2012-09-29

A question on French tax rises

What makes them have less impact than spending cuts?

The BBC's Chris Morris noted that many of the Hollande government's policies come from raising taxes rather than cutting spending and compared with other countries in Europe pushing through painful austerity, "France is resisting such radical surgery".
France aims to raise an annual €20bn from the top 10% of taxpayers. The much-heralded 75% tax on €1mm+ earners will raise €200mm or so which is chickenfeed (1%). The rest of taxes include an abolished ceiling on wealth taxes, taxing capital gains as income, and a 45% tax rate on incomes above €150K.

With 65mm people in France, say about 70% of them are taxpayers. That's 45mm people, so all these taxes (€20bn annually) will come out of the income of 4mm people. That's €5000 per person, per year.

Would anyone like to argue that tax rises like this are not going to induce an extremely sharp slow-down in discretionary spending? How exactly does Hollande expect consumer service and goods companies to keep afloat when these taxes bite? Who's going to cover the cost of unemployment as they lay off workers?

Chris Morris, France is not "resisting such radical surgery". France is merely choosing to lop off an arm rather than a leg. The problem is, the gangrene is in the leg...

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