Soaking the Future Poor
A year ago, France scrapped the infamous 75% income tax that had made Gerard Depardieu move to Russia, € 7 billion in assets to be transferred to Belgium, and many others to flee into less burdening fiscal systems. The tax—applicable to earnings over € 1 million—had been ardently disputed by various analyses using the equally disputed Laffer curve—depicting the negative relationship between high tax levels and government revenues. French government revenues totaled only 16 billion Euros in 2014, a little over half the expected 30 billion. The ‘supertax’ had not only pushed existing businesses and their owners out of France, but also prevented many foreign businesses from entering France over the 2 years it was in effect. The government then expected that a return to the previous level of 45% taxation for top incomes will aid their ongoing efforts to patch up the gaping budget deficit of 4% of GDP.
One vociferous supporter of the tax, back in 2012 when it was first proposed, was Thomas Piketty. Although aware that the new fiscal burden might affect the behavior of market participants in such a way as to actually decrease contributions to the government budget, he argued at the time that Hollande’s proposition was “sending an important message” and was confident that “lots of other countries will inevitably follow this route”. Previously in a working paper, he had fiddled with some correlations and elasticities to show that an 80% top tax rate could actually be a revenue-maximizing option for the US and UK administrations, as it had been before the reforms of Reagan and Thatcher respectively.
Many arguments were and can still be offered against France’s attempt to soak the rich, or against Piketty’s support of this measure and other similar policies—and many parallels can today be drawn with the ongoing support in the United States for an increase in taxation at the top. But perhaps this time it is better to let Henry Hazlitt’s eloquent economic commentary explain the less seen effects of such policies.
In 1947—no less than 27 years before Arthur Laffer had made his contribution to fiscal economic policy, and thus long before the Reagan and Thatcher tax cuts—Hazlitt was writing in his column at Newsweek on “High Taxes vs. Incentive and Revenue”:
One obvious effect (considering the present corporate as well as personal income-tax structure) is to soak up the principal sources of capital funds. The funds that the present tax structure takes are precisely those that would have gone principally into investment—that is, into improved machines and new factories to provide the increased labor productivity which is the only permanent and continuous means of increasing wages. An even more important effect of taking so much of the taxpayer’s earnings is to diminish or remove the incentives to bringing such earnings into existence in the first place. This means not merely a loss to the taxpayer who does not trouble to earn the money. It means a loss to the wealth of the whole nation. It means a loss even to the Treasury itself (Hazlitt 2011, 29).
Hazlitt repeated the same point in a column in 1948, titled “The Cost of ‘Soaking the Rich’”:
In other words, the extremely high income-tax rates are self-defeating. Few people realize how drastically revenues from the high incomes have shrunken… But far more important than the effect on Treasury revenues would be the effect on national welfare. The national income would be higher not because the high incomes themselves would be larger; but mainly because the lower rates would both permit and encourage high investment. It is this investment that would raise national production and real wages. In our efforts to soak the present rich we have been soaking the future poor (Hazlitt 2011, 75-76).