Scott Sumner  

The French experiment: Laffer >>>>>>> Piketty

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What an unmitigated disaster for Pikettynomics!

PARIS (Reuters) - When President Francois Hollande unveiled a "super-tax" on the rich in 2012, some feared an exodus of business, sporting and artistic talent. One adviser warned it was a Socialist step too far that would turn France into "Cuba without sun".

Two years on, with the tax due to expire at the end of this month, the mass emigration has not happened. But the damage to France's appeal as a home for top earners has been great, and the pickings from the levy paltry.

"The reform clearly damaged France's reputation and competitiveness," said Jorg Stegemann, head of Kennedy Executive, an executive search firm based in France and Germany.

"It clearly has become harder to attract international senior managers to come to France than it was," he added.

Hollande first floated the 75-percent super-tax on earnings over 1 million euros ($1.2 million) a year in his 2012 campaign to oust his conservative rival Nicolas Sarkozy. It fired up left-wing voters and helped him unseat the incumbent.

Yet ever since, it has been a thorn in his side, helping little in France's effort to bring its public deficit within European Union limits and mixing the message just as Hollande sought to promote a more pro-business image. The adviser who made the "Cuba" gag was Emmanuel Macron, the ex-banker who is now his economy minister.

The Finance Ministry estimates the proceeds from the tax amounted to 260 million euros in its first year and 160 million in the second. That's broadly in line with expectations, but tiny compared with a budget deficit which had reached 84.7 billion euros by the end of October.


To put that number in perspective, France's GDP is around 2 trillion euros. The tax raised less than one one-hundredth of one percent of GDP in tax revenue. So much for the pipe dream of American progressives that we could finance a more generous welfare state with higher taxes on the rich. BTW, many people don't realize that the top MTR on the rich in the US is already relatively high by international standards. The federal top income tax rate is 43.4%, and with state income taxes added it's above 50% in places like California and New York City (where many of the high earners live.)

But the news is actually even worse than this, much worse. The revenues for the tax are estimated without accounting for dynamic effects. Even if you are not a devout supply-sider (and I am a moderate supply-sider, who believes tax increases usually lead to more revenue) it would be hard to deny that this particular tax increase cost revenue, after accounting for the impact of French economic growth. Even if the tax merely discouraged investment by a small amount, the impact on total revenues would almost certainly be negative, as even a very small reduction in economic growth would reduce ordinary tax revenues by far more than the extra 160 million collected by the rich. France collects close to a trillion euros in tax revenues, meaning even a 0.02% reduction in economic growth would cost their Treasury more than 160 million euros.

Progressive American bloggers often tout the egalitarian French economic model. What they don't tell you is that France has 10.4% unemployment and a per capita GDP (PPP) that is only about 70% of US levels, and falling. Sure, some of that is the euro. But unemployment was also about 10% to 11% back in 1996-99, before the euro was created. Even worse, the French labor market model would almost certainly perform far worse in the US than in France, because the productivity of American workers is more unequal. And the French government investment model would also perform more poorly in the US, because our government is far less efficient at building infrastructure.

Speaking of the supply-side, I endorse Miles Kimball's post where he argues that Doug Elmendorf should be reappointed at the CBO. The GOP would be making a mistake if they force him out.

I'll be busy over the holidays, posting a few items written earlier. Not much time for comments.

Joyeux Noel


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CATEGORIES: Taxation




COMMENTS (25 to date)
UnlearningEcon writes:

Piketty quite clearly states that his efforts at taxation would have to be coordinated at an international level to be worthwhile. He also states that the purpose of such taxes would not necessarily be to raise revenue, but to deter high salaries. So there's a double miscomprehension on your part.

And your evidence of the tax failing is just one guy saying it isn't working, based on anecdotal experience. The article actually states that the revenue raised is "broadly in line with expectations", and all you have against this are just-so stories that the tax has had a negative impact on economic growth, with no evidence to back them up!

Piketty is certainly fortunate in his opponents.

Michael Moran writes:

I think the better case would be to look at GDP per person on a PPP basis for both France and the US in 1980 and 2013. Then look at other factors that may impact PPP GDP, like defense spending. Then ask the question, why has the US done so much better when it followed "supply side" policies verses France which rejected such policies at every turn.

ThomasH writes:

I thought that Piketty advocated a small tax on capital, not a steeply progressive tax of income? Perhaps Scott is more familiar with economic bloggers that I but I do not recall any who supported the Hollander surtax.

[spelling of Piketty's name corrected from Pinketty. If it was a typo, no problem. If it was deliberate, please note that we do not make fun of people's names on EconLog.--Econlib Ed.]

Ray Lopez writes:

Comment is free, sometimes moderated, but facts are sacred. The indisputable fact is that, two-thirds of the time, as Piketty says, r is greater than g. That's a fact. That the 1% has turnover, eventually (though Gregory Clark points out it takes a long time, based on Swedish data), and that r is less than g during times of war or other times (the other 33% of the time), does not diminish this fact.

As for Laffer, his curve is true, but where on the curve do we lie? I would agree that government is too big, worldwide, but Laffer's curve, by itself, does not give guidance as to what point on the curve we are. And keep in mind democracies have voted governments in, so the masses do enjoy big government.

As for France, it does have problems but it has been voted as the #1 place for retirees to live, if they have money. Inconvenient facts.

Scott Sumner writes:

Unlearning Econ, Unlike the vast majority of Piketty fans, I've read his entire book, and some of his other papers. Yes, he favors an international agreement on wealth taxation, but the fact is that he also supports a unilateral move to set very high MTRs on the top incomes. So contrary to your claims, I did not mischaracterize his views.

If the revenues were in line with expectations, that just means the policy was expected to fail from the get go. And if it is working in line with expectations, why would the French government, which is socialist, abandon their own policy?

And how were the French people helped by a policy intended to "deter" high salaries? Did it mean more money for the average Frenchman? Is there any evidence that happened? People can set up whatever strange criteria for success they choose, but that doesn't mean the rest of us have to take it seriously. I'll judge taxes on their ability to raise revenue, and their unfortunate tendency to deter growth.

Michael, Yes, good point. I've done some posts on that over at TheMoneyIllusion.

Steve Herr writes:

UnlearningEcon,
Why do you believe that high taxes deter high salaries? I would assume that in the long run salaries would adjust to have lower taxable income and higher nontaxable perks.

"BTW, many people don't realize that the top MTR on the rich in the US is already relatively high by international standards"

My understanding is that the American IRS is also much more aggressive at taxing all benefits (except health insurance that is exempt by statute) than are European equivalents.

In Germany, even middle management often receives an untaxed company car (including gas, which comes in handy when going 200kph on the Autobahn). Almost all countries have a "meal voucher" system, whereby you get 10-15 euros per working day in untaxed food vouchers (>90% of restaurants accept them, as do all grocery stores). At the top, the company might even pay your rent if they claim they had to attract you to Paris/London/OtherExpensiveCity (this is untaxed, I think).

In the public sector, this sort of system is heavily used to be able to both (1) attract decent managers or keep them from leaving to the private sector and (2) avoid the politically difficult step of openly paying these people much more than the base worker. In some places, a top public manager will even get an expense account for "representation", which means they can claim things like clothing, jewelry, &c. In Portugal, the typical value for this account (before the crisis) was 20% of base salary. Add all of these things together, and (1) incomes are much more unequal than reported, and (2) a fairly large fraction is untaxed.

Discreetly too, most EU countries have a tax expat status whereby if you move there from elsewhere, you get beneficial tax rates for a period (5 or 10 years). Sometimes, the difference to what the locals pay are enormous (it even works if you are a national of that country, but had been living abroad).

It's the middle class that pays fewer taxes in the US, not the top. Also, there are incomes that pay middle-tax rates in the US, which would pay top rates in Europe.

[Comment removed for irrelevance. --Econlib Ed.]

Scott Sumner writes:

Thomas, He favors a high tax on capital, and also high income tax rates on the rich.

Ray, Yes, r is greater than g in most cases, but that fact doesn't have the implications that Piketty assumes. In any case, not sure what your comment has to do with this post.

You said:

"And keep in mind democracies have voted governments in, so the masses do enjoy big government."

Well I guess then there is no point in discussing public policy issues, as whatever exists at the moment in any particular democratic country must be optimal for the masses. And what about the democracies that have relatively small government? And what do you make of the fact that Switzerland has by far the most democratic political system in Europe (with direct votes on taxes) and also far lower tax rates than the rest of Europe? Just a coincidence?

And what tax rate do retirees pay in France?

mbka writes:

Scott, you said "Progressive American bloggers often tout the egalitarian French economic model. What they don't tell you is that France has 10.4% unemployment and a per capita GDP (PPP) that is only about 70% of US levels, and falling."

