Wednesday, August 8, 2012

The Travails of Wealth

Imposing a 75% top marginal rate on incomes over €1 million has surely brought François Hollande a lot of attention, in addition, presumably, to some number of votes in the election, which may well have contributed to his margin of victory. The New York Times takes notice of the policy today with a certain amount of the usual disbelief: "What? 75%, you say? Can they get away with that?" In search of proof that such a "confiscatory" tax rate will wreck the French economy, the Times intrepidly sets out in search of tax accountants and their clients. But despite a good deal of heavy breathing, it doesn't come up with much:
“Should I be preparing to leave the country?” the executive asked Mr. Grandil.
The lawyer’s counsel: Wait and see. For now, at least.
Or, to get right down to the nitty gritty, we can look at actual numbers:
A tax accountant in Paris with many wealthy clients, Steve Horton, has calculated that a two-parent, two-child household with taxable annual income of a bit more than 2.22 million euros ($2.75 million) now has after-tax take-home pay of about 1.1 million euros ($1.35 million) under France’s current tax system.
That household would end up with 780,000 euros, or $966,000, if the Hollande tax took effect, Mr. Horton says. (The same family, with comparable income in Manhattan, would take home $1.55 million, the dollar equivalent of 1.25 million euros, after paying federal, state and city income taxes, he calculated.)
"Confiscation" looks a little less bleak now. A family of four should be able to get by on $966,000 after taxes, even in Paris. Perhaps the rich won't be forced to avail themselves of the privilege they share with the poor, to sleep under bridges, after all. And if Johnny Hallyday and Laetitia Casta decide to make their homes elsewhere, France will still have Sylvie Vartan and Sophie Marceau to console itself.

But what about the disincentivizing effect of high marginal tax rates, you ask? It's not clear that there are any, but economists convinced that entrepreneurs will go on strike if limited to a million a year will now have a natural experiment with which to prove their contention, if only they can somehow control for all the potential confounding variables, which are legion. To me, it's always seemed that one of the great attractions of building a company is the power that goes with controlling it. The income is nice, to be sure, but power, they say, is the greater aphrodisiac.


FrédéricLN said...

For sure, the issue in France isn't about incitation / disincitation to make business, only about incitation / disincitation to move your official home (and fiscal address) from Paris 90 minutes away to Brussels, or 150 minutes away to Geneva.

The "brake" is the "real life clause": you should then spend more time in Belgium (say) than in France.

With the consequence, that you may be inclined then to invest your money in Belgium (or Switzerland, or elsewhere), instead of France.

That's the very crude issue of fiscal attractiveness: it's about attracting the wealthy ones (and esp. the wealthiest ones), not the ordinary workers.

Mitch Guthman said...

@ FrédéricLN,

Perhaps but it’s a flaw that would be easily fixed by adopting:

(1) Something like the American system of universal taxation based on citizenship. If it was done on a EU-wide basis and required people to give up EU citizenship and permanently live or work someplace else if they want to be tax exiles, I think it would work quite well.

Remember, not every rich person is able to live in a country different from the source of his or her wealth. The same entrepreneurs and corporate big-shots that Art is talking about might not be able to move themselves to Belgium or Switzerland or Monaco. Outside of financiers and artists, it’s not that easy for even rich corporate executives to spend six or nine months out of the year living in Monte Carlo.

(2) Also taxing income at its source (much as we do with the VAT) would make being a tax exile much less attractive. Whatever money Johnny Hallyday makes on music sold in France would be taxed in France regardless of his country of residence.

bert said...

Mitch, I think under your proposal you'd still have an issue about tax harmonisation within the EU.

Do people in the States complain about Delaware's corporate tax rate, the same way Irish corporate tax rates get complained about in France?

Far more effort should go into using the tax system to impose disincentives against socially harmful behaviour, by the way. Johnny Hallyday should be taxed at the highest possible punitive rates.

Mitch Guthman said...

@ Bert,

I think that’s a fair point, although using a variation on the VAT method to capture income would bring people like Johnny Hallyday and Laetitia Casta more within reach of the tax laws. For example, Johnny’s income from concerts or record sales in France would be certainly be fully taxable.

As for the question of tax harmonization, I think you’re absolutely right on the money. It’s starting to be a big issue here in the States, for many of the same reasons that it will be an increasingly important and divisive issue in Europe. A number of states, including California, have simply begun taxing economic activity with their borders regardless of a company’s place of incorporation. Also, some states apply different tests related to the scope of a company’s activities to determine for themselves whether the company should pay taxes there or not. If the bulk of your employees and facilities are in California, you are deemed to be a California corporation for tax purposes regardless of your place of incorporation. This has also been a perennial point of contention between, for example, New York City and the bedroom communities whose residents travel into NYC for work and play but don’t pay income taxes there to support the infrastructure they enjoy and profit from.

