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Posts Tagged ‘France’

Actually, I better add an important qualifier to that title and instead say that we should listen to a specific Frenchwoman.

My friend Veronique de Rugy recently testified before a House Committee and she completely kicked you-know-what.

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I write about the Laffer Curve so often that I’m surprised people don’t run away screaming. But I’ll continue to be a pest because I want people to understand that you can’t just look at changes in tax rates when predicting changes in tax revenue. You also have to consider changes in taxable income.

Simply stated, my goal is for people to recognize that higher tax rates lower incentives to earn and report income and lower tax rates increase incentives to earn and report income. However, I also want people to understand that this doesn’t mean “all tax cuts pay for themselves.” That only happens in very rare cases. Moreover, it would be good if people recognized that there are lots of factors that influence the economy’s performance, and it’s therefore important to be cautious when making claims about the relationships between tax rates, taxable income, and tax revenue.

So we many not be able to precisely measure the impact of the Laffer Curve, we know it’s there and we know it can be very significant. We also know that economic incentives are not constrained by national borders. The Laffer Curve exists even in nations where politicians generally are not sympathetic to good tax policy. France naturally comes to mind, and here are some excerpts from a new report from Pierre Garello. He examines recent changes in tax rates and the tax base, and finds that better tax policy is having a positive impact.

In 2006 a major change was implemented in France regarding the income tax. Not only the top marginal rate was lowered (from 48.09% to 40.00%), but the same treatment was applied to the other rates. Also, the number of brackets was reduced from 7 to 5. As a result, whatever the level of taxable income, the rate applied was lower after the changes took place than before. …the tax base was also enlarged. In particular, while 20% of gross income from salaries was until then automatically deduced to compute the level taxable income, this was no longer the case with income earned in 2006 and after. …Based on data from the French Public Finances General Directorate (DGFiP) we can see that the impact was a minor drop in tax revenues from the 2006 personal income followed by a slightly higher increase in PIT revenues from 2007 earnings. As illustrated by the graph below, the successive cuts in marginal tax rates between 1995 and 2007 have resulted in higher tax revenues.

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Ireland is in deep fiscal trouble and the Germans and the French apparently want the politicians in Dublin to increase the nation’s 12.5 percent corporate tax rate as the price for being bailed out. This is almost certainly the cause of considerable smugness and joy in Europe’s high-tax nations, many of which have been very resentful of Ireland for enjoying so much prosperity in recent decades in part because of a low corporate tax burden.

But is there any reason to think Ireland’s competitive corporate tax regime is responsible for the nation’s economic crisis? The answer, not surprisingly, is no. Here’s a chart from one of Ireland’s top economists, looking at taxes and spending for past 27 years. You can see that revenues grew rapidly, especially beginning in the 1990s as the lower tax rates were implemented. The problem is that politicians spent every penny of this revenue windfall.

When the financial crisis hit a couple of years ago, tax revenues suddenly plummeted. Unfortunately, politicians continued to spend like drunken sailors. It’s only in the last year that they finally stepped on the brakes and began to rein in the burden of government spending. But that may be a case of too little, too late.

The second chart provides additional detail. Interestingly, the burden of government spending actually fell as a share of GDP between 1983 and 2000. This is not because government spending was falling, but rather because the private sector was growing even faster than the public sector.

This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

But big government is never a free lunch. Government spending diverts resources from the productive sector of the economy. This is now painfully apparent since there no longer is a revenue windfall to mask the damage.

There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending. Ireland also had a major housing bubble. And some people say that adopting the euro (the common currency of many European nations) helped create the current mess.

The one thing we can definitely say, though, is that lower tax rates did not cause Ireland’s problems. It’s also safe to say that higher tax rates will delay Ireland’s recovery. French and German politicians may think that’s a good idea, but hopefully Irish lawmakers have a better perspective.

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A paper posted on the Social Science Research Network looks at nations that are prospering compared to those that are stagnating. Not surprisingly, limited government and free enterprise policies are associated with better economic performance. Here’s an excerpt from this new research.

What can we conclude about the effect of various policies on economic growth? What lessons can we learn from the growth miracles of recent years, and how can we avoid the sorry fate of the growth disasters? The countries that have been most successful at increasing their economic growth rates, and therefore at raising the living standards of their population, have all shared a commitment to increasing economic freedom, limiting the role of government, stamping out corruption, and strengthening the rule of law. They relied on free markets, rather than on central planning. They lowered their tax rates, and some even adopted a flat income tax. They made their labor laws more flexible, and allowed their firms to hire new workers more easily. They privatized their inefficient state-owned enterprises. They lowered tariffs, and opened up to trade and international competition. They courted foreign investors, and created a favorable business environment to lure them in. In other words, growth miracles have occurred in countries whose governments have adopted policies that reflect the classical liberal ideals of economic freedom, limited government and rule of law. Our brief survey of economic successes around the world shows that this lesson is universal: Countries as diverse as China, Estonia, Germany, India, Chile, South Korea and Slovakia have benefited from applying a similar set of market-oriented policies.

