Thursday, August 28, 2008

Unhappy Campers

The Left is rather pleased with Sarkozy's proposal for a new 1 percent tax on income from dividends, interest, and rents to finance the RSA, but on the Right there are discordant voices. Laurence Parisot, the head of the MEDEF, fears an "asphyxiation" of the economy, while Sen. Alain Lambert, if more measured in tone, is nearly as hyperbolic in content. Lambert's argument is curious, because while couched in terms of basic economic principles, it makes no effort to offer a model or statistics to back up its central claim, that "saving is good" for the economy and that a "tax on saving and investment" will drive money elsewhere. A one-percent additional tax on dividends will reduce the return on an investment currently returning 5 percent to 4.95 percent. It seems unlikely that many portfolios will be overhauled as a result. The savings rate is simply not that elastic.

In any case, some economists argue that the French savings rate is too high. While Lambert is right that saving can be a good thing, there is an optimal balance of saving and consumption, and underconsumption is not a good thing. The transfer of funds from savers to spenders, which the RSA presumably would accomplish, may therefore provide a (small yet welcome) boost to aggregate demand. So Lambert's case is incomplete and, worse, biased by his dislike of "taxing capital." While it is true that the real incidence of a tax is not defined by who pays it, in this case it does appear at first sight that there would be a net transfer from savers to spenders. That does not mean that it is only "the rich" who would pay, as some on the left seem to believe, since many who are not wealthy own stocks, bonds, rental properties, etc. Retirees are numerous among small investors in France, and there is a regional imbalance as well, with far more small investors in the south of the country than in the north.

Nevertheless, few politicians are willing to say that the RSA should be scrapped, since it will remove some of the disincentives to work created by the current hodge-podge of welfare payments and job subsidies. If you want the RSA, you have to pay for it, and the new tax solves that problem in a way that does not, on its face, imply significant perverse effects. Lambert's and Parisot's criticisms therefore seem to be driven by ideology rather than analysis.

Bernard Girard notes that to adduce a political motive for Sarkozy's choice of the new tax is not sufficient to explain it. I quite agree. There is a clear economic rationale for this choice, as outlined above. Among the choices available for financing the RSA, however, the "tax on capital" has the attraction, for Sarkozy, of appealing to the Left while demonstrating to those in his own camp that he retains a certain autonomy.


Anonymous said...

One may argue that there is an economic rationale behind this decision. But this is still not an explanation of why taxes on capital were cut last year. There has been a change in the estate tax, the wealth tax and the so called 'fiscal shield'.
Right now Sarkozy goes the other way. He can't claim he didnot know as he said he would implement the RSA at the beginning of his term. So what's the rationale?

You also make a point of the low rate of this new tax. But I cannot imagine that you do not know about the fiscal history of France. Before the creation of the CSG at the beginning of the 90s, there was only a 16% tax on capital gains.
Over the years, the CSG reached 8.2% on capital gains, there was the creation of the RDS (0.5%), of the 2% for pensions, of the Raffarin 0.3%. The bottom line is that we can make a 100% tax with 100 1% taxes...

One other point you donot address is that there has been some talk that the french state was spending too much (a certain Sarkozy said that for example)... Everyone seems to agree, but in the end a new tax is created, which means more will be spent. Maybe the 1.5G€ could have been found by cutting expenses elsewhere. The franch GDP is ~1900€ and public spending more than 50% of that. The sum is then ~0.2% of public spending. It seems it is impossible to redistribute such a tiny part to fund something which is presented as the most efficient way to spend public money? That's very telling of the incompetence or incapability of the ones in charge...

Fr. said...

It would make a lot more sense to tax capital in the absence of “fiscal holes.” The problem is, NS has not really made any progress on that part of his agenda.

Anonymous said...

i agree with fr.
73 G € of tax cuts "niches fiscales" on income taxes and nearly the same on scocial taxes
allows some moves without new taxes,
in fact il could bne the same people who would pay for RSA, but politically it would not have been the same "stunner".....

Anonymous said...

^^ nice blog!! ^@^

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