French Exports to Avoid: Wealth Taxes

Some bad ideas just won’t go away. In the 2020 primaries, several candidates floated the idea of burdening the wealthiest Americans with a wealth tax, on top of taxes already levied on annual income. More recently, President Biden floated the idea of a “billionaire tax” and a few economists have suggested reducing income inequality and tax arbitrage through a global wealth tax.

A wealth tax has once again been proposed, by both extremist parties in France. The NFP coalition that gathers the extreme left and communists through the center-left socialists and environmentalists — but also the nativist-populist extreme right RN — included a wealth tax in their electoral platforms. The good news is even if the parties ironically agree on much of substance, they won’t cooperate. The bad news is more than half the legislators favor such a tax, and one with more teeth than past versions.

France’s political future remains uncertain, as the President has yet to nominate a Prime Minister in a hung Parliament. We should expect no action soon, as he has called for a political truce during the Olympics (which last until August 11). As of this week, more than a dozen contenders have been short-listed for the job. For now, the problem remains theoretical, but nonetheless very real.

As I have argued in this space, Europe has often been a source of bad ideas for the US, from the welfare state to Progressivism, and the philosophical roots of wokeism. So the current wealth tax proposal is troubling – for two reasons that apply for the US, as for Europe. First, the tax is proposed as a revenue-generating measure, to bypass an already heavy income tax and address the national deficit. Second, because a wealth tax — even if it is bad economics — is good politics to stoke class warfare and resentment.

French citizens already pay eye-watering taxes. There are five tax brackets, ranging from 0 percent on low earners to 41 percent on annual incomes between €78,571 ($85,642) to €168,994 ($184,204) and 45 percent on annual incomes higher than €168,995. To this, we can add about 20 percent of gross income for nationalized healthcare, retirement contributions, and various social charges (not to mention the portion of payroll taxes “paid” by employers, the 20 percent value-added consumption tax on most goods and services, and miscellaneous other taxes and fees).

But, wait… there’s more!

France has attempted several times in the past 40 years to “soak the rich” with a wealth tax. From 1980 to 1986, it imposed a Tax on Large Fortunes. From 1988 to 2017, that tax was replaced by the Orwellian Impôt de Solidarité sur la Fortune (solidarity tax on fortunes). This tax added an annual wealth tax of 0.5 percent to 1.5 percent in six brackets, for those with a net worth above €800,000 ($872,000). In 2018, the counter-productive tax, which raised a measly 0.17 percent of total revenue, was scrapped by President Macron’s parliamentary block — and replaced with a tax on harder-to-conceal real estate. French home-owners with net real estate assets over €1.3 million ($1.4 million) now pay the Impôt sur la Fortune Immobilière (tax on real estate fortunes), which also ranges from 0.5 percent to 1.5 percent. Fewer than half a percent of French households pay this tax — indicating, once again, its class warfare character.

By ditching its wealth tax in 2018, France joined most OECD countries (only four countries in this club of the world’s 38 strongest economies currently levy a tax on cumulative wealth, in addition to income).

There is a reason that most countries don’t tax total assets — and it’s not generosity. Rather, it is because such taxes are unproductive. As might be expected, wealth taxes lead to capital flight and brain drain; they cause a drop in savings and investment, as well as entrepreneurship. They have high administrative costs (involved in finding and valuing assets). In the end, wealth taxes tend to yield low revenue, while dragging down economic growth. But they do make for good politics, especially in election years; envy commands votes.

With high taxation, government spending at about 60 percent of GDP, and a place in the second quartile of economic freedom, French GDP per capita is barely more than half of Americans’. The US still suffers from high levels of intervention… if less so than most European countries. Total government spending is at about 45 percent, to which we can add 10 percent for annual compliance with federal regulations. And the US still clings to its position in the top quartile of economically free countries. The US could do much better with higher levels of economic freedom.

There are many things to be admired in France, from cuisine to art, literature to architecture. Economic policy is not one of them — and American politicians would do well to avoid importing bad policies from Europe.