I've quoted this before on these pages and here it is again. French independent politician Raymond Barre said this a long time ago:

The French social model is not a model, since no-one wants to copy it. And it is not social, because it produces high unemployment.
But somehow, envy tends to win elections in Europe. Because that's what it is really, a social model based on discouraging "high earnings", i.e., the success of a few. Not on making the average person's lives better. And the sobering results from sociology show that people really do judge their own lives more in relation to others than the absolute. Rather be poorer as long es everyone is, than richer but have to bear with a few be very rich.

Mm writes:

r>g may be true (otherwise why invest?) but it doesn't have the policy implications Piketty claims. To cause greater concentration of wealth r must be greater than g AFTER taxes and division of capital by inheritance and expenditure- a very unlikely situation. Why his fans don't address this is beyond any reasonable explanation- except they want greater taxes even if it hurts the economy and provides no economic benefit to the poor.

[spelling of Piketty's name corrected.--Econlib Ed.]

UnlearningEcon writes:

I'd like to apologise for being a douche in my first comment, I shouldn't do this when it's late and I'm cranky.

Yes, he favors an international agreement on wealth taxation, but the fact is that he also supports a unilateral move to set very high MTRs on the top incomes. So contrary to your claims, I did not mischaracterize his views.

He also implies that his other proposals would have to be internationally coordinated, particularly in Europe where high earners can move about more easily. For example:

Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking. I say more about international coordination in the next chapter; here I will simply note that the United States is big enough to apply this type of fiscal policy effectively.
(end of ch14).
And how were the French people helped by a policy intended to "deter" high salaries? Did it mean more money for the average Frenchman?

Well, Piketty is advocating reducing inequality as an end in itself, as he doesn't believe the income of the 'supermanagers' is deserved and also thinks it is socially destructive.

@steve herr

Why do you believe that high taxes deter high salaries? I would assume that in the long run salaries would adjust to have lower taxable income and higher nontaxable perks.

The question is whether this is a 1:1 adjustment or is more imperfect, which is ultimately empirical although I don't have anything relevant to hand. Piketty also seems to be in favour of restraining 'supermanagers' by restructuring current shareholder arrangements, which could help.

maynardGkeynes writes:

France is an exceptionally pleasant country compared to ours. Their GDP per person is less than ours, but maybe the GDP metric is not the right one. Their food tastes like real food, they don't shoot each other like we do, and they tend to avoid idiotic wars due their humane commitment to diplomacy. I think their commitment to 'egalite' has much to do with this. I view the Hollande tax as a manifestation of this impulse -- scoring it as revenue enhancing, revenue neutral, or revenue decreasing is a trivial point in the context of what they are about as a country.

Scott Sumner writes:

unlearningecon, Perhaps someone can help us out. I'm traveling now, but using Google it shouldn't be hard to find out if Piketty opposed Hollande's tax increase.

And no apology necessary, you are polite compared to some of my money illusion commenters.

Ray Lopez writes:

@Mm - "r [greater than] g may be true (otherwise why invest?) but it doesn't have the policy implications Piketty claims. To cause greater concentration of wealth r must be greater than g AFTER taxes and division of capital by inheritance and expenditure- a very unlikely situation.

Not true at all. The fallacy in this logic --as I alluded to in my post, which is, btw, germane to this post since the OP references Piketty on inequality--is that if the 1% cannot pass on their wealth and/or there is turnover in the group, that it's OK to have a 1%. A simple moment's thought will show this is false: some rich don't care if they pass on wealth to their children (Warren Buffett comes to mind), and, having turnover does not get rid of the 1%, it just means that in the next generation there will be different members of that 1%. Speaking btw against my own interests on this issue.

[spelling of Piketty's name corrected.--Econlib Ed.]

Mikko-Ville Määttä writes:

It's worth remembering that bizarre monetary experiments in Europe didn't start with the current euro. Some countries didn't recover from damage done by ECU/ERM before the euro hit.

It may not be an easy task to analyse how much french unemployment is caused by monetary mismanagement and how much is because of supply side mismanagement.

Nick writes:

Ray,
I believe Fance has a relatively restrictive probate regime that actually forces a sizable percentage of estates to go to direct descendants. I'd imagine that if the priority was to limit familial consolidation of great wealth in France they would do away with these. Keeping them while imposing the tax looks like trying to maximize revenue first, and deal with inequality second. It looks like they aren't even achieving that, though.

