The Follies Hollande

A few days ago, the socialists, now in control of France, announced their new plan to levy a 75% tax on those making the U.S. equivalent of  $1.29 million and 45% on those making a little more than $194,000 (U.S.) in the "belief" that these new taxes will reduce the government debt by $26 billion (U.S.) a year and bring all debt within 3% of GDP.

Of course, this all makes sense if, in fact, France's wealthy just accept their fate and do nothing about it.  But, I think that French President Hollande and the rest of his socialist cohorts are going to find themselves falling well short of their very optimistic tax collection goals and the entire country will lose in the process.

First of all, most wealthy people are mobile.  If a person is truly independently wealthy and living off investment income, that person can do that anywhere.  So, I would expect a lot of wealthy French to pack it up an go elsewhere.  This could cause French businesses to move as well.. In the process, France will become a poorer nation. Further, those that are independently wealthy, but still want to remain in France, might adjust their investment activity downwards to fall below the 75% or 45% taxing levels; meaning the country will lose more tax revenues.  Some might actually punish the socialist government, all together, by stopping all investment income activity. Other talented and highly paid workers might peddle their talents to companies and institutions in other countries; even taking pay cuts because those cuts would still leave them better off than if they had remained.  I could just see a number of French soccer stars pursuing other competing country's teams.

Lastly, I would also expect some of the highly paid workers to actually ask for pay cuts.  Think about it. If I were making $1.3 million a year and the tax level for the 75% tax is about $1.29 million, why not take my salary down to $1.28 million.  That loss of $100,000 to $200,000 would easily offset having to pay an additional $390,000 in taxes.  This would also be true for those on the cusp of having to pay the 45% tax rate.

--- Los Angeles Times: France unveils tax-heavy budget: http://www.latimes.com/news/nationworld/world/la-fg-france-budget-20120929,0,4668110.story