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
Tony C.,
Economics, business, taxes, gut reactions vs investments….
What do you not cover Tony? My approval and thanks have been expressed before. Only now to repeat them.
An aside, if rightly calculated, the French are proposing a tax for the one half percent. Heard that figure before.
” … if my gut says no, I don’t go. On the other hand, if my gut likes it, THEN I investigate to make sure I am not being tricked by some sort of bias.” (Tony C)
Wise words.
I’m not much of a gambler and the truth of the matter was simple where Amazon was concerned … books.
My philosophy on money is also pretty simple: Enough to be comfortable but not so much as to handicap the next generation. It’s subjective, of course … my view of what constitutes comfort compared to someone else’s.
@Blouise: I am not shaking my head, gut instinct has a very important place in investment; your subconscious can condense an enormous amount of information into an emotional reaction.
There are things to worry about, confirmation bias for one, and getting manipulated for another: Con men prey upon gut instinct.
It is also important in investing to ignore some gut reactions that are generated by our predisposition to see physicality where there is none; for example, if you look at a stock graph and a stock is going up, you have to remember there is no “momentum,” look at any graph of a stock that went bust and, if you cover everything to the right of the highest peak, it was going up like gang-busters right before investors lost it all.
But I would not discount the importance of gut instinct, many stories are both good and real, and they do not have to be an Amazon or Microsoft to be a good investment.
I personally tend to treat it as a veto signal; if my gut says no, I don’t go. On the other hand, if my gut likes it, THEN I investigate to make sure I am not being tricked by some sort of bias. So I only look for rational confirmation of good feelings.
Tony C. Thank you for your great info.
Hollande’s
bettykath,
If one looks at the original post concerning Hollands’s win in France, your rant is right on topic!
tony c. thanks for the info. Our tax rates on the wealthy are obscenely low.
Just rec’d an email from the right wing nuts. I’ve rec’d dozens over the past couple of years, all but one was false. This one is a link to a video on the 2013 budget and purports to show how that eliminating the government still won’t produce a balanced budget due to the amount being spent on entitlements. I’m sure it’s a bunch of hooey put together by those wanting to privatize social security, medicare, medicaid, etc. but consider all those who believe it. The copy lists tend to be 15-20 people in each forward. Yes, they aren’t even smart enough to strip out the emails of all those who received the first, second or whatever forwards. Sorry this is OT but I have this rant in me. I’m not even sure what I’m ranting about. (sigh)
Generally speaking, of course.
“Is there much difference between being born with genetic gifts and being born to wealth?” (Tony)
IMO, yes. Being born to wealth is in many ways a handicap to achievement whereas talent (genetic gifts other than beauty) pushes the drive for achievement.
@Mike: In the case of Bell, we can add “lucky accident.” My understanding is that he was not trying to invent the telephone (long distance communication) at all, he was working on a hearing aid and inadvertently invented the telephone!
Many a boon has been found while looking for something else entirely. Heck, penicillin comes to mind.
There are strange correlations between achievement and luck. For an athlete or movie star or stellar scientist, how much of their success is achievement and how much of it is just winning the genetic lottery for athleticism, striking beauty, or superior mental acuity?
I think it is hard to pin down. Is there much difference between being born with genetic gifts and being born to wealth?
raff,
I’ve always got your back!
Tony C and gbk (thankfully re-hydrated and out of the forest 😉 )
I am sincerely grateful for the your time and willingness to help educate someone like myself who should know more about this subject but tends to get lost easily in the buzzwords.
I admit to being a “calculated” risk taker who operates on, please don’t start shaking your head like that Tony, gut instinct. My last venture into the field of speculation was the mid 90’s when I decided to spend a few bucks on a new offering from a start-up called Amazon. I liked the idea of being able to buy books on-line and figured others would too. Yep, me and Forrest sitting at the bus-stop eating chocolates. Note I said a “few” bucks. (sigh)
@GBK: Good link, and an easy read. Thanks.
Blouise, I am glad that you confirmed that there was no math required! 🙂
I agree with Tony C. that the high rate of taxes can be a good thing for the economy.
