Tuesday, 11 September 2012

Hollande's Fallacy

Yesterday, as I was watching the news, the story of Francois Hollande's budget cuts of around €10 billion and his proposed 75% tax for the "well-off" citizens of France came up. Since I do not know any details on the cuts I will refrain from commenting, however, a 75% tax seems like too much.

Personal tax in France has so far had a maximum of 41% and now people who earn more than €1 million per year will have to give 75% of their income to the state. Although this is a temporary tax, expected to last until 2017 and then removed, I do not think that it is sustainable under economic logic. People who actually earn 1 million euros per year aren't those who sit around all day and do nothing. They are those whose responsibility is great, like operating pension funds or multinational organizations. They hold the wealth and jobs of many individuals in their hands and they have most likely worked exceedingly more than everyone else to get where they are now.

The problem here is incentives: Who would be motivated to work hard
towards earning a substantial amount of money if the state would be able to regain most of it? It is the same incentive problem which occurs in Denmark where people are taxed up to 64% of their income. The Danes do not have any incentives to work hard to become doctors, financiers or entrepreneurs. A difficult, more stressful job, should normally have a higher salary than others. However, why bother with a job which would be stressful, difficult and highly competitive when the remuneration is bound to be similar to other less stressful occupations?

If Hollande really wants to enforce a rich tax, and this is not just a publicity scheme, then a 50-55% income tax, for incomes of more than €1 million per annum should be substantial to aid the nation increase its incomes. It wouldn't even have to be a temporary tax, as this is fair enough for it to remain permanent. A tax as high a 75% would only mean that France's most capable entrepreneurs would be fleeing the nation, which, given the current situation is not a good idea.

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