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Guest Post: The Flawed 75% Tax Solution From Hollande And Piketty
Submitted by Richard Epstein via CapX.com,
The recent world of political economy features the deep paradox. By common consent Thomas Piketty’s recent volume Capital in the Twenty-First Century has been hailed of the intellectual triumph of the year. Its bold recommendations make the theoretical case for a global income tax in the range of 54 to 80—a figure that has also been defended in the academic work of 2010 Nobel Prize winner Peter Diamond and Emmanuel Saez, a frequent coauthor of Piketty and the winner of the 2009 John Bates Clark award. The basic conceit of these distinguished authors is that preserving economic growth does not require governments to sacrifice the strong push to income equality, for which the strongly progressive taxes on both income and wealth are thought to be primary policy levers.
I have already expressed my theoretical disagreement with their position both here and here. But there is no reason to rest with these theoretical objections, in light of the unfortunate test case kindly presented by French President Francois Hollande, who made a two-year top tax bracket of 75 percent on salaries of over 1 million euros an essential part of his economic programme. His political boldness comes at a high price, as Hollande suffers from an enormous loss of popularity, racking up recent approval ratings in the order of 12 percent owing to the persistence of high unemployment rates in a zero growth economy.
The intellectual challenge is to explain the gap between Piketty’s confident theoretical assertions on the one side, and Hollande’s empirical abyss on the other. Clever social democratic economists can surely think of some confounding factor to explain the results in question. But to this lawyer, a set of simple economic propositions help to explain why the grand theories of Piketty and company cannot respond to the fatal flaws of their theoretical construction.
The basic question is why would anyone assume that major shifts in tax rates should have only relatively modest effects on the production of wealth. No one would say that about a cut in market wages of over 50 percent. So why assume otherwise in a tax context? To orient the discussion, any accurate prediction of the effects of high taxation critically depends on the distribution of benefits from those tax expenditures. In theory, some taxes should increase the willingness of individuals to work, but only if the public goods they generate for each taxpayer exceeds their tax contribution. But exactly the opposite conclusion applies to tax regimes that use, as do Piketty and Hollande, higher taxes as the first step in a large program of income and wealth redistribution to individuals further down on the income chain. At this point, the simple question is how earners and investors now respond to these new incentives.
To give the numerical examples suppose that we increase total taxation on the marginal euros from around 40 percent to around 75 percent. That move represents a reduction in disposable income from 60 percent to 25 percent, or a reduction in excess of 58 percent. People might not make any major adjustments to that tax burden if they knew that it were to last for only a year or two. But let the new tax rates be regarded as permanent, and it have enormous impact on the entire pattern of human activity from cradle to grave. People will be less reluctant to take short term sacrifices in (low-taxed) Euros today in order to earn (high-taxed) euros tomorrow, when the after-tax income from lower but flatter earnings profile exceeds that from a higher, but more peaked, earnings profile. The entire nation loses from the destruction of human capital.
In the short term, moreover, we should expect to see other effects, including considerable migration into more tax friendly jurisdictions. Just those types of dramatic movements are evident among states in the United States with its persistent relocation of people from high-tax to low-tax states. These movements take place notwithstanding the fact that the high levels of federal taxation apply across the nation. Those differentials are far smaller than the tax increases of the sort introduced in France. And as one wag has put it, there are many English people who live in France, and they are all retired, and many French who live in England, at the peak of their professional careers. No mystery here.
It will of course be answered that the reason for the migration is that the high tax rates are not imposed across the board. But if uniform high taxes solve one problem, they create another, which is that individuals will drop out of the formal labour market and engage in other tax avoidance strategies, including working in the barter or underground economy. Ordinary people may not have the sophistication of eminent French and American economists, but they nonetheless perceive the decline in their after-tax income and act accordingly. I confess that I am unable to find any empirical study which shows the various responses to the high marginal tax rates that have caused such widespread resentment in France. But that reason is simple. Most politicians have long some vestigial economic survival instincts that prevent them from going over the tax-cliff. Until now, people were reluctant to impose taxes at that self-destructive levels. The great danger of theoretical studies like Diamond’s and Saez’s is that it gives adventurous politicians the intellectual cover to try take that ill-advised plunge. Yet note how squishy their results really are given the 26 point range from 54 to 80 percent in the Diamond/Saez estimate. Prudentially, why would any champion of progressive taxation start at the top end of that dicey range remains a mystery to me.
