Tag Archives: taxes

08.09.2012 | Do You Agree With French Taxes?

Talking about taxes, economists like to quote Louis XIV’s finance minister: “The art of taxation consists of so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”

We have been hearing a lot of “hissing” about France’s 75% tax hike proposal. News articles tell us that business executives are planning to leave France because of high taxes. And yes, looking at other countries, France’s taxes are high. The new 75% rate would move France to the top of a list of high income tax countries that currently is led by Sweden, Japan, the UK and Germany.

A progressive tax, the 75% rate reflects an approach through which those who earn more pay a higher rate than people who earn less. For France and most other countries, the top rate is marginal. It just applies to a slice of income at the top of what an individual earns.

In France, currently, if you earn €100,000, then…

The first €5963 of your paycheck has a 0% income tax.
The next layer of earnings between €5964 – €11,896 is taxed at 5.5%.
Then, for the slice that is between €11,897 – €26,420, 14%.
And, for earnings between €26,421 and €70,830, 30%.
Finally, everything above €70,830 has a 41% rate.

Now, the new law would mean that on the amount you earn above €1,000,000, you give back 75% to the government.

This table from the NY Times provides a specific example:

A French Millionaire’s Taxes: With and Without the 75% Proposed Rate

A family with 2 children	Current Tax Law (In euros)	Proposed Tax Law (in euros)
Gross Salary	2,224,694	2,224,694
Income Taxes	-837,242	-1,137,383
Employee Social Taxes	-289,210	-289,210
Take-home pay after taxes	1,098,242	798,101

Source: NY Times

The income tax is not France’s only tax. People also pay social taxes that relate primarily to healthcare, retirement and unemployment and a value added tax (sort of the equivalent of a sales tax) of 19.6%.

France’s tax approach represents considerable income redistribution from those who earn it to those who spend it for medical reasons, as old age pensions and when they are unemployed. Looking at income redistribution (below), you can see that France is among those countries with more equality.

Equality Among Selected Countries For Disposable Income: Ranking From First (most equal) to Fifth (least equal)

The Most Equal

Almost as Equal

Less Equal

Even Less Equal

The Least Equal

Denmark

Iceland

Norway

Sweden

Switzerland

Belgium

Czech Republic

Estonia

Finland

France

Italy

Slovak Republic

Slovenia

Austria

Germany

Greece

Hungary

Japan

Korea

Luxembourg

Poland

Spain

Australia

Canada

Ireland

Netherlands

New Zealand

Chile

Israel

Mexico

Portugal

Turkey

USA

Source: OECD

France’s President Hollande says his tax proposal is all about social justice. Disagreeing, others believe that the income redistribution he proposes will further diminish France’s stagnant economic growth, worsen its fiscal slide, and thereby harm social welfare.

Your opinion?

And finally, nearby states seem to delight when their neighbors raise taxes. Belgian business people are smiling as French inquiries about home purchases and business investment increase. (Similarly, when Illinois raised taxes, Wisconsin said, “Come here!”)

News stories about the 75% proposal and the facts I cite are here and here. You might also want to look at this OECD paper on income inequality. My information on French tax rates came from here.

Please note this post was slightly edited after it first appeared.

Posted by: adminEcon
Tags: 75% tax bracket, France, Germany, income inequality, income redistribution, Japan, marginal tax rates, OECD, progressive taxation, Sweden, taxes, UK, welfare state
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07.02.2012 | Are You a Follower?

This sign in Arizona’s Petrified Forest was having little impact:

“Your heritage is being vandalized every day by theft losses of petrified wood of 14 tons a year, mostly a small piece at a time.”

However, after some sign experimentation, they understood why. Researchers tried out 2 kinds of signs.

Paired with a picture of visitors admiring and photographing a piece of wood, the sign asked people to leave wood in the forest.
Paired with a picture of a person taking wood, the sign asked people not to remove wood.

Their conclusion? Because the signs conveyed different social norms, the first one was more successful than the second in generating desirable behavior.

Similarly, the same researchers looked into why a group of homeowners had not reduced energy usage when asked either 1) to reduce resource use, 2) help future generations, or 3) save money. However, they did respond more proactively when told, “The majority of your neighbors are regularly undertaking efforts to reduce energy. Please do it too.”

Again, the same conclusion. The key is establishing a social norm. People seem to engage in a requested behavior when they find out that everyone else is doing the same thing.

Where does all of this take us? Flip an issue to the positive side to get the behavior you want. Say that most people pay taxes, a lot of us conserve energy, and many individuals vote to get more people to do the “right” thing. Also, econlife looks at how a health insurance mandate and social norms could be connected.

In “Following the Herd,” Chapter 3 from Nudge and in this Freakonomics podcast, you can hear more about how social norms shape our behavior. And, for a more academic discussion about the Petrified Forest experiment and others, you might enjoy this paper written by a group led by Robert Cialdini.

Finally, are you a follower? When asked, participants in social norm experiments emphatically said no. And yet, the data in the experiments indicated the opposite.

