Wednesday, August 8, 2012

The Travails of Wealth

Imposing a 75% top marginal rate on incomes over €1 million has surely brought François Hollande a lot of attention, in addition, presumably, to some number of votes in the election, which may well have contributed to his margin of victory. The New York Times takes notice of the policy today with a certain amount of the usual disbelief: "What? 75%, you say? Can they get away with that?" In search of proof that such a "confiscatory" tax rate will wreck the French economy, the Times intrepidly sets out in search of tax accountants and their clients. But despite a good deal of heavy breathing, it doesn't come up with much:
“Should I be preparing to leave the country?” the executive asked Mr. Grandil.
The lawyer’s counsel: Wait and see. For now, at least.
Or, to get right down to the nitty gritty, we can look at actual numbers:
A tax accountant in Paris with many wealthy clients, Steve Horton, has calculated that a two-parent, two-child household with taxable annual income of a bit more than 2.22 million euros ($2.75 million) now has after-tax take-home pay of about 1.1 million euros ($1.35 million) under France’s current tax system.
That household would end up with 780,000 euros, or $966,000, if the Hollande tax took effect, Mr. Horton says. (The same family, with comparable income in Manhattan, would take home $1.55 million, the dollar equivalent of 1.25 million euros, after paying federal, state and city income taxes, he calculated.)
"Confiscation" looks a little less bleak now. A family of four should be able to get by on $966,000 after taxes, even in Paris. Perhaps the rich won't be forced to avail themselves of the privilege they share with the poor, to sleep under bridges, after all. And if Johnny Hallyday and Laetitia Casta decide to make their homes elsewhere, France will still have Sylvie Vartan and Sophie Marceau to console itself.

But what about the disincentivizing effect of high marginal tax rates, you ask? It's not clear that there are any, but economists convinced that entrepreneurs will go on strike if limited to a million a year will now have a natural experiment with which to prove their contention, if only they can somehow control for all the potential confounding variables, which are legion. To me, it's always seemed that one of the great attractions of building a company is the power that goes with controlling it. The income is nice, to be sure, but power, they say, is the greater aphrodisiac.

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