MIke S.,
Good catch on the “achievers” label.
Blouise,
Here’s a link to A CRS report from 1987 concerning the Glass-Steagall act (pdf). It’s only seven pages long and reads like it was written last year.
http://digital.library.unt.edu/ark:/67531/metacrs9065/m1/
@Blouise: No, you are not being short-sighted. The Glass-Steagal act was passed in the first place because regulators saw what had happened before it (in the crash of 29) and that it would happen again without the act; and they were correct: It happened again after the repeal.
What happened then, and again after 1999, is that banks (or savings and loans, under Reagan) have a one-sided incentive to speculate with their customers deposits. If they can win they get huge returns, and since their customers are typically entitled to just a tiny percentage of return, those huge returns end up being distributed as bonuses and salaries to the speculators. If they ultimately lose in speculation, they are not personally liable to their customers. Any salaries or bonuses they have already received are untouchable, and in todays environment they rely on insurance to make their customers whole (in 1929 the customers were just screwed). So, in both 1929 and now their personal risk is not much, and their personal reward can be measured in millions.
Glass Steagal prevented banks from wild market speculation like this, it restricted the types of investment they could engage in.
I wouldn’t call it a partisan thing to be in favor of Glass Steagal: The repeal was pushed by Republicans but Bill Clinton signed the repeal and he could have vetoed it without any significant political fallout. I believe Clinton signed it because his wealthy friends, contributors and cabinet members all told him it should be repealed.
I wouldn’t say it was the Glass Steagal act alone, however. There were other big factors, such as the effective repeal of all Insurance Law in allowing the trading of Credit Default Swaps. A CDS is the equivalent of an insurance policy, but not subject to the normal laws governing insurance. So their invention created a wild west of insurance policies that were inter-linked in crazy ways, for example by letting Goldman Sachs legally buy the equivalent of a big life insurance policy on Lehman Brothers and then legally engineer the destruction of Lehman Brothers and collect on the policy.
There was also the invention (or at least wild proliferation) of mortgage bundling, which created a classic conflict-of-interest situation for mortgage writers; if they were able to just sell mortgages it no longer mattered how good a job they did in vetting the loan. In fact it reversed the normal adversarial role of lender and borrower, it was in the bank’s best interest to approve every applicant as quickly as possible with zero money down, a situation that punishes competence and encourages fraud because the risk of loss is not borne by the banks but the chance of gain is all theirs. Hence the home real estate bubble, and the current commercial real estate crisis.
Tony C.,
I’m paying close attention to this thread and have already admitted a profound ignorance so please bear with me as I ask this next question:
It seems to me that the repeal of the Glass-Steagall Act in 1999 put us in the toilet. Am I being short sighted or, even worse, falling into the trap of partisanship in that view?
@JC: The Laffer curve is bad science, bad economics, and irrelevant.
The reason for that is the Laffer curve is both unproven, and based on a false premise even if it were: The idea that the purpose of the government is the same as the purpose of any business, meaning increasing revenue. That is not the purpose of a government at all, it is not in business to make a profit.
Here is some business basics (I have been partners in several, I have been a division manager in a large company, I have been a COO of a regular and successful corporation): Business expenses are 100% deductible. You do not pay income taxes on expenses, and that includes expenses for advertising, expansion, equipment, materials, employees, benefits, and research and development.
Let us make a distinction here between “profit” and “excess revenue,” because during the fiscal year “excess revenue” is not yet a taxable “profit.” If it is not used in the business it will become a taxable profit. But before then, “excess revenue” can be used to start another factory, or another outlet, or a whole different business, and then it has become a business expense and you pay zero taxes on it. Zero taxes.
A business man NEVER spends after-tax money on expanding his business if he can possibly help it, he ALWAYS spends all of his excess revenue first.
