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
“When an official spends for his own profit an extra hundred sous, it implies that a taxpayer spends for his profit a hundred sous less. But the expense of the official is seen, because the act is performed, while that of the taxpayer is not seen, because, alas, he is prevented from performing it.
You compare the nation, perhaps to a parched tract of land, and the tax to a fertilizing rain. Be it so. But you ought also to ask yourself where are the sources of this rain, and whether it is not the tax itself which draws away the moisture from the ground and dries it up?
Again, you ought to ask yourself whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation?
There is one thing very certain, that when James B. counts out a hundred sous for the tax gatherer, he receives nothing in return. Afterwards, when an official spends these hundred sous, and returns them to James B., it is for an equal value in corn or labor. The final result is a loss to James B. of five francs.
It is very true that often, perhaps very often, the official performs for James B. an equivalent service. In this case there is no loss on either side; there is merely an exchange. Therefore, my arguments do not at all apply to useful functionaries. All I say is — if you wish to create an office, prove its utility. Show that its value to James B., by the services which it performs for him, is equal to what it costs him. But, apart from this intrinsic utility, do not bring forward as an argument the benefit which it confers upon the official, his family, and his providers; do not assert that it encourages labor.
When James B. gives a hundred sous to a government officer for a really useful service, it is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes.
But when James B. gives a hundred sous to a government officer, and receives nothing for them unless it be annoyances, he might as well give them to a thief. It is nonsense to say that the government officer will spend these hundred sons to the great profit of national labor; the thief would do the same; and so would James B., if he had not been stopped on the road by the extralegal parasite, nor by the lawful sponger.
Let us accustom ourselves, then, to avoid judging of things by what is seen only, but to judge of them by that which is not seen.”
Frederic Bastiat
tony c/pcmodz:
by internationalism, do you mean free trade?
Just to be honorable to the French and American Fries, here is the problem they are trying to address in their special way: On The Size of Government.
Size matters, especially when it comes to taxation.
Justice: Ok, is it 100% actually paid tax or is that a nominal rate that is never paid?
This is a philosophical question. Do you believe we enforce laws out of revenge, or do you think (as I do) the laws exist as a threat to prevent crime, and we have to carry out the punishments or that threat is meaningless?
The hypothetical I proposed would be a 100% tax to prevent people from earning more, in a year, than $12 million dollars. If they earned $14 million, we would be obligated to take $2M of it. If they make a billion, we would be obligated to take $988M of it.
What would happen in reality, however, is that once people KNEW we would take the excess, they wouldn’t bother to earn the excess. It would still be in everybody’s best interest to strive to get up to $12M a year; but not beyond that. That would encourage diversity.
Right now, the median (which is not the average) American pays about 50% of their income in various forms of taxes (most pay SS, MC, income tax, sales tax, property tax, and gasoline tax).
If tax policy were up to me; I would make the median national income the deductible beneath which people pay zero taxes of any kind. By definition that is the bottom 50% on the earnings ladder, and in my mind the economy is obviously not serving them, they are serving it. The other 50% would pay 50% of what they earn over the deductible; up to $12M per year; and if they earn over $12M per year, the excess is taxed at 100%.
Salary strategies would obviously be drastically revised in this view, but for various analytical reasons I believe the median would settle at about $2000 take home per person, without paying any sales, gasoline, property, income, SS, or Medicare or unemployment taxes.
Tony,
Notice that, other than the orchard, the large trees only shelter the buildings. I like your metaphor.
http://dfs.berkeley.edu/wp-content/uploads/2011/10/farming_for_pollinators_brochure-2.jpg
Blouise: Had I thought about that metaphor a little more; I would note that beneath large trees very few things can grow. So it is like clearing a field of a few large trees that are absorbing all the sunlight, so a thousand flowers and shrubs can grow instead. If you limit size in the field to no more than four feet in any direction; you encourage diversity. The amount of sunlight is the same, the amount of rain is the same, but no single entity dominates.
People should have seen that coming. Money is not of God. Therefore Money will consume the consumer even as devils want to consume the consumer that consumes. The more money in circulation the more debt. On and on it goes. It is a downward spiral that people are not awaire of.
“Isn’t it possible the French be better off if their economy was built on smaller businesses, with more competition, and less corruptive influence?
Might that be a stronger democracy with a government more focused on the will of the people instead of the will of the mega-wealthy?
… more about clearing a field so something else can grow.” (Tony C.)
I positively love it when you go all revolutionary on us.
When the rich Frogs pull out the Euro is in trouble.
Ok, is it 100% actually paid tax or is that a nominal rate that is never paid? We have corporations that complain about the high corporate taxes in this country who pay ZERO or next to ZERO.
If this is an actual paid rate 75% is too high. But lets be serious while the French may police their taxpayers better than we do I am pretty sure few of the very rich pay anything near the highest tax rates, just like here.
A few weeks AG Lawrence O’Donnell of MSNBC said no one pays 39% in the US. Well, he is wrong the middle class does. Really rich people like Larry doesn’t, BILL Gates doesn’t, Romney doesn’t but middle class people who cannot take advantage of the loop holes do. I want the rich in this country to pay their fair share. If I pay 39%, I want them to–all of them.
Perhaps the French went too far but the rich need to pay their fair share in France and the US too.
pcmodz: And I forgot to say the reason I have all that competition preventing me from getting too big is because of the $12M limit; that is what prevents a few giant burger sellers from dominating the market, it basically forces the market (however large it may be) to be served by a lot of smaller (but still multi-million dollar) companies / competitors.
