Talking about taxes, economists like to quote Louis XIV’s finance minister: “The art of taxation consists of so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”
We have been hearing a lot of “hissing” about France’s 75% tax hike proposal. News articles tell us that business executives are planning to leave France because of high taxes. And yes, looking at other countries, France’s taxes are high. The new 75% rate would move France to the top of a list of high income tax countries that currently is led by Sweden, Japan, the UK and Germany.
A progressive tax, the 75% rate reflects an approach through which those who earn more pay a higher rate than people who earn less. For France and most other countries, the top rate is marginal. It just applies to a slice of income at the top of what an individual earns.
In France, currently, if you earn €100,000, then…
- The first €5963 of your paycheck has a 0% income tax.
- The next layer of earnings between €5964 – €11,896 is taxed at 5.5%.
- Then, for the slice that is between €11,897 – €26,420, 14%.
- And, for earnings between €26,421 and €70,830, 30%.
- Finally, everything above €70,830 has a 41% rate.
Now, the new law would mean that on the amount you earn above €1,000,000, you give back 75% to the government.
This table from the NY Times provides a specific example:
A French Millionaire’s Taxes: With and Without the 75% Proposed Rate
A family with 2 children
Current Tax Law
Proposed Tax Law
Employee Social Taxes
Take-home pay after taxes
Source: NY Times
The income tax is not France’s only tax. People also pay social taxes that relate primarily to healthcare, retirement and unemployment and a value added tax (sort of the equivalent of a sales tax) of 19.6%.
France’s tax approach represents considerable income redistribution from those who earn it to those who spend it for medical reasons, as old age pensions and when they are unemployed. Looking at income redistribution (below), you can see that France is among those countries with more equality.
Equality Among Selected Countries For Disposable Income: Ranking From First (most equal) to Fifth (least equal)
The Most Equal
Almost as Equal
Even Less Equal
The Least Equal
France’s President Hollande says his tax proposal is all about social justice. Disagreeing, others believe that the income redistribution he proposes will further diminish France’s stagnant economic growth, worsen its fiscal slide, and thereby harm social welfare.
And finally, nearby states seem to delight when their neighbors raise taxes. Belgian business people are smiling as French inquiries about home purchases and business investment increase. (Similarly, when Illinois raised taxes, Wisconsin said, “Come here!”)
Please note this post was slightly edited after it first appeared.