Cuba Without the Sun
It drove Gerard Depardieu to relocate to Russia’s flat tax paradise (with its 13% flat tax, it is the geographically largest tax haven in the world), and no doubt contributed to the decision of countless young Frenchmen with entrepreneurial inclinations to leave for friendlier places. Mr. Hollande’s economic policies have led to noticeable growth of French expat populations in places like London and Hong Kong. The 75% super-tax was of course probably not the only factor in driving many of the best business minds away, but it surely played a role. As current economy minister Emanuel Macron remarked at the time, the tax threatened to turn France into “Cuba without the sun”.
Has any benefit come from this “soak the rich” scheme? Not even the slightest. The revenues flowing into the government’s coffers because of it were simply too small to make a difference, while the damage it did to France’s reputation was undoubtedly enormous. We previously noted that Mr. Hollande has nothing left to lose with his approval rating at the lowest level ever attained by a French president, so he finally has some leeway to push through reforms, although a plethora of vested interests are arrayed against these plans. The latest sign that things are changing is that the super-tax has been quietly allowed to expire. Reuters reports:
“When President Francois Hollande unveiled a “super-tax” on the rich in 2012, some feared an exodus of business, sporting and artistic talent. One adviser warned it was a Socialist step too far that would turn France into “Cuba without sun”.
Two years on, with the tax due to expire at the end of this month, the mass emigration has not happened. But the damage to France’s appeal as a home for top earners has been great, and the pickings from the levy paltry.
“The reform clearly damaged France’s reputation and competitiveness,” said Jorg Stegemann, head of Kennedy Executive, an executive search firm based in France and Germany. “It clearly has become harder to attract international senior managers to come to France than it was,” he added.
Hollande first floated the 75-percent super-tax on earnings over 1 million euros ($1.2 million) a year in his 2012 campaign to oust his conservative rival Nicolas Sarkozy. It fired up left-wing voters and helped him unseat the incumbent.
Yet ever since, it has been a thorn in his side, helping little in France’s effort to bring its public deficit within European Union limits and mixing the message just as Hollande sought to promote a more pro-business image. The adviser who made the “Cuba” gag was Emmanuel Macron, the ex-banker who is now his economy minister.
The Finance Ministry estimates the proceeds from the tax amounted to 260 million euros in its first year and 160 million in the second. That’s broadly in line with expectations, but tiny compared with a budget deficit which had reached 84.7 billion euros by the end of October.
French soccer clubs briefly threatened to go on strike, and actor Gerard Depardieu took up Russian residency in a one-man protest against the French tax burden, among the highest in the world. Others were making more discreet arrangements.
“A few went abroad — to Luxembourg, the UK,” said tax lawyer Jean-Philippe Delsol, author on a book on tax exiles called “Why I Am Going To Leave France”. “But in most cases, it was discussed with their company and agreed to limit salaries during the two years and come to an arrangement afterward,” he told Reuters by telephone.
It was no accident that Prime Minister Manuel Valls — alongside Macron the main reformer in Hollande’s cabinet — chose a visit to London in October to confirm that the super tax would not be renewed: his British counterpart David Cameron famously offered to “roll out the red carpet” to French tax exiles.
But Delsol said the saga had made his clients more nervous about investing their time and money in France and had only added to mistrust of a complex tax system which successive governments have failed to reform.
“People have lost confidence,” he said. “That is not something you can restore overnight.”
Indeed, the damage to confidence has been high and it will take quite a while to rebuild it. France’s economy has done nothing but stagnate under the policies of the socialist party, and it will take a lot of effort to turn the ship around.
French prime minister Manuel Valls (right) during his recent visit to London. “I’ve come to bury the super-tax”.
