Call it an ideological paradox or the inherent irrationality of human nature that although we stress so much on study of history and yet we never learn from it. The same is happening in France where a new Super Rich Tax, which puts a tax burden of 75% for individuals with annual income of more than 1 million Euros, has been imposed. As per it’s election promises, the Socialist Government of Francois Hollande passed this tax to achieve its target of bringing down income inequality and the burgeoning fiscal deficit.
Such a hard line socialist approach to handle fiscal issues is unsought for and has not yielded much success in the past. A new mistake to solve some other mistake is not justifiable. Take the examples of Russia, China and India etc. They all moved towards more open & free economic setup and the end-results are well known, no proof required. And here we are moving backwards which is totally unprogressive.
Reasons why it seems to be more of a gimmick
Not only is there an ideological issue with this Super Rich Tax, but also its implementation itself is clouded with a lot of ifs and buts. Some of the most prominent of these issues are:
I. This socialistic approach of financial equality by way of 75% tax, itself creates unfair inequality between individuals and households. Individuals with 1 million Euro plus income and households (say with 2 units each having 1 million Euro plus income) are going to be taxed differently. This throws the individual super rich at the losing end.
II. In many cases, the individuals on the borders of 1 million Euro plus Income bracket are anyways going to tweak their accounts to short fall the bracket. Of the approx. number of 15000-20000 super rich individuals, a large number will try to get off the radar just by cooking the books.
III. The tax laws of France, like most countries, are based on Residency and not on citizenship (like in US). Hence, there may be exodus of large number of Super Rich to other countries just for tax benefits. How is the government going to save this from happening? Let’s say just 10% emigration happens, still a large number of super rich with their income will be gone and with them will go the existing 45% taxes that the government earns currently.
And that’s quite possible. Take the example of French Actor Gerard Depardieu, who is seeking official Belgian residence to avoid this unrealistic tax rate.
IV. Under the pressure of Counsel’s rejection, Hollande decided to keep the Super Rich Tax just for 2 years or as the fiscal situation demands. Isn’t it so natural that with the timeframe declared, still larger chunk of the Super Rich minority will move abroad for the aforesaid period to save taxes. You are then hardly left with 1500-2500 Super Rich Individuals.
Now the question arises that ‘how the hell are you going to bring down the fiscal deficit of 85 billion Euros by taxing a small chunk of Super Rich Individuals’ whose richness has benefited others in the form of employment opportunities and other similar ways. There seems to be no logic behind this quick formula of fiscal consolidation.
In fact it will have adverse effect of capital and talent exodus, discouragement to entrepreneurial spirit, more economic inequality and loss of precious legislative and policy framing time in defending such bogus laws. Super rich tax seems more of a gimmick to keep up the election promises than some realistic groundwork to benefit the French Economy and its citizens.
Written by Azouz, a trader and editor for QS Trading Software