In the context of the EU, this is a point on which I agree with Germany. Ireland, for example, can have such nice low taxes because it receives generous subsidies from the EU and because it isn’t taxed to pay for stuff like defense. There’s something fundamentally unfair with using a low tax rate (subsided largely by Germany, France and England) to lure businesses from those countries. That’s especially true when the businesses don’t really “relocate” to Ireland but rather use it as a corporate tax shelter. This is unfair but it’s also yet another example of something that ought to be addressed before Europe has more “political integration” but surely won’t be.

For the USA , I think there should be one tax rates for all of the States that should go into a common pool and be distributed on a per capita basis. There should also be a uniform tax rate throughout the EU and it should factor in things like defense so that the burden is equally distributed.

Anonymous said...

Your idea of a American system of universal taxation based on citizenship would be a disaster for the 99% of expatriates that do not enter the categorie of "Tax avoidance Exiled".
This is the law of inatendend consequences. The US did set up the universal taxation for the same reason you mention. Thanks to that even long term US expatriates are still under the obligation to file with the IRS.

Cincinna said...

 Confiscatory tax codes are, in the end, not only unfair, but counterproductive.
 Is there anyone out there who really believes there us any fairness or incentive for an individual to work nine months out if the year for the government and only keep the fruits of three 
months of his labor?
 A 75% tax rate is Confiscatory, IMHO, having as its sole purpose the redistribution of wealth, not raising of revenues.  
 This has already been proven in the US, where high earners, and businesses have fled, and continue to flee very high tax states like NY, NJ, and CA which have lost population (and electoral votes), and businesses to low tax states like FL and Texas, which have gained population and businesses. 
  Living in NYC, we pay federal, state, and local income tax, as well as federal payroll tax, FICA tax, state & city sales tax, property taxes, etc. 
 This is tax on earnings, not investments or capital gains. Giving more than 50% of your earnings to government is confiscatory, considering close to 50% of the population pays no federal income tax at all.  
 Re: the US tax system, federal income tax is residency based; the rate is the same for all 50 states. Each state has its own tax system, as do many cities. This is paid in addition to federal income tax. 
 American nationals living abroad do not pay income tax in two countries, just the country they work in. If you do eventually want to collect Social Security retirement benefits, you must file a US tax return and pay (or have your employer pay half) the FICA tax which is credited to your SS account.
  In short, the 75% tax proposed by Hollande is counterproductive and confiscatory. It will cause businesses to leave, and startups to go to more tax friendly countries.

Anonymous said...


American expat pay tax in the US too. They have the obligation to declare their foreign earnings to the IRS. you only pay to the IRS if the foreign taxes are lower than the taxes you would have paid under the US tax code. This is for the federal level only. I dont know what happen at the state level.
this is especially very painfull for the US expats that live in high cost of living countries.

Cincinna said...

You are correct about Federal income taxes. State taxes, for the most part, are based on the state in which the money was earned. Local taxes such as property tax, school tax, etc are based on property ownership. Local income tax, such as in NYC, is based on earnings in NY.
It is an important issue for American citizens living and working abroad, but their number is very smal.
Contact your congressman if you have any issues. Their local offices are very helpful with constituency issues like this.

Mitch Guthman said...

@ Cincinna,

I spend considerable time in the San Francisco Bay area and I haven’t noticed it becoming a depopulated economic wasteland. The Bay Area probably has the highest concentration of billionaires, multimillionaires and millionaires of any place on the planet. Same with expensive neighborhoods in Southern California such Beverly Hills, Santa Monica, Bel Air and La Jolla. Rich people flock to such communities, are willing to pay be enjoy the lifestyle there and the businesses that cater to such people continue to be located in those communities despite their slightly higher taxes. They’re always bellyaching and threatening to go Gault but they never do.

By contrast, I haven’t seen a huge influx of jet-setters to low-tax, low-service part of the United States, such as Mississippi, Georgia and Louisiana. The businesses that move to those places are looking to take advantage of low taxes and lax environmental regulations but the rich people who run those business never move with them. For decades, high-value businesses (like those in Silicon Valley) have resisted moving to Louisiana despite the lower taxes and costs of doing business because their valued employees resist moving to a place without good schools, police, fire and roads. They don’t want to live in place with terrible pollution.

The richest places are usually high-tax and high-service because high taxes are necessary to support the infrastructure and services that make life enjoyable both for the rich and for the people for entertain and serve them. There are very few low-tax, low service countries that are prosperous in the absence of mineral wealth. There’s no free lunch. Shouldn’t be any free-riders, either.