We have been discussing the tax policies of President Francois Hollande’s Socialist government — a record that I have criticized as ruinous from an economic standpoint. A recent report indicates that for some high-earning families — more than 8,000 — the Hollande policies impose a 100% tax. It is the ultimate “eat the rich” policy. Even for those families facing a 75% rate, it is unclear why they would continue to work in the country. Many are not. France is experiencing a flight of both high earners and companies.
The bizarre 100% tax is the result of a one-off levy last year on 2011 incomes for households with assets of more than 1.3 million euros ($1.67 million). The surcharge was imposed shortly after Hollande took office on a promise to hit the rich with high taxes. The Hollande 75% direct tax was so unfair that the Constitutional Council struck it down. However, this report states that the one-off levy effectively pushed some families to a 100% tax.
The newspaper Les Echos found that nearly 12,000 households paid taxes last year worth more than 75 percent of their 2011 revenues due to the exceptional levy. ($1 = 0.7798 euros).
Putting aside how many families are impacted by taxes above 75%, it is in my view an insane, self-destructive economic policy for France. I just spent an evening with a friend and his parents discussing the situation in France. This is a moderate family politically that has long fished in French waters. My friend is now an American citizen but his parents and family remain in France. They recounted how they had to destroy half of their ships because of taxes. They are seeing other businesses doing the same or simply moving out of France. These a patriotic and proud French people but they are watching their government cannibalize off the economy. The government is getting instant revenue while killing revenue producing businesses. It is like eating the grapes and roots of the vineyards of Bordeaux for food and leaving the fields barren.
As someone who truly loves visiting France, it is disheartening to watch Hollande’s cultural war on the wealthy. I favor higher taxes as part of a comprehensive package of reforms in this country and other countries. However, Hollande’s expressed hatred of the rich resulted in a political success and now an economic disaster. It is also grossly unfair to wealth French who love their country and are not opposed to making sacrifices. Hollande played the class card and told the French that their problems were due to a sinister upper class rather than France’s high labor costs and burgeoning budgets. Even if one dismisses this study and the one-year levy, there are still many thousands of families and businesses who face a government demanding 75 percent tax rates.
These policies however will only lengthen the economic crisis. Indeed, France is already viewed as a hostile country for business and that is likely to continue under Hollande who is fighting the French judges to impose taxes higher than what is viewed as constitutional or fair by the courts.
Source: Reuters
Tony,
It’s nowhere to be found. It has apparently vanished into the WordPress vortex of doom. If you try it and it happens again, let me know.
Gene, can you look and see why my comment is awaiting moderation?
pcmodz: If the internationalism is curbed the higher tax rates could indeed stimulate an economy as stated.
The internationalism is a problem, but if taxes were higher on income, the vast majority of businesses (in the USA) do not have internationalist advantages to hide income overseas, or become corporations running out of Monaco or the Bahamas or some thing. Joe’s Garage isn’t going to do that, and Joe has to make these decisions too: Hire another mechanic? Buy a new hydraulic lift? Advertise? Build on to the auto bay?
pcmodz says: But there is only so much each business model can improve on,
True, but so what? Then they stop growing, and if there is more market to serve, somebody else grows another business. Any business earning a hundred million a year can be broken into ten businesses earning ten million a year each. That isn’t necessarily true for a business earning one million a year, or even five million a year. But once a company exceeds about five million in revenue per month, it is almost always divisible into smaller independent units.
So as a consumer, would you rather have ten vendors competing with each other for your business, or one giant vendor that presents you with a ‘take it or leave it’ proposition? As a job-seeker, would you rather have one giant potential employer or ten smaller ones? As a citizen, would you rather rely for the communities economic health on one big organization or ten smaller ones? As a voter, which scenario is likely to exert less financial influence on your political leaders: One giant, wealthy corporation, or ten little corporations? One billionaire, or ten centi-millionaires?
pcmodz says: These resources must exist first as the basis of money
I think that is a narrow view; in my opinion the best way to look at money is to equate it to time. The “value” that money is trying to store is basically hours of life, not raw resources. Most raw resources are kind of meaningless. Gold doesn’t really mean anything if we are all starving and nobody is willing to trade their food for it.
