It has been in the news recently that due to an extraordinary deficit, and rising unemployment (much like the rest of Europe), France has decided to initiate large spending cuts and levy a slew of new tax hikes. Not only has it been reported that they plan on a top tax rate of 75% for those making over one million Euros, but that taxes will be raised across the board, specifically on large businesses.
According to CNN: “A third of the savings will come from cuts to public spending, the president’s office said, while an additional 10 billion euros will come from a tax on companies. The remainder will be raised through tax increases on high-earning individuals, including a 75% levy on incomes higher than 1 million euros ($1.26 million) and a new 45% tax bracket affecting 6.2 million households.”
Now, I think it is an excellent idea to make cuts from public spending, because generally (by which I mean ALWAYS), that is where countries accrue the most debt. That being said, taxing the “Rich” at a rate of 75% will do little to acquire the amount of money the government needs to get out of the fiscal hole. In addition, raising the tax bracket to 45% for 6 million more individuals will also not do much to benefit the country. Finally, heavily taxing businesses is the exact opposite of what France needs to be doing. Large businesses are a core source of employment and revenue in the marketplace.
Let’s break this down into nice, bite-size pieces.
1. Taxing at a rate of 75% will discourage those against whom the tax is levied from investing. The 75 percenters (as I’ll call them) will instead horde what little money they have left after 3/4 of it is taken by the government.
2. Heavily taxing large businesses will cause those businesses to freeze hiring, or even lay off employees to counterbalance the tax burden. Or, the increase in taxes will simply be moved on to the consumer by means of increased goods pricing, making the tax increase invalid at best and harmful at worst. To compare it to a situation in the United States: in the 1990’s, Bill Clinton lowered the capital gains tax from 28% to 20%. Following this, there was an economic boom, effectively lowering unemployment substantially. When George Bush came into office, he lowered it again to 15%. According to Townhall, after Bush reduced the capital gains tax, “Capital gains tax receipts…far outpaced the [tax] revenues that the government’s static models predicted. Between 2003 and 2007, actual tax receipts exceeded expectations as income.”
3. Increasing the tax bracket to 45% on 6 million people (nearly 10% of the population) will again, cause those individuals to horde their cash and save, rather than invest in stocks and goods. It has been shown, time and time again, that lowering tax rates, specifically on capital gains, increases revenue to the government.
According to renowned Economist Thomas Sowell: “This disconnect between higher tax rates and higher tax revenues is not peculiar to the United States. Iceland and India both collected more tax revenue after tax rates were cut. In Iceland the corporate tax rate was cut from 45 percent to 18 percent between 1991 and 2001 — and the revenue from corporate taxes tripled at the lower rate.”
Even John Keynes, the namesake of Keynesian economics admitted this: “Given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”
What France is doing is equal parts intelligent and foolish. On one hand, they are making dramatic cuts in government spending, which is essential to their recovery. According to CNN: “The French national debt increased from 64% of GDP to more than 90% in five years.” In this regard, they are acting intelligently.
On the other hand, they are dramatically increasing taxes on large businesses and 6.2 million French. This will not help them solve their debt problems. As Thomas Sowell said and as I mentioned in regards to capital gains taxes, it has been shown time and time again that lowering tax rates increases government revenue and that increases constrict that cash flow.
But all of this is yet another form of class warfare. People envious of “the Rich” want them to pay more. Obama has said multiple times that he thinks the Rich should pay their “fair share”. Joe Biden said that it is “patriotic” for the Rich to pay more. Besides the fact that that attitude stokes resentment, it simply doesn’t work in reality.
I applaud France for actually making some cuts in spending, but what is gained from the cuts will be lost with the tax hikes. If we reelect Obama, we will certainly see similar measures taken. We will see tax hikes on the more wealthy (who already bear a large portion of the tax burden), but we will not see any cuts in spending. As evidenced by the last four years, Obama appears to have absolutely no intention of stopping his spending spree. Welfare and food stamps usage is up (food stamp usage is up to approx. 45 million), and our debt has increased by $5 trillion dollars, despite Obama promising to cut it in half during his first term. The $800 billion stimulus was an abject failure, the auto-industry bailout has not been very fruitful (GM still owes the taxpayers $25 billion) and it has been revealed that Obamacare is NOT “budget neutral”, as was originally claimed.
The spending spree will continue, the cuts will not take place, and the our country will collapse inward if we do not oust the current president and elect someone who knows how to fix an economy. Think about it and vote with your mind and not your emotions. Vote Romney/Ryan on November 6th.