Do Hollande and his supporters understand the risks of a 75% tax rate?
Since being elected, Hollande has continued outlining a series of budget measures, including cuts and tax rises at achieving economic recovery within two years. One of these is a planned 75% upper tax rate to be imposed on annual income above €1 million. Hollande won a lot of support in the French election for the policy, but he has yet to implement in. He has recently stated that he plans to drop the extra tax rate after 2 years, but by then, the consequences could be disastrous, with very little, if any, short-term benefits.
Hollande has claimed that this policy is needed to “send a message,” with the government under pressure to increase tax revenue or cut spending in order to balance the books. Yet to introduce the policy, his supporters have claimed that he is procrastinating, with his opponents still claiming that it will be a bad idea. The policy might have just been a political gesture, but facing mounting criticism and seeing his poll ratings decrease by twenty points in just four months, Hollande seems to be moving towards a 75% tax rate yet again.
Many have claimed that the rich need to pay more of their fair share, but looking at British figures, we can see that they already contribute a massive part of the revenue received by the government. For example, the top 10% earns 35% of the total income, but pays 58% of the tax. This is a massive chunk of money that the government needs to continue paying for the services that the rest of society enjoys. Not only do I believe that this is a fair amount, I also believe that this isn’t something that the French can risk. Recently, we’ve had France’s richest man, Arnault, apply for Belgian nationality. If not to escape current tax laws, he might be doing it to protect himself against future policies. Belgium has fiscal stability, which means that taxation and policies don’t change regularly, making it attractive to millionaires whose wealth is at risk under constantly changing policies, as seen in France where politicians are constantly trying to gain support. Reports have suggested that other millionaires are doing similar things, meaning that the prospect of France losing this revenue is realistic. Losing just a small chunk of the 10% is massive, and likely means that any fiscal problems in France would get far worse. In the EU, it’s not difficult for people to move country, and therefore pay tax in a different country, meaning that it would be easy for France’s bankers or businessmen to move to London or Frankfurt. Once these people left, they would have little incentive to return, still having access to the EU single market.
At the same time, Hollande has suggested that certain groups, such as artists and sportsmen would be immune from any increases in tax. This is another stupid thing to do, as it means that entrepreneurs are being unfairly hit. Not only do these businessmen help create wealth for the rest of the country, but they probably also contribute a lot more than the groups that will be immune. Entrepreneurs could have the next big idea to create a valuable company, brining jobs, exports and other benefits to France. Therefore, this tax policy will likely lead to these people leaving the country, and setting up their businesses elsewhere. They already consider places like Silicon Valley a better environment, and this will just make that decision easier, meaning that France loses out on lots of other benefits that would likely outweigh the additional income gained by a 75% upper tax rate.
Overall, the evidence points to the fact that the policy will be a bad idea, in both the long and short run. In the short run, we could likely see huge discontent amongst the wealthy, which could lead to them leaving the country. Using an example, with the top 10% in the UK paying 56% of the tax revenue, this could lead to a massive decrease and fiscal problem for the country, finding it hard to pay for the services used by the rest of the country. Long term, the country might not be able to regain this revenue, and could likely see additional problems with entrepreneurs leaving to launch businesses elsewhere, depriving France of a lot benefits that stretch far beyond tax revenue. All in all, it’s likely that Hollande could see a further drop in support if he introduces the additional tax, creating a lot of problems in the two years that he plans for it to exist.