The ultimate folly is that the highly-stylized models of Piketty and company misunderstand the productive interaction between capital and labour. A simpler economic model stresses that high taxation cuts off private investment by putting more capital in government hands. That capital which is consumed will not be invested. That which remains will be invested unwisely by government officials who are all too vulnerable to strong political crosswinds. The reduction of available capital for investment reduces in turn the demand for labour, as a complementary good. Wage stagnation is the result.
The American situation is by no means as grave as the European Union’s, but median U.S. family income has declined, as John Kyl and Stephen Moore recently wrote in the Wall Street Journal, in the six years since Barack Obama unleashed his own interventionist policies, whereby high taxes on the rich result in lower wages over much of the income distribution, at rates are far lower than those that Piketty has championed and Hollande has implemented.
Any economic sage should conclude that the cure for high taxation is, well, low taxation. Remember our job is not to maximize government revenues in the short run, but to improve living standards in the long run. As this is written, the Democrats in the U.S. Congress are engaged in a fierce debate about how to reverse the fortunes of the declining middle class that deserted them during the recent mid-term elections. But some people never learn. The major criticism of President Obama was that he put his health care program above the an economic program that featured tax cuts for the middle class and an increase in minimum wage rates and protections for labour unions. Even Mr. Hollande has to be aware that this program too is bound to fail, giving that restrictive labour market regulation will compound, not offset, the dangers of high taxation. France would do well to repudiate its native son Piketty, and move to align its policies with the Scotsman Adam Smith, who a long time ago advocated low-broad taxation and light-handed regulation of capital and labour markets.
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The reasons for the widening gap in income inequality lie in the functional nature of an ever larger, predatory fed'l gov't. And Piketty's solution is to make the fed'l gov't even bigger via vastly increased tax revenue?
Do they think we're stupid?
No - they think we're sheep, ripe for the fleecing.
Sadly, they're mostly right.
And what baaaaaaaaad news that is for all but the black ones.
Best you be one no matter what color you are on the outside.
Meanwhile, and as always, the state can kiss my ass.
Yes, actually they do.
Just ask Jonathan Gruber.
Exactly.
And the really funny thing about that is, he had to have been talking about everyone who supported ObamaCare. Anyone who opposed it (by his own definition) wasn't stupid ;-)
Big company earnings are at record highs! While wages have been stagnating!
Either company profits are record high and wages are low or vice versa. Both is not possible.
You are falling victim to this 1%-propaganda article, that suggests higher taxes for the parasiting 1% would be the same as higher taxes for the middle class!
It would be funny if it wouldn't be so dramatic: how much less taxes shall international corportions pay?!
It's always the same kind of propaganda:
On the left side the bolsheviks that want to give free money to the low-class parasites and on the right the propaganda for the 1% that is camouflaged as being helpful for the middle class.
Propaganda works, doesn't it?
"It would be funny if it wouldn't be so dramatic: how much less taxes shall international corportions pay?!"
Corporate taxes are passed through to you, the end user.
Now, having said that (not that I'm a big fan of taxation on any level...but) if those stock options were taxed at the "progressive rates" they should be (if we're talking equality, meaning equal taxation of all wages under the progressive regime of taxation) there would be a lot more coming in wouldn't there?
Corporate profits are at record highs.
Since when are record profits necessary?
Either record profits or higher wages. Both is not possible,
You prefer record prodfits.
The funny thing is, that it's not my problem, since I make my money in the markets and pay at maximum only 25% taxes.
Very nice to have so many average joes that believe in this false propaganda when it comes about raising wages because "that would not be good for the economy". LOL.
