As I recently explained, France has some of the worst public finances in Europe. They have consistently ignored the EU rules that are meant to keep government debt down and deficits small:
France has been in breach of the Stability and Growth Pact every year for 22 years. Despite that, the EU has never subjected France to even a remote resemblance of the punitive fiscal measures that they applied against Greece.
The EU finally did something earlier this year and placed France on a ‘watchlist’—with the only requirement that they present a plan for reducing the deficit before the end of this month.
Normally, there would be no reason to expect any attention to the budget from the French political elite, but maybe these are not normal times. According to an October 10th story from Politico, the new French government under Prime Minister Michel Barnier
intends to reinject €60.6 billion into state coffers, mostly through spending reductions. Tax hikes on businesses and France’s wealthiest households will also be major parts of the package.
There is a lesson to be learned when a government in such dire fiscal straits as the French finds itself depending critically on the wealthiest 1% (or even less) of their population. That is how small the group of ‘rich’ is that the French government wants to tax, and therefore avoid further confrontation with the EU over its bad public finances.
Media reports also indicate that the new French government is afraid to raise taxes on a broader segment of the population because it could lead to social unrest. If we take such statements at face value, they tell us that French taxpayers in general have been pushed to the brink by a political leadership with an admirable ability to invent new ways to tax people. Increasing the burden on the rich one more notch or so becomes a politically desperate lifeline for a fiscally desperate government.
Unfortunately for Paris, higher taxes on the rich do not save any government. It is very likely that France’s wealthy are already at the point where one more tax, regardless of which, becomes the proverbial last straw. We need not look further than the income taxes to see why this is the case. Already when a household earns €78,571 per year, it loses 41 cents of the last earned euro to the government. Once their income exceeds €177,106 annually, the marginal tax rate is 45%.
Add to this every other conceivable—and for that matter inconceivable—tax that France asks its taxpayer to pony up for: value-added tax, wealth tax, property taxes, etc. How much more will the wealthy in France put up with? What will the consequences be if they decide to leave by any meaningful numbers?
Perhaps part of the answer can be found in Norway. Two years ago, their government decided to solve a critical budget problem by going after a very small number of wealthy people.
The nation’s wealthiest sent a swift and unmistakable message in response to the government. Spearheaded by Kjell Inge Røkke, the country’s “biggest taxpayer,” a small but financially significant number of wealthy residents
have left Norway over the past year as they were hit with higher rates of wealth tax. Record numbers of the country’s richest residents have fled since the Labour-centre coalition increased wealth tax rates by 0.1 percentage points, costing the government tens of millions in lost tax revenue.
Like so many other high-taxed jurisdictions, Norway relies disproportionately on its wealthiest residents to keep government coffers filled. While the journalistic story quoted above is factually correct, it seems to suggest that wealthy Norwegians want to escape what is an almost microscopic rise in the wealth tax.
In reality, these very wealthy individuals pay a slew of other taxes. For starters, people who are worth these amounts of money typically also have high incomes; a person making the equivalent of $1 million can easily be required to pay 45% of that income in tax. Then there are property taxes, a value-added tax of 25% on most goods and services, and other excise taxes and fees.
In other words, much like their peers in other European countries, the Norwegian government has invented a sophisticated system of taxes to get as much as they possibly can from their taxpayers, especially the ones with the most money in the bank. In response, per The Guardian article quoted earlier, the rich—much like their peers in other countries—vote with their feet and move to where taxes are lower.
You would think that this is the end of the story. It is not. Back in March, Bloomberg.com reported:
Norway unveiled plans to remove a loophole used by the Nordic nation’s richest leaving the country, as the government attempts to drag more tax revenue out of the fleeing billionaires. … For people leaving, an exit tax on unrealized changes in the value of their assets, or transfer of such assets, would have to be paid within 12 years
Since the tax would apply to value growth for the entirety of a person’s residence in Norway, and since it applies to unrealized capital gains, this is effectively one last installment of a wealth tax. It is a toll booth at the border where the Norwegian taxman will open the emigration gate only when he has squeezed the fleeing wealthy for a few more krona.
I doubt that the politicians in Paris will have learned the Norwegian lesson. The big question is: what will they do when they have run out of wealthy people to tax?
