Economic growth doesn’t happen overnight, of course. But, as generations of young people get educated, possess a strong work ethic, and are motivated to succeed in challenging yet rewarding occupations, the synergy of effects is evident as economic growth builds up a head of steam and moves forward like a freight train.
Want to destroy an economy? Reverse all of that. Of course, economic contraction won’t happen overnight. But, like reversing the direction of a freight train, the economy will have to slow down, stop, and then reverse direction. Once economic contraction builds up a head of steam, it will be difficult to reverse.
And that's precisely what's happening in France.
The economic freight train is slowing down due to President Francois Hollande’s so-called “Millionaire Tax.” Hollande has levied a 50% employer-side payroll tax on the portion of income that exceeds $1M Euros. Hollande wanted a greater percentage (75%) and wanted it levied on the personal income side as well. But, the Constitutional Council ruled that “unfair.”
Imagine that! 75% is unfair but 50% is equitable.
According to Alan Cole, most of France's mainstream media is focused upon the short-term responses to the tax. Actors have threatened to leave France. Football clubs have threatened to strike. All of that blather isn’t “on point” because even though there will be some immediate effects, more important are the long-term impacts upon France's economy.
For example, Cole notes that many high salary jobs–for example, partner in a law firm–require extremely long hours and graduate degrees. These represent substantial investments of time and money. However, if citizens leave a country because the tax climate doesn’t favor getting that education, developing a work ethic, and the increasing the desire to succeed in challenging yet rewarding occupations, the transgenerational synergy of economic effects will inevitably slow down, stop, and then, reverse economic growth.
On January 3, 2014, Hollande increased France's value-added tax from 19.6% to 20%. That seems nominal, doesn't it? But, the intermediate rate, which includes hotels, restaurants, and public transportation, increased from 7% to 10%. That's nearly a 43% increase! According to the Financial Times, the tax increases translate into 12B Euro!
The Motley Monk isn’t much worried about France. But, he is worried about the United States. Creating a negative tax climate to redistribute wealth signals that the economic freight train is slowing down. With meager economic growth the past few years, perhaps the train has come to a stop.
Let the discussion begin…
To read Alan Cole’s post, click on the following link: