By Alexander Reed Kelly · 3 Oct 2012
A bold experiment is under way in the world’s fifth-largest economy: As part of a recovery plan aimed at plugging a $48 billion hole in the French budget, leftist President Francois Hollande announced last week a 75 percent tax on the personal incomes of anyone earning more than $1.3 million a year, effective for two years beginning in 2013.
The decision has some of the country’s top earners, led in the media by cosmetics tycoon Jean-Paul Agon, suggesting that the new rules will make France inhospitable to commerce, and implying that the impending blow to their bank accounts may compel executives to take their moneymaking activities elsewhere.
“If there is such a new tax rule,” the L’Oreal CEO said in an interview before the figure was confirmed Friday, “it’s going to be very, very difficult to attract talent to work in France, almost impossible.”
Agon’s warning reflects an attitude among the rich that is older than capitalism itself. If you tax us too much, the thinking goes, then the cost of providing the goods and services society requires will become too high. We won’t be able to pay the wages our workers deserve, and our talents for enterprise will find more favorable conditions elsewhere.
The refrain has been heard virtually everywhere a tax increase has been proposed in the Western world in the last 50 years. In the United States, the marginal tax rate—the percentage taken from every dollar of personal income earned past a certain amount—reached 94 percent in 1944, and with the exception of a four-year period in the late 1940s, didn’t dip below 90 percent until Congress accepted President Kennedy’s tax reforms in the mid-1960s. Rates remained at or above 70 percent through the Carter administration, and after Ronald Reagan’s drastic reform program in the early ’80s, settled amid their current range in the 30th percentile in the early ’90s.
The argument among economists and politicians over whether taxes should generally be increased or lowered is everlasting, but economists agree that an immediate increase of 35 percent—however temporary—is breathtaking. If it is cost-effective for them to do so, top earners who work primarily for massive financial rewards will be encouraged by the hike to take their accounts elsewhere. Additionally, many of the remaining 1,500 to 2,000 soccer stars and other people earning $1.3 million or more per year who remain in the country will work to avoid their tax obligations through legal or illegal means.
Aside from sophisticated legislation and committed police work, little can be done to discourage people who feel entitled to their surplus wealth from devising ways to hold on to it. Some will triumph over the new tax law from home. But how might the French or any other government prevent wayward business leaders from moving their engines of wealth into nations more amenable to their views of the rich man’s rightful due?
The easiest answer is that action on the part of government, at least in the short term, is unlikely to be necessary. Moving a company, especially one with a large workforce and substantial real estate assets, cannot be done overnight. The exportation of America’s manufacturing base in the second half of the 20th century took decades. Executives inclined to ship their operations across borders today would have to convince essential workers and stockholders that relocation is worthwhile. (They themselves may have to persuade their families to leave a country they know and might even love.) Even if a move could be demonstrated to be financially beneficial in the long run, the prioritization of short-term rewards over long-term gains appears to be a defining—and in this case, limiting—practice of modern corporations.
In the event that a company of consequence decides it is worthwhile to emigrate, a combination of business taxes and trade embargoes could make it difficult for the firm to continue doing business at home. Nations privileged to host major markets are uniquely positioned to play a consumer hostage game, separating manufacturers from the customers who live within their borders. Corporations that depend on government contracts would be especially vulnerable to such sanctions. At the very least, a state could attempt to impose exit taxes.
The questions and possible answers raised here are worth considering because Hollande’s administration may soon find itself needing to come up with ways to retain businesses that provide French society with vital jobs, income and tax revenue. If that were to happen, then the world, for what would be virtually the first time since the emergence of a global, tax-resistant capitalism in the late 20th century, will witness a test of the conventional wisdom that says high taxes on individuals and corporations irresistibly drive societies toward financial ruin. The results of that test would have profound implications for the validity of the assumptions upon which a majority of modern economies are currently based.