French Tax Proposals Show Politics, Not Economics, At Work

June 25, 2013
Francois Hollande’s proposal to increase payroll taxes on high wages is poor economics.

Here’s a good example of what the US should NOT do.  French President Hollande wants companies to pay a 75% payroll tax on employees that make more than one million euros ($1.3 million) a year.

The new payroll tax would be in place for two years, meaning it is largely a symbolic political gesture.  This idea is to replace his earlier plan to institute a 75% income tax on high-income individuals, a plan thrown out by France’s highest court. 

The goal is for the French government to raise €100-300 million in additional revenue, a sum that will hardly dent the €85 billion budget deficit.  This fact highlights the political posturing, as opposed to sound financial planning, behind a proposal that comes when his popularity is sliding.

Besides raising taxes, President Hollande said that he hopes the new proposal will lead companies to lower executive pay.  This is where he goes even more drastically wrong.  It is the function of the marketplace, not the government, to determine what executive pay should be. 

Prices are best determined by the market, not by central planners, because the government has no special insight into what is a globally competitive wage and what it costs French companies to attract and keep the talent needed to run multi-national businesses.  Implementation of this proposal could force the best talent to shun France and look for a friendlier environment.  

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