Posted by: adminEcon
Tags: Freakonomics, herd behavior, Nudge, peer pressure, Petrified Forest National Park, regulation, Robert Cialdini, signage, social norm, taxes
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05.18.2012 | Sweden, Ikea and Taxes

Our story starts when Ikea’s founder, Ingvar Kamprad, left Sweden during the 1970s. It ends with Sweden’s current finance minister saying that taxes were the reason.

Associated with a more humane form of capitalism, Sweden was the prototype for the welfare state. But then a real estate bubble burst during the early 1990s. Government spending soared as the economy sank.

Sounds familiar.

Sweden’s response included less public sector involvement through deregulation of industries like postal services and electricity. They eliminated a wealth tax, inheritance tax and gift taxes. They cut the size and duration of unemployment benefits. With retirement options at 61, 65 and 67, their political leadership has suggested 75 years old.

Because the Swedish economy has been relatively healthy, it is being cited as a country that coped with contraction by cutting taxes, diminishing spending, and vastly improving its debt to GDP ratio. Economist Ed Yardeni says that Sweden’s story proves that more spending is not necessarily the answer to recession and unemployment.

And that takes us back to Ikea. Sweden’s finance minister says that his goal is to attract people like Ikea’s Ingvar Kamprad to start businesses, grow them, and remain in Sweden because it is business friendly.

Our Bottom Line: Don’t we always seem to return to the Smith/Hayek v. Keynes debate? Do we need more business friendly environments or more government spending?

To read about how Sweden’s economy is changing, you might want to look here in the Globe and Mail while here is what The Economist has to say and here is The Spectator’s discussion. For a more academic consideration of the changing Swedish economic model, this Harvard paper is a possibility. And, here is the “Ease of Doing Business” rank for Sweden.

Posted by: adminEcon
Tags: Anders Borg, Fredrik Reinfeldt, Ikea, regulation, Sweden, taxes, welfare state
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04.16.2012 | Free or Fair Government?

I live in a town where I have to pay for garbage pick-up and recycling or I can dispose of it myself. The fire department is voluntary. Because there is no local high school, the town pays other school districts to educate our teenagers. In our town, government provides less and our property taxes are relatively low.

Harvard professor N. Gregory Mankiw might use my town as an example of competition among governments. People who want a local high school would not choose to live here. Using the same reasoning, Massachusetts might attract people who want universal health care while New Hampshire is for those who do not.

Dr. Mankiw said that municipal differences can elevate the quality of government because they lead to competition. Concerned that its households and businesses are leaving, then a town, a city or a state will improve its services or lower its taxes.

By contrast, those of us who believe government is responsible for more services and a more equal society have to reject municipal competition. In order to give more to everyone, governments have to redistribute income. Then though, as Dr. Mankiw explains, When you… “take from Peter to pay Paul, Peter may well decide to leave.” How to prevent Peter’s departure? Make everyone more equal everywhere.

Do I want a national government that gives me what my town does not provide? The next U.S. presidential election will probably let me express my opinion.

To read more about the free and fair visions of government, you might enjoy this column by H. Gregory Mankiw. For each side, “free” is defended in this econlife post while the opposite position is in this obituary for Harvard economist John Kenneth Galbraith. Also, you might want to see what Mitt Romney and President Obama have said about the debate.

Posted by: adminEcon
Tags: Barack Obama, free or fair government, H. Gregory Mankiw, Milton Friedman, Mitt Romney, presidential election, redistribution, regulation, taxes
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10.20.2011 | Top Earners

A quiz:

Looking at the top 1% of earners, how many are in financial services?
Close to 75%, 50%, 25% or 10%?
The answer: 10% (or precisely 13.9%)

Next…

How much does the top 1% earn?
The 1% threshold is close to $350,000. $200,000, top 5%; 150,000, top 10%; $100,000, top 25%.
Here, you can identify your income group. (Stats are for adjusted gross income, 2009.)

And finally, with Occupy Wall Street expressing anger about money moguls, do most people agree? This Gallup survey concludes that more of us blame government than Wall Street for our economic difficulties.

These Occupy Wall Street interviews from NPR’s Planet Money provide an unfiltered look at individual protestor’s goals. They let us form our own opinion of the group’s objectives.

The Economic Lesson
Saying that education is crucial for income mobility, a 2010 study from the OECD concludes that U.S. intergenerational mobility is relatively low. In other words, fathers and sons, mothers and daughters remain close to the same rung on a social mobility ladder.

By contrast, this 2007 report from the U.S. Treasury indicates that there is considerable income mobility in the U.S. Describing a hotel with luxurious rooms and shabby rooms, they say that, “…those in small rooms have an opportunity to move to a better one, and that the luxurious rooms are not always occupied by the same people. The frequency with which people move between rooms is a crucial aspect of the trend in income inequality in the United States.”

An Economic Question: Explain why you would accept income inequality as a consequence of a market system or support more government redistribution of income through taxes.

Posted by: adminEcon
Tags: income distribution, inequality, taxes
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