France is providing us with a very good case study on what happens when you raise taxes too high. The 75% tax rate imposed upon the richest French residents* was a centerpiece of Socialist Francois Hollande’s campaign for the French Presidency. At any rate, having found out just what happens when you raise taxes to such draconian levels, the country is now quietly scrapping it. As Britain’s Daily Mail reports:
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.
He added: ‘It clearly has become harder to attract international senior managers to come to France than it was.’
Hollande first floated the 75-per cent super-tax on earnings over £784,000 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.
Evidence that the rate didn’t work is painfully easy to find. As Jorg Stegemann noted in the article, the fact that the French are having a hard time convincing talented senior executives to come to the country is one of the big reasons that’s received some coverage. Also, despite what the Mail says, the problem of French leaving the country because of its taxation rates is real, and Anne-Elizabeth Moutet does a great job explaining that at Britain’s Telegraph. Even the Huffington Post was wincing at the thought of it being enacted. However, it’s the paltry returns that have probably done more to kill the tax hike. As the Mail article notes:
The Finance Ministry estimates the proceeds from the tax amounted to £200 million in its first year and £125 million in the second. That’s broadly in line with expectations, but tiny compared with a budget deficit which had reached £65 billion by the end of October.
Hollande’s time as President has not been easy for him, but this is probably the biggest failure he’s encountered so far. It’s something like President Obama deciding to scrap Obamacare. This is also a useful lesson for us here in the US, even though saying higher taxes don’t work is about as revolutionary as saying “Water is wet” to conservatives. Still, it’s a useful example next time someone talks about raising taxes. With the 2016 election coming up, that could be very so0n.
*=In France and the other EU countries, the tax code is based on residency, not on citizenship, as in the United States. In other words, if you live in France, citizen or not, you are subject to their tax laws. Forbes’ Tim Worstall does a nice job explaining how this has affected the taxation debate there, too.