If you wonder what tax changes Barack Obama would have made in 2009 if the U.S. had a parliamentary form of government, take a look at what Francois Holland is doing in France. According to the Financial Times:
- E2.3 billion will be raised via a one-off increase in the “wealth tax” on those with wealth of more than E1.3 million.
- 75% marginal tax rate on incomes over E1 million.
- An increase in the inheritance and gift tax
- A E2.9 billion rise in the tax on business, including higher taxes on oil companies and banks
- 3% tax on company dividends
- Higher tax on bonuses and stock options.
- Rise in the transaction tax, from 0.1% to 0.2%, on French equities with market caps over $1 billion.
In France government spending claims 56% of GDP (second highest in Europe behind Denmark), and the unemployment rate is 10%. Supposedly these tax hikes will ensure that France reaches its budget deficit target for this year of 4.5% of GDP.
Our prediction: The tax hikes will not generate the expected revenue because job creators will decamp to more capitalistic climes (Switzerland, the UK, the US and Canada). Economic growth in France will be even slower than expected and the budget deficit larger. Most of these tax hikes reduce the return on investment, so fewer investments will be made in France and fewer jobs will be created
Why it matters: President Holland supposedly favors “growth” over “austerity,” but in reality he is pursing policies that will stifle growth. The situation is similar in Spain, Italy, and Greece, which in various ways are failing to make the pro-growth, pro-market “structural” reforms needed to accelerate economic growth. Employers are deeply demoralized—tangled in red tape and burdened by high taxes. This reality tends to be overlooked because structural reforms are complex, incremental, and localized. The media prefers to focus on high-profile, market-moving decisions regarding monetary policy, bank recapitalization, fiscal policy and the like.
But in the end it’s all about growth, not financial engineering. Nothing is more important than liberating the European private sector in order to reignite growth—the key to keeping banks solvent and reducing, or at least restraining, sovereign debt-to-GDP ratios.
