One of the things that France is most roundly mocked for by foreign business people, after strikes, is its wealth tax. And French President Nicolas Sarkozy unveiled a plan yesterday to eliminate the lower rate of the wealth tax. (Via Les Echos, in French)Here’s the problem: basic economics shows that a wealth tax is a really good idea.
Why a wealth tax is economically efficient.
To take an example from French economist Alexandre Delaigue: imagine someone with $100 million in assets.
Let’s call her Marie Antoinette.
Let’s say Marie Antoinette can either work hard and get a 6% yearly return on those assets, work less hard (say, 35 hours a week) and get a 3% return on assets, or leave her money in the bank and (especially these days) get no return.
Now let’s say Marie Antoinette’s country starts levying a 1% wealth tax on those assets. Under each scenario, she would pay $1 million per year.
The hard work strategy now pays $5 million per year, the moderate work strategy $2 million, and the lazy strategy actually costs money.
If you have three Marie Antoinettes following each strategy, the Treasury gets $3 million.
Now let’s say instead of a wealth tax, which is a tax on capital, the Treasury decides to replace it with a capital gains tax. To keep it fiscally neutral, it has to put it at 33%.
Now the hard-working Marie Antoinette pays $2 million instead of $1 million, and the lazy Marie Antoinette pays nothing instead of $1 million.
Which tax rewards hard work and economic productivity?
All else being equal, taxes on capital (as opposed to capital gains) incentivise working harder to achieve a higher return on investment.
Again, this is basic economics. France’s bureaucracy is very good at inventing new forms of taxes, and most of them are awful, but two of them are actually great: the value added tax and the wealth tax.
And realising this is incumbent on understanding the Econ 101 difference between a stock and a flow. In practice, in general, it’s better to tax stocks than flows, because stocks are capital that should be deployed in the economy, and flows are almost always returns on investment (whether that investment is money or work).
Why President Sarkozy’s proposed reforms are awful
If you’ve been following you realise why the plan proposed by President Sarkozy, who was elected on a slogan of rewarding hard work, is stupid: the wealth tax is one of the few economically efficient taxes in France. The country already has high rates of corporate and personal income tax, and absurdly high payroll taxes.
What’s more, France is actually a really wealthy country. There are tons of really rich people in France. The reason it doesn’t show is because everything in the tax code encourages that wealth to be used for rents instead of productive investment that would create growth, innovation and jobs.
The wealth tax is one of the few things weighing on the other side of the scale. It’s not the place to cut.
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