Various news organizations have been reporting an exodus of the superrich from France — often buying homes in England or surrounding countries to avoid the expected 75 percent tax rate proposed by the Socialist government of President François Hollande. While the rate would apply only to those making one million euros a year or more, I view it as a mistake. I admit that I tend to have great reservations about heavy tax hikes during economic crisis. We have debated the value and potential harm of such hikes on this blog. However, a 75% rate is in my view insane. As rational actors, top earners are likely to simply leave the country as they are doing. Hollande came into office on a wave of sentiment to soak “Les riches” and Hollande himself proclaimed “I don’t like the rich.” It is a bit too Robespierrean for my tastes as an economic policy.
Only around 30,000 people (out of 65 million) in France would be subject to the greater tax if it is approved. While that may seem to mitigate the concern over its social impact, it would also result in the collection of a small fraction of the needed revenue — even if they stay to be taxed. What is all does, however, is create the impression that France is hostile to top earners — a dangerous image for a like France with a portion of the economy catering to high-value estates and tastes.
Hollande insists that the 75 percent tax is “sending out a signal, a message of social cohesion.” Perhaps, but it also (in my view) sends out a message of economic chaos. The tax is a virtual invitation for the top earners to flee France for England. The result could be a modern remake of the “Tale of Two Cities” with London enjoying an infusion of capital and investment as wealthy French families shift assets away from Paris.
What do you think about a 75 percent tax?
Source: NY Times
Looks like everything is getting back to “normal” in France. May they RIP.
JCTheBigTree,
Thank you … first thing I had to do was google Laffer Curve. 😉
You explained your position well so that even I could understand it.
raff,
Be not afraid … it isn’t math.
“Losing 30,000 rich people would not be so bad.”
————————————————————-
If the million dollar earners payout a net 25% rate, losing 30,000 costs $7.5 Billion. That’s a fair chunk of change.
75% is clearly too far to the right on the Laffer Curve.
I assume it would be on marginal income and eventually in time it would keep people from going out of their way to earn more than $1 million, which eventually would lead to a socioeconomic shift. If I have no incentive to earn more than $1 million from my business, but my business is going gangbusters, I’m going to end up paying my employee’s more so that less of that money gets ‘wasted’ into the government. Call it ‘forced trickle down’ In the long run, it may be a good thing, but there is large short to middle term pain.
The rich need to understand that the better those below them are doing, the better they are doing.
Say you have a society with one business serving all the needs of the people. Everyone works there or retired from there. In one scenario the executives make a BUNDLE of money…100 times that of their lowest employee. The employees can barely make ends meet and are forced to buy less of the companies products, certain non-necessity departments hurt and some are laid off, employees have to take pay advances to put food on the table and get into debt spirals… Ultimately, the company goes into its own recession, the executives get paid less and are forced to deal with a bad situation and a very unhappy workforce.
Now consider that the company pays its executives a lower rate, say 25 times what the employees make. The business is able to pay their employees more and more of their money gets returned to the business, necessities and wants are bought, all the departments do well, morale is high and employees get more done. No one is going broke, no one is having to take excessive loans. The executives actually start to to make more money because the company is performing better.
Which is a better scenario?
Now consider that the business is the US economy as a whole, because it fits perfectly. If our top earners took less of a percentage of the overall earnings, they’d ultimately do better because us here in the middle class would have more to spend.
I think of it as “trickle up” economics.
… and the iconic guillotine. 😉
@Mike: The largest portion of these “achievers” have achieved by being born into it.
Exactly. More broadly speaking, by lucking into it, being in the right place at the right time, with the resources to take a risk. After that, the majority of even the self-made millionaires really did not do much besides work 60+ hours a week. My father did that for 30 years without ever becoming rich, as tens of millions of citizens still do today.
In my opinion (and having known and worked beside many more multi-millionaires than most people) The majority of the rich have not really achieved anything special at all. They won the lottery of nature and circumstances, for their environment and time, so that their normal workday paid them much more than the typical person’s workday.
To me an achievement is something that was a choice, planned and pursued with success. Graduating college is an achievement, becoming a master welder is an achievement. In my opinion being lucky is not an achievement, a lottery winner can be rich without having “achieved” anything.
SwM,
Thanks for that link. France has high corporate tax rates too, especially when compared to those in Ireland. I want to say 20% more(?).
I don’t know enough about economics to venture an opinion on the strength of Hollande’s plan … I leave that to Tony C, Gene, and others but I am fascinated with the “politics, buzzwords, and overall propaganda” employed.
Since from a policy perspective, the rich seem to do the most damage to a country, a tax at the Pre-Reagan level when the US was much more equal and prosperous seems to be an effective tool. If they choose to leave, then it would only help the country whereas if they stay, then their boats would also be lifted by the rising tide.