Money equates to hours of life and effort. That is why people give up parts of their life (time and mental effort) to work in exchange for money; but that is just a conversion medium: I trade pieces of my life, measured in hours, for pieces of other people’s lives spent growing my food, building my car and TV, writing my entertainment, etc. Money is just a convenient conversion mechanism for how many “life hours” I own; it is a pretty abstract resource, not a physical one. And the actual physical resources are not the basis of money; they are priced in the abstraction of life hours, too.
For example, if Armageddon happened, gold may be meaningless if it isn’t quickly convertible into things useful for life: bullets, blades, food, clean water. There would be no guarantee anybody would take gold as payment; it isn’t useful on its own, like a scalpel or hunting knife. A hunter gatherer tribesman won’t take it in trade for his food.
More relevant perhaps to us, events like illness or accident that change your perception of how much life you have left to live can dramatically change your perception of the inherent value of work or money. If one thinks they are going to be dead in a few years, they may quit their job: Quit sacrificing present life hours to store up life hours for later use that will never come. They may spend their savings (store of life hours) trying to prevent losing their life altogether. Or may spend it on the entertainments they have been postponing, bequeath it to improve other lives, etc.
In my view, money isn’t based on physical resources, those are just some of the things you can buy with it. It is based on life hours, either those expended or those yet to be expended.
Like everyone here, I’m certain that the confiscatory tax rates imposed on wealthy French families are bad public policy but I do secretly relish the reversal of roles (if only temporarily) where the rich are forced to pay for society’s ills (many of which their own banks and companies inflicted) instead of the poor.
Call it Tax Saturnalia or maybe Fiscal Schadenfreude. Very Robespierre-esque.
pcmodz,
No need to eviscerate. That was pretty good. I’m glad you have a firm grasp on what constitutes real wealth generation (and a service economy isn’t it). It was a point well worth making.
But that’s not necessarily compatible with human psychology, Tony. People react differently when they perceive a game as zero sum. You are (correctly) applying logic to a situation that may illicit irrational reactions.
Darren: Then the businessperson becomes eligible for a 100% tax. Under that situation there is totally no incentive to continue doing business. There is 100% risk and zero percent reward.
No, there is no incentive for growing the business any further. There is an incentive to keep the business small, and no incentive to engage in any dirty tricks to prevent competition from arising if you cannot serve the entire market by yourself.
I think the 1.6M threshold is far too low, but I am pointing out your logic is wrong. Setting a point where return is maximized means that people, in their own self-interest, will stop at that point of maximum return. It doesn’t mean they will abandon the game altogether; and most people would rather own an asset worth a million dollars that pays them a few hundred thousand a year, than work for somebody else for fifty thousand a year.
Tony-
You’ve presented the most realistically reasoned argument in favor of the higher tax rates that I’ve seen, but your own caveat works against you. It is an international market for capital, human capital, and taxation. If the internationalism is curbed the higher tax rates could indeed stimulate an economy as stated. However, that’s not guaranteed even then, because that presumes a sufficient internal consumer demand growth, which is dependent on, among other things, cheap goods provided by cheap international labor, consumer confidence, employment rate, and other regular supply and demand constraints. And with current and foreseeable global political environments, I don’t see decreasing internationalism as even remotely likely. Indeed, the opposite is true and almost certainly will continue to accelerate.