One job not enough? You need two jobs? Be glad that you have one job, even if it pays sh.t. Who needs a decent payment for a fulltime job?
Don't have any retirement security? Be glad about it, because otherwise you would pay more taxes!
US people fully deserve this system and even moar of the free unleashed markets.
Do you enjoy making unsubstantiated, non-sensical assertions?
You cannot say I prefer record corporate profits in your defense of advocating for higher corporate taxation when I just told you THE CORPORATION will and DOES pass higher taxation of itself on to you and I, they do not just eat it. The ones run by people with lower ethical standards just don't care about higher corporate taxation because they know YOU will be paying it (not them) we have one of the highest corporate tax rates in the world right now.
Now you're attempting to drag minimum wage into this. Lets go high end: Do you really think an extra $200 bucks a week paid to burger flippers (AND THEN TAXED BY GOVERNMENT!!!) is going to give them a comfortable retirement? You expecting them to be leaning on their canes fifty years from now saying "Would you like to super-size that, sonny?"
Then compound all that by saying you make your money and are taxed at a maximum of 25% because of "evil corporations" making all those record profits.
Why don't you just come right out and say you're a crony-socialist (like Piketty) and be done with it?
Do they think we're stupid?
Yes they do.
And lately, they've been right.
I think you are so dumb you think manual labor is a Mexican!
Farmers in France just drop the food in your highway.
The farmer in France ain't going hungry. He's drinking wine and feeling FINE.
What governments are going to realize sooner or later (probably later) is that when they all went balls-deep in globalization, it wasn't just labor that got arbitraged on the world stage, it was also their ability to set their tax rates in a vacuum. Raise taxes too high and the capital/tax base simply LEAVES to someplace where money is treated better.
So, go right ahead and pull a France. Then watch what happens next.
assuming you can get out
"By common consent Thomas Piketty’s recent volume Capital in the Twenty-First Century has been hailed of the intellectual triumph of the year."
Intellectual vacuum.
"Its bold recommendations make the theoretical case for a global income tax in the range of 54 to 80"
Gerard Depardieu boldly left France for Russia, when the 75% tax was announced. Other well to do French left for Belgium. France got less tax revenue than expected. Hollande is abandoning the 75% tax next year.
Exactly. When tax reveunes start to decline and the heavy-hitters start to walk off the field (never to return) all the nicey-nice talk about "fairness" and "even distribution of wealth" goes out the window right quick, doesn't it?
Intellectual vacuum is exactly the right phrase.
"which is that individuals will drop out of the formal labour market"
The majority of people who are in the highest bracket aren't in the "formal labour market." And they likely have never been. Boehner even said it at the last government shutdown: increasing income taxes at the top level impacts hollywood and sports figures. The top "earners" don't pull income, they pull capital gains. Talking about taxes without seperating out high-income wage earners and those that make all of their money from capital gains is stupid from the start.
And it's not that difficult to find a scenario in which there were high income taxes for top brackets. That time and place is called America from 1900 to about the 1960s.
Keep your leftist propaganda aside, how much was really in that insane bracket without using defiscalistion Trust and Shell compagnies ?
You can have a 90 % tax while you can have a mechanism that can cut this rate to zero...
Bonus point: you can even avoid death tax.
I'm sorry to say this but ZH has become a farce. A factory of non stop contradictions and perpetual complaints. What's probably sadder is that most here don't see that they are being led around by their noses like puppets by people with no destination in mind but their own amusement and profit.
On ZH, it has become commonplace to see, within days if not minutes apart, one post bemoaning the decline of the middle class and rising prices crushing people only to be swiftly followed by another post about how raising the minimum wage will destroy America. Then an article about how banks are getting away with nothing short of the greatest theft in the history of mankind, which is swiftly followed by another post on how regulation to curb banking abuses is nothing short of a socialist assault on our great capitalist system, which is followed by another post about how there is no real capitalism anymore since the banks have manipulated the entire system to their advantage at the expense of all honest small businesses. And on and on and on.
I've been reading ZH since it was a blog. I've stepped away from here because it's gone to shit. It's become hypocrisy personified. Bitching about Jim Cramer while running his ads? Really guys? Have you no shame?