Mike S.,
You think that people like Paris Hilton didn’t have to work hard to achieve their wealth?????
“Mike S., You think that people like Paris Hilton didn’t have to work hard to achieve their wealth?????”
Elaine,
Paris achieved fame the way many working in red light districts achieve wealth, on her back.
“More broadly speaking, by lucking into it, being in the right place at the right time, with the resources to take a risk.”
Tony,
So much of luck is discounted in the story of financial success. Had Elisha Gray reached the patent office before Alexander Graham Bell, it would have been “Ma Gray” instead of “Ma Bell”.
http://www.irishtimes.com/newspaper/world/2012/0808/1224321715883.html You are correct, Blouise.
Wow, Milton Friedman would be very disappointed as I am with these responses. Long live capitalism…
Hollande is probably going to make some deep cuts in France’s social programs in order to reduce the budget deficit. I suspect this tax the rich scheme is a political move he’s hoping to hide behind when the general population starts screaming about the cuts to their social programs.
I’m only half joking when I suggest that, given the history, the overly-rich may want to be well out of the country when those cuts come.
“but that’s just the start of the problem for France’s achievers”
Puzzling,
The operative buzzword is “achievers”. The notion that most of the wealthy are “achievers” gives the “connotation” that they have an exalted status within society of making it run. The largest portion of these “achievers” have achieved by being born into it. These people mostly take far more from society than they give back. A country has the right to protect itself from those who would use its resources, but avoid paying their fair share for it.
The US has the lowest marginal tax rates it has had since the 1930’s. Doesn’t seem to be working out so well. We also have a presidential candidate that pays at an extremely low rate, maybe zero, in some years.
This 75% tax on top earners is wildly confiscatory, but that’s just the start of the problem for France’s achievers. France also taxes wealth directly on assets over €790,000 at rates from 0.55% to 1.80%, called the Solidarity Tax on Wealth, or ISF. Some tiers of the ISF are increasing by up to 143% through a new surtax also being imposed.
In combination these new tax levels on strong incomes and accumulated wealth will drive capital and talent from France rapidly. Individuals and families targeted by these new government policies who choose to stay may be subject to capital controls once the outflow starts and government seeks to limit money movement.
Given the ridiculously low rates of taxation the wealthy pay here in the US, combined with how loudly they whine about it and how hard they play the system to hide money offshore, I am sure that a 0% rate would still cause some number of the numbnut freeloaders to emigrate.
Welcome to the third world kids.
Dr. Turley:
I have no problem with a 75% rate. I would structure it differently; and prevent anybody that tries to avoid it by moving from owning anything in France, living in France, or doing business in France of any kind. (I would do the same for anybody that renounces their American citizenship in order to avoid income taxation: Stay out, and we can prevent them from doing business here).
a) Losing 30,000 rich people would not be so bad. If the 75% tax would not have made up much of the budget, getting rid of them won’t either. Force them to give up their businesses, too. From a business sociology point of view, that opens up niches for others to occupy, hopefully many others splitting that now-available pie, and that spreads the wealth.
b) Your assumption that the wealthy would provide investment capital elsewhere is a rehash of the trickle-down theory. They do not. The vast majority of the money of the wealthy is in sterile income producing investments; they buy and trade income-producing shares of long-established existing companies, like IBM or P&G, but those companies do not benefit in the least from those trades. If I buy a thousand shares of IBM from you, IBM does not make a penny on that transaction. Only a small fraction of their money is risked in new ventures.
c) I presume that, like us, the French have a perfectly legal way of avoiding those taxes: They can limit their income by spending their excess income on business expansion, and claiming those expenses as legitimate, untaxed business expenses. The rich benefit from owning MORE business assets with the money they spent, while the public benefits from the work created by the expansion, building factories and machines or offices and eventually working in the new businesses.
I look forward to the French experiment. Everything for the rich is a trade-off, close the loopholes and they will choose to stay in France and pay the piper. A country could tax the income of its citizens no matter where they earned it, and they could tax the income of ALL money earned within their country regardless of whether earned by foreigners or not, and they could prohibit anybody that renounced their citizenship from ever re-entering the country for so much as a visit, and blacklist such people from owning or benefiting from any French company in any way.
Treat them like citizens from a hostile country; that is what they are.
Oh my…..
Whatever the rate, the problem is that these people can just “shop around” for a better tax-avoidance deal in suitable low-taxing havens. Like the USofA even.
I am moving to Holland at the suggestion of the President. We call it the Nederlands. He calls it Hollande. Aur revoir to the reservoir of fools.