Mm writes:

Ray- if the composition of the 1% continually changes than the danger is considerably less thereby greatly decreasing the significance of Piketty's claims. 1st, the inequality will not result in permanent political control by the 1%- since the 1% is merely a statistical abstraction not a given set of people or at least it is a constantly changing cast. 2nd- the so called 1% will likely temper their rapaciousness since they will be well aware the wheel will turn quickly. Piketty's claim is based on a static analysis of the 1%. He isn't claming having rich people is bad he is claiming that we will have an permanent overclass of rich people if we don't take steps to prevent it. If your are claiming that anyone being rich is a danger I can easily counter that any measure to ensure there are no wealthy people is clearly worse than having wealthy people.

[spelling of Piketty's name corrected.--Econlib Ed.]

Brian Donohue writes:

Luis, great comment.

Jason writes:

Luis, in Denmark nearly everything is taxed. My work phone is taxed. Company cars are taxed. The only exceptions I'm aware of are laptops and internet connections at home. Even these were taxed until a couple years ago.

Jim Glass writes:

"And how were the French people helped by a policy intended to 'deter' high salaries? Did it mean more money for the average Frenchman?"

Well, Piketty is advocating reducing inequality as an end in itself ...

And just how is that supposed to work? Reducing the inequality created by the million-dollar salaries of ballplayers, deterring those salaries out of existence, is an 'end in itself', so we force those salaries down ... to send that money back to the billionaire team owners instead?

By the same token we somehow force down the salaries of a business's high-paid managers -- so the income of the business that currently goes to pay them will instead go right to the business owners' pockets, directly to the very owners of capital itself?

Sounds like a program fostered by the owners of capital to cut their costs and get even more for themselves.

... as he doesn't believe the income of the 'supermanagers' is deserved

Oh, he thinks other people are over-paid. I'm sure this modest and careful opinion is based on his extensive experience in and studies of the business world, such as ...?

Jim Glass writes:

"Why do you believe that high taxes deter high salaries? I would assume that in the long run salaries would adjust to have lower taxable income and higher nontaxable perks."

The question is whether this is a 1:1 adjustment or is more imperfect, which is ultimately empirical although I don't have anything relevant to hand

There's tons of empirical data on this as we lived through it not so long ago, within my adult working life. Before the TRA'86 dropped the top federal tax rate to 28%, from 50% and a little before that 70%, there was a massive tax shelter industry in the US combined with massive 'in kind' compensation practices: perks, expense accounts, use of business assets (cars, properties, planes, etc) much legal and much technically illegal but universally accepted because it was totally beyond the power of the IRS to monitor much less control.

This was all so terrible that the left readily signed onto the huge rate reduction to get rid of it all in the bipartisan deal that the Reagan people put together with the top Democrats in Congress.

How quickly we forget!

High taxes on salaries don't reduce the value of a manager to the business by a single dollar, so how would it reduce the compensation paid to the executive by a single dollar? What they change with a vengeance is the form of compensation.

It is much, much, better for all to have transparent, efficient, dollar compensation than opaque, inefficient in-kind compensation based on game-playing the rules that blends into corruption. The effects of "prohibition" on high salaries aren't different than on liquor or anything else.

Remember that the deadweight cost of taxes increases not with the increase of the tax rate but by the square of the increase in the tax rate. So tripling the top tax rate from the bi-partisan TRA'86 level to a Piketty-dream level multiplies its deadweight cost nine fold.

This creates *massive* incentives for politicians to start selling tax breaks and tax shelters, for businesses and individuals to game the system, tax avoidance, evasion, fraud, and corruption. And people respond to incentives.

This is not theory. It is pre-1986.

Scott Sumner writes:

Mikko-Ville, It's very difficult to see how tight money could produce 30 years of high unemployment.

Jason, thanks for the info. That sounds much more like the American way. It's certainly not the case in many other European countries.

Dan J writes:

Laffer Curve... Picketty world wide, inescapable, all encompassing tax for redistribution... Tax increases, tax decreases... What will increase revenue to the state?
I will ask, over and over again, why the argument rests on why we should always be trying to feed the govt more? Why are we always discussing how to increase govts revenue? I, personally, reject the idea that this should be the goal. What policy increases govt ability to skim more and spend more?
It is a ridiculous argument. Govt is never satiated. People in govt ALWAYS will justify more spending. The arguments should center around functions of govt and how to NOT require more revenue. How can govt function while decreasing its impact on the people being governed.

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