Investment in expansion and growing a business is well and good, and a higher tax penalty for a given income threshold will induce higher capital improvements. But there is only so much each business model can improve on, and eventually, the cost of doing business when a certain scale is reached will become a critical failure point in any given industry, especially in the case of big business. These expansions can eventually tip the company into disaster, and it frequently does happen when markets shift and undermine the profitability of the company that now has a much lower income to support a massively expanded infrastructure. In the case of medium and small business, most of which are in heavily saturated industries, the opportunity to grow is limited. Sinking money into wasted capital improvement is just as much of a loss to that business as paying the money in taxes would be, thus removing incentives for development of new businesses or futilely investing when there’s a sense that their earning potential is capped before the get go. While in theory a company can shrink to reduce it’s overhead, this is seldom done efficiently, and entails job losses and capital lost to the realistic timetables required in major structural changes to a company. These job losses and wasted capital damage an economy.
Ultimately, one has to remember that there are only a very few things which truly increase the wealth of a given economic environment, and these increases follow some basic Newtonian principles. Wealth is a given quantity of resources, and money is simply a medium for exchanging of resources. These resources must exist first as the basis of money, because without them, it’s becomes a rather silly printing of paper. Resources (as I define them) that materially add to the intrinsic wealth of a system can be labeled (I do, anyway) as Raw Goods, Value Addition (Manufacturing) and human capitol (the directed energy needed to reduce the entropy of a system and add value by processing and extracting the other two resources). Service industries can be either a generator or optimizer of resources, or a consumer of them.
Taxation policies must incorporate the reactions of these primary economic originators when evaluating how they will impact an economy. Of course, simply adding wealth to an overall system is not the sole goal of taxation. But whatever the goals of the political structure are, be they health care, military, infrastructure, etc., they must be balanced against the actual constraints facing the system or the situation spirals out of control, as it has in the US on one extreme, and now France on the other.
Balance, balance people!
Ok, I’m done spewing, dissect and eviscerate me at will 🙂
Are their taxes on a graduated scale. like ours, so that their income over say $1B is taxed at 100%. So the CEO can still expense his salary and all of the operating costs (including taxes..). Very big businesses have so many advantages (in the US it is access to law makers) and are surely the biggest threat to small businesses. Maybe the French are trying to level the playing field?
davidM: (That “Then what will happen” was inadvertently copied from your post, it wasn’t me asking a question.)
But what will happen is greater diversity of products and businesses, instead of wealth concentrating in the hands of the few, it will be distributed across hundreds of times as many entrepreneurs, creating a richer market place, and actually more opportunity for people to succeed.
So yeah, McDonald’s might leave behind a bunch of people that could not compete with McDonald’s costs and pricing, but they can compete against each other to produce a better dining experience than you were getting at McDonald’s.
davidM: Is this antagonism toward large businesses, or antagonism toward successful people?
Either way; look at it as antagonism toward wealth concentration.
david says: If the government is antagonistic toward the successful, is it not right to predict that only the unsuccessful will remain?
No. You replied while I was writing the above post; which answers some of that. You are engaging in binary thinking, that people are either “successful” or they are not. Success is a spectrum; there is not only one winner that is the richest person or corporation in the entire world, or entire country, or entire county. Is every business person worth less than ten million an automatic “failure” in your eyes? If so, I do not trust your vision.
I am not saying the French are doing this, but one can be antagonistic to extreme wealth concentration while still encouraging capitalism and competition that could result in wealth on the order of earning a million a month or so. Earning a million a month would be considered wildly successful by well over 99% of Americans; it is in the ballpark of what world famous actors, entertainers and sports stars earn.
Then what will happen?
Darren,
Precisely the shortsighted nature of Hollande’s error.
Those who think a 100% income tax imposed on those having 1.6 million in assets not greatly affecting small business are not considering economic reality.
For one, if a person owned a business as a sole proprietership the assets of that business are considered personal wealth. So a situation arises where inventory, property values, equipment, and accounts receivable can easily help push personal assets over the 1.6 million mark. Then the businessperson becomes eligible for a 100% tax. Under that situation there is totally no incentive to continue doing business. There is 100% risk and zero percent reward. Why would a business risk having a downturn and actually having a net loss when if they make any income it will just be taken away by the gov’t?