It takes very little wisdom to see the problem, it takes intelligence to find a solution. My solution to the ZH bitch-fest...walk away.
Go ahead and defend them and rag on my post all you want. I'm gone. I'm immune. Have fun getting spun in circles guys.
Vaya Con Dios, my friend. You're not the only one who feels that way.
You left out the "falling energy prices are going to kill the economy" meme. My current favorite. Just happens to be one I'm not going to let pass without push-back. Bitching all the way up, now bitching all the way back down.
Too bad. Alien IQ hits the showers as well. Pretty soon I will not have to lurk anymore. Hang in there No Debt!! I have not seen LTER post for awhile. WTF? Maybe one day there will be a Fonzhedge.
TYLER...
GIVE THIS FUKKER WHAT HE WANTS.
SEVER HIS ASS.
Buh Bye....
- reply
Tue, 12/02/2014 - 20:27 | 5510999 alien-IQalien-IQ
Sorry, but you can't leave and never return, unless and until you post your solution.
If you fail to post, then, by omission, your intelligence and wisdom has forced you to conclude there is no solution. NP. Abandoning all hope has always been a viable alternative to everything, everywhere, and everywhen.
Ziiinnng!
Well, bye
The only reason a tax rate as high as he has proposed is needed is because the government is socialist/communist/collectivist. Please, (ivory tower idiots,) explain why the USSR and China failed as socialist and communist experiments and why your ideal centrally planned economy is any better than those failures.
"They pretend to pay us and we pretend to work."
Say there is an economy of 1,000 producers. Each producer produces 10 units of various things. The producers then trade with each other. The production available to be consumed is 10 units per-capita.
Now 10% of the producers quit and set themselves up as a "governmnet," and institute a 10% tax. The producers produce the same, 10 units each, but only 900 are producing, so consumption per-capita falls to 9 units.
If the "governmnet" raises the tax to, say 75%, the "governmnet" lives better than the producers. The producers then become incentive to lower production, as they only see a 25% loss in available consumption for each unit they don't produce. The "governmnet" on the other hand, sees a 75% reduction in available consumption for each unit not produced.
The tax must be lowered, or a revolution utilized to lower the burden of the idle, "governmnet," or extra mouths need removed form the consumption pool. Stalinist Russia and Maoist China are prime examples of the latter.
Guillotine a pol, crat, func, or bankster, raise available consumption for the producers.
An American, not US subject.
French here:
Each year we have hundreds of weatlhy familiy fleeing the country,
We have wealth tax (ISF at 1.8%), inheritance tax (up to 50%), income tax (up to 60% and the infamous 75% above 1 million), "contribution" to social security deficit tax (CRG-CRDS 13% flat tax), social security tax (part on employee and employer, can be if you calculate everything up to 30 %), capital gain tax (34%), gift tax (same as inheritance), property tax (a lump sum depending on where you live: it's not a percentage), etc, etc...
In 2012 they were some case when they abolished the "bouclier fiscal" (tax capped at 50 %) when some folks paid more than 100 % on their income ! (record of 120 %) o.o o.O O.O
Actually it's capped to 85 %.
France is in chronic deficit the whole country pauperize and all political party seems to don't care because tax is consired as a social justice equalizer here.
Union strike is an olympic sport (Gold medail here).
A fucking hell full of leftist, statist (even people on right spectrum are leftist).
We are not even a fucking millionaire (upper-middle class) family, but sometimes considering fleeing after my father retire...
Fuck you Hollande.
rant/
France is a great example of there never being enough theft to satiate the thieves.
An American, not US subject.
"Guillotine. See, I do speak French."
In France here as well. How about our great healthcare (100% coverage for serious illnesses), fine roads, good education, world-beating high speed rail network taking us to beautiful countryside with great weather. If you're unemployed you get 75% of your salary for 2 years & starting a small business is easier than anywhere else in Europe. The food is great the women well dressed, slim and beautiful. Cultural life is rich & vibrant. Of course most of this won't last (except for the women and countryside) but let's enjoy it while we can. I am sick of my French friends and colleagues moaning when they have it really, really good. The "upper middle class" may gripe, Hollande is a prize "bite" (cock), and of course a day of reckoning will come, but the "middle middle" class actually do ok.
