More than two years ago, François Hollande diagnosed that the French economy needed a lot more sacrifice from the wealthy in the form of punitive income tax rates that would spread the wealth. Not shockingly to anyone who understands economics, politics, and financial incentives, the French economy (and apparently its soccer teams) stagnated as investors went elsewhere, mainly to the UK, and wealthy French citizens followed them. Hollande tried a series of adjustments to the so-called “millionaires tax,” to no avail. By last spring, the Socialists began losing elections, and Hollande had to admit that the 75% tax bracket had grossly underperformed the static tax analysis claims of potential income.
Time to say au revior to Hollande’s grand experiment in class warfare? Mais oui:
Once a flagship policy of French President Francois Hollande, the 75-percent “supertax” on top earners limps into its final weeks this month having sparked plenty of controversy but few economic results.
It was no surprise that the policy, which expires on February 1, would be quietly dropped: it was only ever slated to last two years and the Socialist government has for months declared it would not be renewed.
The tax had also been watered down until it was barely a shadow of the “exceptional contribution to solidarity” proclaimed by Hollande when he came to power in 2012. …
Even by its own standards, the tax was largely a failure — the watered-down version brought in minimal revenue and did little to tackle wealth inequalities.
It also had a limited impact on the government’s efforts to balance its books and pay off ballooning debts.
Still more damaging was the way it added to the perception of France as “anti-business”, an image that was gleefully exploited across the Channel in Britain where Prime Minister David Cameron said he would “roll out the red carpet” for French executives fleeing the supertax.
Steve Hayward at Power Line declares that France has “joined the supply side,” and that Paul Krugman’s efforts to get punitive tax rates reestablished in the US are hardest hit by this decision. He’s right about the latter, although premature on the former. Hollande hasn’t become a born-again Reaganaut, but most likely a somewhat more canny Socialist with a new appreciation for the limits of government intervention and class warfare. Hollande has replaced some of his economic advisers and ministers with more moderate choices in an attempt to curry favor with the business community. One has to suspect that investors who fled France will not be gullible enough to return while Hollande remains in power, and that time may be shorter than Hollande had imagined when he replaced Nicolas Sarkozy.
This episode does point out the dangers of static tax analysis, a topic that will become important in the new Congress. Republicans want a new CBO director who will rely more on dynamic tax analysis than Douglas Elmendorf has in the past in order to score legislation with a view as to how incentives and disincentives will impact the economy. Elmendorf’s CBO has done some dynamic scoring, but not enough for the GOP. The opposition to the change wants to cast Republican motivations as a Laffer Curve/supply-side joke, but the failure of Hollande’s pet project demonstrates the total unreality of static analysis. It’s true that dynamic analysis has to make assumptions about the impact of incentives and disincentives on market behavior, but static analysis makes the ridiculous assumption that neither have any impact at all. As the “exceptional contribution to solidarity” makes clear, that’s the worst assumption of all.