What would happen, btw, is the government would not enjoy hardly ANY revenue from the “100% side) of a progressive tax rate that reached 100%; because almost nobody would intentionally exceed it. So it would not actually be confiscatory to any significant degree at all, it would just force market sharing and thereby increase competition, with the benefits that is supposed to bring but often fails to do once markets are consolidated amongst a few giant players that have settled into more or less permanent positions. At which point, no startup can compete, and they are all basically waiting decades for one of them to make a fatal business error, and end up with their market share absorbed by their giant peers.
Not a glass ceiling, a cement ceiling.
pcmodz: What happens when there is no more market to serve? Or in other words, market saturation is reached? How does that lead to someone else growing another business?
What happens now when there is no more market to serve? I will be specific for clarity; if the market will buy one million burgers a day and no more, than you can have ONE company selling one million burgers a day, or you can have 100 companies selling 10,000 burgers a day, each. I think the second scenario is preferable; and if you can earn a profit of 50 cents per burger, that is a profit of $5000 a day, which is $150,000 a month, or $1.8M per year.
So here is the question: If you could earn $1.8M a year and pay maybe $500K in taxes, would you do it? I would. Now, hypothetically, let us say everything in excess of $12M a year has a 100% tax rate. Basically, you can’t earn more than $12M a year. Would that change your mind about earning $1.8M a year, and paying $500K in taxes? It would not change my mind. I might still try to grow until I push on that $12M, but that is a long way to go, and I have 99 businesses competing against me in the burger business, that all want to do the same thing.
mespo opening up and revealing his economic fantasies. Kinky.
And somehow I missed where you said that you would not agree with the level the French set, which means you’re arguing for a less extreme version than I had envisioned you were postulating.Mega billions for a single entity is ridiculous, but perhaps something along the lines of actually hitting 75 percent among top earning corporations, with AMT (alternative minimum tax) set to a certain EBITDA type benchmark, and offsetting deductions applied directly to the AMT’s for activities that directly and positively affect trade deficits and resource extraction and refining?
Tony C.-
Actually, I agree with you on what constitutes money. I was overly vague in my description of human capital. Human capital is itself a contribution of resources to a system because of all the things you mentioned above, because they add value to physical resources extracted, by their existence as consumers, and by their effort in extracting, refining, and making more efficient the use of the physical resources. Time, or effort, of people then becomes the resource itself.
Tony C.
“True, but so what? Then they stop growing, and if there is more market to serve, somebody else grows another business”
What happens when there is no more market to serve? Or in other words, market saturation is reached? How does that lead to someone else growing another business? By definition, the need for that business no longer exists because market capacity has been reached (broadly, and over time, not in every case). You are making an assumption that there will always be another niche to fill, but that only holds true if several factors hold together. First, there has to be a product that people are willing to pay for. Then, there has to be money to pay for that product. That money is added to the system by the contribution of resources, and resources can be removed from a given system and sent to another, or wasted through loss of efficiency, or simply run out because of a lack of sufficient resources to be spread across the demands of a population. If business stop growing, they stop creating jobs, the means by which human capital is applied to value addition. Thus, less money exchanged for human capital, less money in a system, and less to go around an ever increasing population. Another reality is that business are not stagnant, not for long. They either grow, or they die off. No business remains static in proportion to the rest of the market share for long. They have a constant fluctuation.
I actually agree with you that big businesses are basically the bane of the country morally and ethically speaking, but high tax policy is not the correct solution, because it will reduce the amount of human capital in the market and the amount of raw and value added resources. Jobs will decrease simply because there are less resources to exchange for human capital, while increasing the leverage companies have to lower the money paid for a higher supply of human resources. A balanced policy, one that gives incentives for the things which add wealth to a system, must be maintained. What is done with those tax dollars can be a huge benefit to an economy IF they are not spent in a way that consumes resources without promoting an ever larger input to them. No utopian balance will ever exist, because without the drive to increase access to resources, human capital becomes far less efficient, and on the flip side, if human capital is traded too cheaply (as it is in most countries) then wealth concentration becomes another negative impact on the economy. Remember that most government spending is on things that reduce efficiency and consume resources without stimulating a replacement source, thus replicating a service industry.
Does that mean I have a suggestion for this balanced policy? Not even close. I ain’t that smart. I can’t believe that the US or the French polices are correct, though, or that big business has the answers. A balanced approach to meeting the demands of ever increasing resource addition and a fair distribution of resources is and will always remain an evolving game.
Gene: Well, we agree on that point. I think the French limit sounds ridiculous. But one can set a limit that the vast majority would not ever achieve, like a million in profit per month. A limit like that will have little effect on the psychology of the business mind; while still preventing vast multi-billion dollar accumulations of wealth. And I believe (without having looked for evidence) that all the market niches would still be filled and all the market would be satisfied. Due to greater competition, we might have lower prices, greater quality, and a greater selection from vendors more attuned to our preferences.
Tony,
From an ownership perspective, doing something to build the base of the business might not be psychologically attractive if any increase in profits is taxed at 100%. It can make small and medium business owners unwilling to assume risk which they might in a less taxed environment even when the risk appears to be good by rational standards. It influences their perception of ROI.
Gene: That is it above. It apparently self-approved; but for several minutes (and refreshes) it was just “awaiting moderation.”
Gene: People react differently when they perceive a game as zero sum.
I don’t think it is a zero sum. A friend of mine would work as a chef at a hotel or something for about $50K, or get some investors and open a restaurant, where he can earn about $200K. There is more hassle in the latter and longer hours, but per-hour he earns more, and is happier in charge. How is that zero-sum?