France Imposed A 75% Tax On The Highest Incomes: It Didn’t Work And Here’s Why
In a recent interview, Alexandria Ocasio-Cortez stated that the highest income brackets in the US should be taxed at a 70% tax rate. The argument is that this extra income could then get channeled to fund a variety of policies from the so-called Green New Deal to different types of aid for the poor. The problem is that these types of high tax rates have been tried: in France. The policy failed.
In 2012, with great fanfare then French president Francois Hollande announced that all earnings above 1 million EUR were going to be taxed at a 75% tax rate. The policy was supposed to bring a windfall to the French coffers, and make the wealthiest citizens pay up. Just two years later in 2014, the tax was dropped after it had failed to deliver.
The money that was gotten through the tax was quite small, and the projected revenues for 2013 and 2014 were actually down! The government had forecast that in 2013 through all these measures it would be able to collect around 30 billion EUR of extra tax income. What it in fact got was 16 billion, which is 14 billion below the estimated forecast!
This failure forced a change on the post of the Prime Minister, with the new PM Manuel Valls being quoted as saying: “Too much tax kills tax.” The French government did not foresee the consequences that this type of a policy could have. This is a warning sign for any other government that will try to implement a similar policy.
Rich guys like Donald Trump don’t pay taxes and never will
The problem with these high tax rates on the highest income earners is that they punish some of the hardest workers, and not guys like Donald Trump. The ultra rich will never pay their fair share of taxes, because they can hire the smartest lawyers and accountants to get around them. They will stash their money in foreign accounts, or find all kinds of loopholes to get out of paying their taxes.
These high tax rates instead end up being slapped on people who are just above the threshold and don’t have the know-how to be able to get around paying them. What happens instead is that they decide that it is not in their best interest to work as hard as before and they substitute the higher income for more leisure time.
Another effect that the high tax rate in France had, is that it made some of the high income earners flee the country and instead install themselves in foreign countries. One example of this is the actor Gerard Depardieu who moved across the border to Belgium and also got Russian citizenship.
The Laffer Curve
An easy way to show what type of an effect a high tax rate might have on revenues is the Laffer Curve. According to this model, the revenues from taxes rise with higher tax rates, but only up to a point. When that point is reached, with every higher tax rate, the revenues in fact start falling.
This is due to several factors. High earners might find it more profitable just to hide their income or try to find different loopholes in order to avoid paying the tax. Others might instead start working less, substituting money for leisure time. A number of people might even decide to outright move to places with lower tax rates. High tax rates might also discourage investments in the economy from firms, further diminishing tax revenues.
Economists at the St. Louis Reserve Bank and Georgetown University wrote a paper where they analyze what tax rate is probably the optimal one for the US economy. They found that: “ the peak of the model Laffer curve occurs at a 52 percent top tax rate.” So a tax rate of 70% is quite questionable and more likely to actually decrease tax revenues.
Large income disparities are a problem, but high tax rates won’t solve it
History shows that large income disparities are a problem. Whenever a government falters, a lot of times this is correlated with the fact that the poor are getting poorer and the rich are getting richer, with the wealth being concentrated in the hands of a very small number of people. This is in fact what happened at the end of the Roman Republic and probably contributed to the fall of the Republic.
Economist Thomas Piketty wrote a book “Capital in the Twenty-First Century” where he discusses the widening income disparities and comes to the conclusion that they cause social and economic instability, creating havoc in the countries. This is in fact a real problem.
However, the solution is not to hike up the tax rates. Human nature is human nature and it is quite evident what will happen if a tax rate of 70% for the highest income brackets is implemented in the US. We can only look at the analogy of what happened in France. It will not result in more revenue and in fact might cause problems. If you want to collect more tax revenue from the richest segments of society, you need to go about it in a different way. You need to start with closing all the loopholes and enforcing the current laws.