Sunday, July 15, 2012

Will The French Be Able To Tax Their Way To Prosperity?

The newly elected Socialist government in France plans on taking a path that seems almost certain to fail. Increasing the tax rates on the rich and upon big businesses seems like an unlikely route to prosperity. The tax increases include extra levies on those who pay the wealth tax, a 75% rate for households earning over €1m, higher inheritance tax, an extra 3% tax on dividends, heavier charges on stock options, higher taxes on financial transactions, banks and oil firms, and a 5% extra tax on big companies. 

The increased revenue is needed in order to meet deficit reduction targets of 4.5% of GDP this year and 3% next. Yet France desperately needs to grow their economy. The unemployment rate is about 10% and trending upward and business activity is flat. Increasing taxes is almost certain to restrain job creation and economic growth.

Among the various methods of reducing the deficit, the Socialist Party is taking the most politically palatable. Given how poorly reducing spending has worked out for Greece, it is no surprise that politically unpopular austerity measures have not even been put upon the table by the new government. Increasing taxes on the middle class would be equally unpopular. Thus, while the French increases in taxes on the rich and big business are likely to send the country into recession, the new government did not have a lot of other politically palatable options for reducing the deficit.

As the demographic time bomb of aging baby boomers explodes in economically developed democracies  across the globe, voters will have to choose between:  1) continuing to run up unsustainable deficits; 2) cutting entitlements, 3) increasing taxes, or 4)  making structural changes such as increasing the work week and pushing back retirement ages. It seems unlikely that France will be the only country to choose to increase taxes on the rich and big business. Despite the fact that increasing taxes on the rich and big business will fail in France, that lesson is unlikely to be learned as deficit problem worsen in every country with generous entitlement problems for aging baby boomers.

Wednesday, July 4, 2012

How Will French Plan to Reduce Budget Deficit By Soaking The Rich Work Out?

Wealthy individuals in democracies across the world had better keep a close eye on what is happening in France. While governments in the U.S,, U.K., and Japan continue to run up unsustainable public debts. the government in France is taking measures to reduce their deficit. The newly elected socialist government is doing so by implementing the only solution that is politically feasible in the age of entitlements -- soak the rich and big business.

There is little appetite in the U.S. for the type of deep cuts that would be required to balance the budget. Thoughtful plans to for deep budget cuts, such as those proposed by Paul Ryan or the Simpson-Bowles Commission are brushed aside by knee jerk attacks by the left. The Tea Party talks a good game about balancing the budget, but has too much that is off limits to make doing so feasible, including their inflexibility on taxes. Proposals to reduce medical spending are met with demagoguery on the Right about "death panels", and defense spending cuts are off the table among the favored candidates of conservative voters.

In the age of entitlements, voters want ever more benefits, but are deeply reluctant to pay more in taxes. The only type of taxes that voters will approve are those that are imposed upon the rich and big businesses. Thus, the wealthy had better hope that the French plan to soak the rich fails miserably, otherwise they are next on the docket for big tax increases in democracies running big deficits.
The following is a summary from the The Guardian of the French plan to soak the rich 

 Over half the measures target households, mainly the country's richest, and just under half target big business. They include lowering France's wealth-tax threshold, which had been raised by Nicolas Sarkozy. France's wealth tax is unique in the EU and Hollande will now add a one-off higher levy on those with net wealth of more than €1.3m. Inheritance tax, which had been loosened by Sarkozy, will be tightened.
• Banks will face higher taxes, as will petrol giants through a new tax on energy firms holding oil stocks. A 3% "dividend tax" must be paid by companies on dividends distributed to shareholders. This aims to encourage firms to use cash flow for investment as France seeks to close the competitiveness gap with its industrial powerhouse neighbour, Germany.
• The tax on financial transactions will be doubled to 0.2%.