The paper also makes a key point about economic growth and living standards.

Over time, even modest increases in the economic growth rate can, furthermore, lead to vast improvements in the standard of living. If China sustains the eight percent annual GDP growth rate that it has achieved since its market-oriented reforms began in 1978, its inhabitants will double their living standards every nine years. By contrast, in the United States, which has grown at an average annual rate of about two percent, a doubling of living standards would require thirty-six years.

This is an under-appreciated observation. The author cites a rather dramatic example, but the key observation is that even modest differences in economic growth can have a big impact on relative prosperity with a couple of decades. Here’s a chart I include in many of my Powerpoint presentations. It shows how long it takes to double GDP based on different growth rates.

Let’s look at a real-world example. Hong Kong has been growing by more than 5 percent each year for decades, while France has been growing by less than 2 percent annually. Now let’s ask a couple of big-picture questions. Why have Bush and Obama been trying to make us more like France? Do they fail to understand that this means less future prosperity for the American people? Don’t they realize that this means a loss of relative competitiveness?

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I’m just making up the 1.94 percent number, but the International Herald Tribune reported last year that unfunded liabilities in France are nearly 550 percent of GDP. The news reports don’t include any estimates of what Sarkozy’s reform will mean, but I would be surprised if it had a big impact on France’s long-run fiscal nightmare. But, as the old saying goes, a journey of a thousand miles begins with a first step, and Sarkozy has pushed through the reforms notwithstanding protests and riots from left-wing unions and brain-dead students (who don’t seem to realize that they’ll pay even higher taxes if entitlements aren’t reformed).

Under pressure from the government, the French Senate voted Friday to raise the retirement age from 60 to 62, a victory for President Nicolas Sarkozy after days of street rage, acrimonious debate and strikes that dried up the supply of gasoline across the country. The vote all but sealed passage of the highly unpopular measure, but it was unlikely to end the increasingly radicalized protests. The coming days promised more work stoppages and demonstrations by those who feel changing the retirement age threatens a French birthright. …Leftist critics called the move a denial of democracy by an increasingly confrontational president. “No, you haven’t finished with retirement. You haven’t finished with the French,” said Socialist Sen. Jean-Pierre Bel, alluding to an apparently unflagging determination by unions, now joined by students, to keep protests alive — even through the upcoming week of school holidays.

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I sometimes joke that the French are the world’s most statist people. I have no idea if that is actually true, but the latest protests in France certainly are a good piece of evidence. French workers (especially government bureaucrats) are protesting a plan to increase the retirement age from 60 to 62. They apparently think marching in the street will magically change demographic reality. I discuss this issue in a new Cato Institute Podcast.

Incidentally, my comments are not favorable to Sarkozy. I point out that his pension proposal is just a tiny step in the right direction, and that any positive impact is undermined by concomitant class-warfare tax increases.

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I like poking fun at French politicians for being hopeless statists, and I always assumed that French voters shared their collectivist sympathies. But according to new polling data reported by the Financial Times, there may be a Tea Party revolt brewing in France. Among major European nations, the French are most in favor of smaller government. Sacre Bleu!

European governments have solid public support, at least for now, for the spending cuts they are making in an effort to boost economic recovery, according to the latest Financial Times/Harris opinion poll.

…The poll’s results point to a fiscal conservatism among the European public that contrasts with the eagerness with which most governments ran up high deficits to protect jobs and living standards as the crisis unfolded.

…Asked if public spending cuts were necessary to help long-term economic recovery, 84 per cent of French people, 71 per cent of Spaniards, 69 per cent of Britons, 67 per cent of Germans and 61 per cent of Italians answered Yes.

…Asked if they preferred public spending cuts or tax rises as a way to reduce budget deficits and national debts, strong majorities in the five EU countries as well as the US were in favour of spending cuts.

Similarly conservative views on public expenditure emerged when people were asked if EU governments were right to engage in large-scale deficit-spending after the 2008 crisis. In all five EU countries, a majority – ranging from 68 per cent in France and Italy to 54 per cent in the UK – said the governments were wrong to have done so.

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