Evaluating the French Millionaire Tax

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from NCPA,

The French “Millionaire Tax” was ruled constitutional on December 29, 2013, says Alan Cole, an economist at the Tax Foundation‘s Center for Federal Tax Policy. The tax is a 50 percent employer-side payroll tax levied on the portion of income that exceeds 1 million Euros. It was originally intended to be even higher and levied on the personal income side, but it was ruled “unfair” by the Constitutional Council and subsequently reworked.

Much of the coverage on this tax has focused on the very short term responses to the tax. Francois Hollande’s record-low approval ratings. Actors threatening to leave the country. Football clubs threatening to strike. But one should not measure the effects of taxes on the economy through only what is immediately visible. The more important responses to tax climates happen slowly, over the long term.

Many high salary jobs — for example, partner in a law firm — require extremely long hours and a graduate degree. These represent substantial investments of time and money. France may need to worry about people leaving the country, but the much more insidious and powerful effect is for people to simply not make those investments in the first place.

For good economic growth, you want people to be as productive as possible. You want them to educate themselves, work hard and angle themselves toward success in difficult and productive jobs. That sort of planning works over very long time horizons — decades or more. It is over that sort of time horizon that the true effects of the Millionaire Tax will be felt. It is therefore inappropriate to try to divine too much from the most immediate reactions alone.

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