Tuesday, October 16, 2012

Taxes destroy wealth: France's capital gains tax rises to 62.5%

French businesses are outraged at a proposal by the government to raise the capital gains taxation rate from 34.5% to 62.2%.  This compares with 21% in Spain, 26.4% in Germany and 28% in Britain.

...the Socialist government of François Hollande has yet to understand the “extreme gravity” of the crisis.  ...the policies border on economic illiteracy: “The idea of aligning taxes on capital with those on wages is a profound economic error. It is scandalous that the French have been left in such economic ignorance for years.”

Here is the analysis behind the outrage.  The new tax rate raises the cost of capital (the return you have to promise investors in order to get them to invest in France) by a factor of 1.74.  Suppose, for example, investors were willing to invest in a project that returns 10% under the lower tax rate.  Under the higher tax rate, the same project would now have to earn 17.4% in order to get the investors to invest.  From chapter five, we know that a higher cost of capital means that fewer investment projects will be undertaken (because they have a lower NPV). 

So, the Socialist (deontological) justification for higher taxes is that they re-distribute money from those who have it (rich investors) to those who don't (poor non-investors).

The Capitalist (consequentialist) critique of higher capital gains taxes is that they raise the cost of capital, which reduces investment, which makes us all poorer.

As Winston Churchill said:   
The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.

9 comments:

  1. Hollande also proposes to make it more difficult to get ahead in school by studying at home. It's unfair to those who can't or won't.

    http://www.washingtonpost.com/blogs/answer-sheet/wp/2012/10/15/french-president-pushing-homework-ban-as-part-of-ed-reforms/

    There will be less to go around, but at least we'll all be equal.

    ReplyDelete
  2. Did the French government conduct any type of cost benefit analysis to understand the effects of what increasing the capital gains tax would do for the long term value of their economy? It would appear that imposing this higher tax would significantly reduce not only new projects due to the higher cost of capital, but also would cause many businesses to move to other countries with lower rates.

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