And here is how the Laffer curve is wrong: A higher tax rate probably WILL result in less revenue for the government, but it can still accomplish the government goal. Because the higher tax rate will discourage businesses from taking profits, and encourage businesses to reinvest their money in growing their business, their sales, and their production capacity. If I am a factory owner and I anticipate $10M in excess revenue throughout the year, and the tax rate on that would be $7.5M if I took it all in profits, I am faced with a choice: Come out at the end of my fiscal year with $2.5M in my pocket, or reinvest the money in my business and come out with $10M in assets and goodwill (the non-tangible or unquantifiable returns on advertising, employee benefits, charitable aid, sports sponsorship, etc.)
When the income tax is low, the equation tilts for the rich in the direction of personal accumulation. Say the rate was 10%, and I could pocket $9M of the $10M. That is a more sure reward than reinvesting in my business. But say the rate was 90%, and I could only pocket $1M of the $10M. It seems quite likely that me spending $10M on expansion, new equipment, R&D, etc would return more than $1M in benefit, so the tax rate pushes me toward the risk of reinvestment instead of profit-taking.
The goal of a higher tax rate does not have to be more government income, as Laffer presumed, it can be to steer the money into more productive outlets.
The public has been brainwashed by the rich to favor the rich. Nobody in their right mind “creates jobs” with after-tax money if they can possibly help it. Every dime you can roll over into business growth is an untaxed dime, it is why we see only mature businesses pay dividends: They do that when using ALL of their excess revenue for growth would be a waste of money.
Our government already provides the perfect tax rate for “job creators,” and that rate is 0%. If you create a new business and / or new jobs, you pay no taxes on the expenses of that. What we tax is the money that business owners chose NOT to reinvest, that is the money they took OUT of the business as personal “income.”
If they were really going to use that to “create jobs” they would have done it before they paid any taxes on it, so they could get the full punch of the amount.
Thank you mespo … you’re right about the link providing an easier read
Well, that top French marginal rate pales in comparison to top US marginal rates which traditionally ran over 75% from the 50s through the 70s.
Here’s the historic progression of top US marginal tax rates:
Ordinary Income Earned Income Capital Gains Corporate Income
Year (1) (2) (3) (4)
1952-1963 91.0 91.0 25.0 52
1964 77.0 77.0 25.0 50
1965-1967 70.0 70.0 25.0 48
1968 75.3 75.3 26.9 53
1969 77.0 77.0 27.9 53
1970 71.8 71.8 32.3 49
1971 70.0 60.0 34.3 48
1972-1975 70.0 50.0 36.5 48
1976-1978 70.0 50.0 39.9 48
1979-1980 70.0 50.0 28.0 46
1981 68.8 50.0 23.7 46
1982-1986 50.0 50.0 20.0 46
1987 38.5 38.5 28.0 40
1988-1990 28.0 28.0 28.0 34
1991-1992 31.0 31.0 28.0 34
1993 39.6 39.6 28.0 35
1994-2000 39.6 42.5 28.0 35
2001 39.1 42.0 20.0 35
2002 38.6 41.5 20.0 35
2003-2009 35.0 37.9 15.0 35
Notes: MTRs apply to top incomes. In some instances, lower income taxpayers may face higher MTRs because of income
caps on payroll taxes or the so-called 33 percent “bubble” bracket following TRA 86. From 1952 to 1962, a 87% maximum
average tax rate provision made the top marginal tax rate 87% instead of 91% for many very top income earners. From 1968
to 1970, rates include surtaxes. For earned income, MTRs include the Health Insurance portion of the payroll tax beginning
with year 1994. Rates exclude the effect of phaseouts, which effectively raise top MTRs for many high-income filers. MTRs on
realized capital gains are adjusted to reflect that, for some years, a fraction of realized gains were excluded from taxation.
Since 2003, dividends are also tax favored with a maximum tax rate of 15%
(sorry about the chart formatting, but you can find it presented better here: http://elsa.berkeley.edu/~saez/course/Labortaxes/taxableincome/taxableincome_attach.pdf)
Note that the US top rate for individuals is now at its lowest ebb after running as high as 91% during the prosperous years in the 50s & early 60s. Corporate rates are way down too.