France has announced a massive redistributive tax program which would send the top tax rate soaring and increase taxes broadly on the top 10% of society.
French Prime Minister Jean-Marc Ayrault has said that nine out of 10 citizens will not see their income taxes rise in the new budget.
He has confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year.
The 75% rate would be on income earnings, but there will also be a wealth tax on holdings above 1.31 million euros, and a cap on tax deductions, as well as a reduction on the tax burden at low incomes.
So the best way to think of this is as a redistributive tax plan. You could alternately call it left-wing austerity, and I wouldn’t agree with the austerity label totally but for the fact that France also plans to cut spending back, and overall the budget has been called “France’s toughest single belt-tightening in 30 years.” That comes not from an analyst, but President Francois Hollande.
The question would be why. France now carries a public debt burden of around 91% of GDP. This isn’t great, but it hasn’t affected their borrowing costs at all. During the Presidential campaign, Hollande swore off austerity in favor of growth. Now he appears to be backsliding, and these kind of pullbacks in the budget don’t make a ton of sense in an environment where the country can still borrow. Hollande would no doubt respond that the Eurozone carries dangers all its own, and the bond market could turn to France and make trouble quickly.
Taking the other side, the redistributive nature of this progressive tax plan is right in line with research on how to best eliminate the negative effects of inequality. I suppose it would have been possible to design it in a more revenue neutral way, but the increases in revenue will presumably go out the door in benefits in a way that is highly weighted to the poor, so the transfer policies remain intact. And with all we’re learning about the damage caused by inequality, including the threat of financial crises, shifting the tax burden has highly desirable effects. For all the whining from the rich in France, they not only probably won’t leave the country, but they won’t change their spending patterns all that much, either. That means that the negative effects of this will be far more muted, while the positive effects of tax reductions on the poor will be more outsized.
Compare this to America, which hit its highest level of income inequality in 2011. Not only does this have social consequences in terms of the lack of cohesion of society and the rise of an insulated meritocracy prone to failure, it creates this glut at the top which does nothing to promote a better economy. If you truly want to grow an economy “from the middle out,” as the President likes to say, you have to engage in policies that can actually achieve that, and among them is progressive taxation. There are also plenty of pre-tax policies that could be pursued, which Dean Baker consistently talks about in his book The End of Loser Liberalism. But a high top marginal tax rate certainly has an influence on pre-tax income. And this becomes a political economy issue as well, as those with the most money, power and influence get there thanks to generous tax policies.
The French system is generally set up so that the budget announcements by the ruling party can be put into action, for the most part. So this will be an interesting experiment, a throwback to a previous time when top marginal tax rates were high. Let’s see how that interfaces with the neoliberal consensus.