The Daily Telegraph article shows the extent of the flight but there are important lessons to be learned.
Many people in the UK have doubted the wisdom of cutting the 50% income tax rate to 45%. There is a feeling that it is 'fair' for the rich to pay more than the middle income earners. This may actually be a reasonable point, but the argument is that the disincentive effects of high tax reduce overall economic performance and so make everyone worse off in the long run. While 75% is a lot more than 50% in tax terms there seems to be credible evidence that incentives do matter.
France has been incredibly slow to adopt supply-side reforms. The French industrialist Louis Gallois has delivered a report calling for 'shock therapy' to help improve French competitiveness. His plan includes cutting payroll taxes for employers, spending cuts and higher consumer taxes. There seems little political will to do this. Hollande is an old fashioned socialist who has no experience of government and ideals are yet to be overcome by reality for him. France carries some of the highest labour costs in the world and with a rapidly expanding trade deficit and 27% youth unemployment the Gallois Report may be the thing that comes back to haunt him at the next election.
A further important point to note is the fall in the French money supply that has resulted from the capital flight. This is potentially serious as it represents a deflationary force in an economy already in recession. Falling money supply is going to reduce AD and prevent recovery. In situations like these deflation is the last thing the economy needs and so the French cannot ignore the loss of confidence the capital flight represents. Like so many socialist leaders before him Hollande must realise that it is not possible for a country to be the sole master of its economic policy.
Personally, I tend to agree with higher taxes for those who can afford it, but taxes as excessive as this seem ridiculous and will likely lead to only more trouble for a country already facing rising unemployment and poor growth expectations. More and more rich French businesses and people will leave the country to escape these harsh taxes. This can already be seen through the recent influx of French homeseekers to areas such as Kensington and Chelsea, and this could well lead to the move causing a decrease in government revenue, not at all what Hollande is hoping for. And now, even in the light of all the crticism, Hollande will not be willing to give up on the tax as he will lose a lot of his already dwindling credibility.
ReplyDeleteYetunde
ReplyDeleteAnyone's immediate repsonse to a 75% tax on income would be one of extreme shock and fear, which are the main reasons why the domestic investors have moved their money to foreign accounts. Such a high tax can also be percieved as unfair and cause a brain drain in France where rich lose the incentive to work, this will have an even more negative effect on the French economy.
The main reason for this 75% tax, is to generate enough revenue to implement these supply side policies; to fix the expanding trade deficit and the staggering 27% youth unemployment. If this new income tax was accepted amongst french workers, then their economy would move towards long term economic growth as there will more funds going towards training the workforce, better working conditions- eventually shifting towards the full employment level, increasing real GDP, and achieving economic growth.
Having said this, I still do feel 75% is a lot to tax, and French government has seen this backfire on them, so maybe they should reduce tax to 50%, which may keep domestic investors from investing their money elsewhere.
I like Francois Hollande and he is right to want the rich to pay a fair share (unlike David Cameron in Britain). However, he is wrong to increase the top rate of tax in France to 75%. It won't raise any money because most of the people who it will affect will go elsewhere. It also seems like the politics of envy rather than credible tax policy. This is because of the effect that such punitive tax rate could have on supply in the economy. The top rate of income tax should not be higher than 50%. If Hollande really wants to get the rich to pay their fair share, then he should give up on a 75% tax rate and instead tackle tax avoidance and introduce new taxes on assets rather than on income.
ReplyDeleteI think what the French President is doing in terms of tax reforms is just not right for the country at all, its as if he wants to eliminate the entire upper class. I fully agree that more well off people should contribute more to public services than those who aren't as wealthy however I think this rate is rather stupid and seems to be penalising people from becoming successful and rich. How can the French expect to create innovative products and goods for the fast changing international markets if potential entrepreneurs are hindered from doing good to the currently struggling economy.
ReplyDeleteMany rich French people are now moving to our countries where conditions are less hostile, so Hollande may actually face a dip in tax revenue as there will be no more rich people to tax. Now that these members of society has been outcasted, I think France will find it harder to sustain itself economically in the future as these individuals have large sums of money which can potentially be invested in French businesses which might help to lower to eye watering unemployment figures, but instead it will be utilised elsewhere like in Russia.
Richmond Amoah
Economicsmate.blogspot.co.uk
It is obvious that this initiative would never work in England. There is already the question of benefits and the lack of incentive it gives people to work. How much more if income tax was raised to 75 per cent? There's no saying how this tax will affect France's employment figures, especially in young people, assuming that the new tax would provide less of an incentive to work, and maybe the level of consumption, which in this economic climate is one of the ways to revive it.
ReplyDelete- Cristyn Nartey