Photo credit: Adrian Dennis. AFP
The Problem with “Soaking the Rich”
We would take issue with the assertion in the Reuters article that the “mass emigration has not happened”. The people likely to emigrate because of such tax policies are obviously not the “masses” anyway. Moreover, people who are already rich can always make arrangements to ensure their pockets won’t be picked too badly. What supporters of such taxes never seem to realize is that there is another constituency that is driven away, and that constituency is extremely important for the economy: people who are not yet rich, but want to become rich.
The government essentially told these people: if you make the necessary effort and take the necessary risks and happen to succeed, it will all be for nothing. We will simply take most of your income anyway. However, young and energetic entrepreneurs are precisely the kind of people who won’t think twice about leaving and trying their luck elsewhere. Why remain at the mercy of a gang of highway robbers waving a flag?
If there was no “mass emigration”, how come Hong-Kong’s French expat population has been soaring? Here are some of the reasons typically mentioned by French residents of Hong Kong as to why they moved there:
“The best place for doing Asian business, for me, there was no contest, it had to be Hong Kong,” Chatté says. He has since sold his share of the venture and now runs his own wine-distribution business and a retail operation called Monsieur Chatté. “I wanted not just to be employed but to be my own boss.”
In a more independent vein, Edouard Malingue, a 38-year-old art dealer from Paris, decided Hong Kong offered better prospects than Europe or America for a new art gallery.
Mr. Malingue moved to Hong Kong in September 2009 and opened his gallery in the financial district a year later. Like other entrepreneurs, he was attracted by the lack of red tape and the relative ease of setting up a business.
Back when highway robbers still wore masks …
Image author unknown
Interestingly, a number of US economists such as Paul Krugman actually think it would be a great idea to hike US marginal tax rates to 90%. Of course this is the same guy who thinks the best thing that could happen to the economy would be an attack by space aliens (his personal “Plan 9 from Outer Space” moment), so this should probably not be a big surprise.
Paul Krugman is on board with some other top economists who say that the U.S. should tax top earners up to 90 percent.
“What you really should want to do is to soak the rich as much as possible,” Krugmansaid in an appearance on HuffPost Live Wednesday afternoon. “So the top tax rates should be whatever it is that collects the most revenue, and now the question is, how high is that?”
The Nobel Prize-winning economist was asked about a new working paper by economists Fabian Kindermann and Dirk Krueger, which found that a top marginal income tax rate of 85 to 90 percent would improve all Americans’ well-being, reduce inequality and bring in more revenue for the government.
Krugman conceded that “soaking” the rich — using a nickname for the Revenue Act of 1935, which established a post-Depression wealth tax on top earners of up to 75 percent — is “not going to happen” due to today’s political climate.
Today, the top rate of 39.6 percent is paid on income above $406,750 for individuals and $457,600 for couples. “Any increase in top tax rates is almost certainly a move in the right direction starting from here,” Krugman said.
Since Mr. Krugman himself is a one-percenter income-wise, we suspect that his support of a 90% tax rate for top earners is indeed contingent on his strong belief that it is “not going to happen”. After all, no-one keeps him from leading by example and donating 90% of his income to the government. No new tax laws are required for this, the IRS would surely accept such a generous gift without demur.
Anyway, the idea that such extortionist taxes would “improve all Americans’ well-being” is so absurd it surely doesn’t require any further comment. It is however symptomatic of something Hans-Hermann Hoppe once said. He characterized the output of the majority of today’s intellectuals as follows:
“What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today’s intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.
As to Mr. Krugman, he should perhaps take note that even the French socialists have now abandoned the extreme tax rates he is supposedly in favor of. When even Francois Hollande’s government abandons this policy, it shows ipso facto that it must be an absolutely terrible idea.
How to fix the economy, Krugman style
Image via ufo-meldestelle.blog.de
Good riddance to France’s super-tax; the decision to let it lapse can only improve France’s economic situation. Still, a lot of damage has been inflicted already. If Mr. Hollande is really serious about economic reform he certainly has his work cut out for him. At least he seems to be taking a few steps in the right direction lately.