Plus, where do lower income persons directly employ others? It simply does not happen overall. There isn’t enough income to do that. Economically it takes higher income individuals or businesses with sufficient revenue to do so.
Additionally, like it or not people are going to make financial decisions based upon cost / benefit not “what they should do” or if it is politically correct. Those who believe that the middle to lower incomes of people would never be subject to these confiscatory tax rates are greatly mistaken. The income / asset level at which these high tax rates apply is just as arbitrary as the amount decided by the gov’t to tax it at. If the constititional protections are not in place, there is nothing to stop the politicians from making the high taxation threshhold lower and now incomes over 50,000 are taxed at 75%. So what would any of you do if suddenly you were put into a 75% tax bracket. All this talk about it being a good thing that “others” pay high taxes is going to go straight out the window and you will react in some manner other than “I’m glad to be paying high taxes, tax me more”.
You reap what you sow.
Lovely.
They certainly don’t want anecdotes offered as evidence either, nick.
And you can take your personal aside and stuff it, you snide prick.
Bron: making investment decisions based on tax implications is a bad idea.
No it isn’t. In fact it is done all the time. Successful businessmen put their personal issues aside and objectively deal with reality; taxation is an expense, and if one is in business to earn money then one wants to maximize their net return after ALL expenses, including taxes.
That return can be measured in terms other than money, such as tangible assets, intellectual property, brand identity, new outlets and their sales potential, new factories and many other such things that can have very real value but are not considered “income” for the purpose of taxation.
Bron: first, that was a one-time levy, and it was on assets, not on income. Those are different things; I do not know the details of the levy.
My statement, as Gene said, is more about clearing a field so something else can grow. As you say, most jobs are created by small business, much of the economy is driven by small businesses. In the modern world, France could still presumably import steel, vehicles, electronics, fuel, and other such products that seem to demand large business operations. So why do they really need giant businesses of their own within their country? If most of our jobs come from small business, why couldn’t ALL of their jobs be in relatively small businesses?
The world was surviving just fine before Walmart, and many people that remember the world before Walmart believe it was a more humane business environment even if the prices were higher and the business profits lower. That can be taken as a metaphor as well, we were fine before McDonald’s came along, we’d be fine without restaurant chains, retail chains, or many other chains.
We might even be better, Heavyweight corporations have buying power and staying power that thwart startup competition. It is impossible to beat McDonald’s cost of goods sold. If business chains were naturally limited by tax consideration to a few dozen outlets, there would be far more diversity, far more competition (and therefore more choice for consumers), far less reliance on any given business, more venues of opportunity (and therefore negotiation leverage) for workers, and far less ability for business owners to influence policy, at least national policy.
Without imposing much of a limitation on owners, either. A store earns maybe half a million a year (after all expenses), an owner of a few dozen might earn a million a month. If that limit would prevent somebody from going into business, they already have their money and income. So I say good riddance, let somebody hungrier have the opportunity.
I suggest that nobody accept what is presented above as fair reporting. This column is not from Reuters. It is possible to find the real report from Reuters on the net. Reuters cites Les Echos in its report. If, after reading the real Reuters article and other background material, someone wants to debate the pros and cons of French tax policy, that’s fine. Please just don’t think that what has been presented on the Jonathan Turley blog is in any way a fair or comprehensive representation of the issues (including taxes, previous policy, and the failure of austerity) involved.
http://www.reuters.com/article/2013/05/18/us-france-tax-idUSBRE94H0AX20130518
http://www.france24.com/en/20130515-france-economy-recession-insee
Tony C – Is this antagonism toward large businesses, or antagonism toward successful people? If the government is antagonistic toward the successful, is it not right to predict that only the unsuccessful will remain? Then what will happen? Surely you can predict that.