/no rant
No the middle class aren't ok, the women are normal (but can't compete with let's say Russian women), maybe good at Paris but full of feminist brainwashing which is an instant turn off.
For the health care, it's collapsing: lesser and lesser drugs are reimbursed you must wait more and more in the "urgence" (urgency ?).
We give free shit to the immigrant even when they are illegal with thing called "AME".
Some road are good some other are very crazy, but doesn't justify high tax at all. In my city I drive on road that look like some bombed Iraqi road...
The middle class, the producer IS NOT OK: the last two days, I saw again on the news a strike from the producer with the small/medium enterprise.
France is great if you are in the free shit army for the producer and the saver it's an hell.
Huge reforms and tax cut must be done and leaving socialism to recover our economy is urgent.
Wow man , i don't know what you're smoking but that shit is making you blind AND happy for it
Your paradise has been built on insane amount of DEBTS. Meaning money this shit country doesnt have , and never will.
The only measure of success for a french is how soon he/she managed to leave to find a proper job , and not being taxed into oblivion .
"The American situation is by no means as grave as the European Union’s, but median U.S. family income has declined"
Okay.
Back of the envelope calcs here:
An American family of four making 41,000 fiats a year.
Generally they will not pay income tax on that after tax-credits, etc. However, they will pay combined 15.3% in SS and Medicare taxes (Yes, the employer pays part, but that share would flow to the worker if the employer weren't paying it on the worker's behalf.) I estimate that of the rest, about 6% will go to fees, fines, and other taxes, like sales taxes. I estimate that Obamacare Bronze rates will cost this family another $10,000 a year.
So a family of four can expect to payout to the governmnet, and the government's fascist cronies, about 18,000 fiats, or about 44% of their income.
And later the governmnet will still want one or both of their gun-toting aged children for cannon fodder.
An American, not US subject.
Uh, the payout will be to the Marxist cronies, Negros and Jews do not do Fascism.
The plutocrats buy politicians who enact laws that shift income from the middle class to the top, and this is the government's fault? How about the best and the brightest working for the .01% as their lobbyists? They have nothing to do with this?
The sad fact is that there are plenty of hustling Americans eager to earn a "big" salary by working for the rich to further aggrandize and concentrate wealth. That is the core problem. We are a nation of mercenary hustlers pretending to be a principled democracy. We pledge our allegiance to greed and injustice.
The reason even the poorest and most disadvantaged don't want to tax the rich is that they dream of becoming one of their well-paid flunkies.
We need bigger government. There's no way rich people would bribe politicians to control such power.
We need smaller government. There is no way rich people would further increase their dominance with less regulation and taxation.
Modern Monetary Theory = Dine and Dash?
the bigger the state becomes the worse its going to be for us all.
we are right at the point in this on going cycle where it gets very very bad for anyone outside the politburo.
i hope you have physical assets outside the eye of the state, you will need them.
If each Nobel Prize winner won a stick of dynamite with lit fuse instead of money, perhaps the world would be better.
Think about it.
The guys who earn Physics awards manufactured nuclear weapons, toxic chemicals products, Biology GMOs, "Peace" and saving, most are fianciada by anyone fuck the world!
Kkkkkkkkkkkkkkkkk
Like the French, both the language and the women after bathing.
Holande is weak.
Sarkozy looked like Napoleon, softly with a hot woman - Carla - who does not she heard singing're missing link:
https://www.youtube.com/watch?v=XvyMG0z0FZY
hehe.
Carla isn't French she is Italian...
When you said you love French women but what "French women" you speak about ?
A "French" women can be anything from an European to an Arab, an African, even an Asian one...
Now I agree that they are good if you are going to compare with the American fatties.
light handed regulation? Phfff.. some hope of that EVER happening