed to admit that the United States has a very punitive exit tax (which Hillary Clinton wanted to make even worse).

P.P.S. Since one of my three examples at the beginning of today’s column dealt with the perverse consequences of “employment-protection laws,” I suppose it’s worth noting that’s another area where Macron is trying to reduce government intervention.

P.P.P.S. While Macron is a pro-market reformer at the national level, he advocates very bad ideas for the European Union.

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