Tuesday, June 19, 2012

Inevitable, schminevitable

So, congratulations to François Hollande, who now has a parliamentary majority to back his own presidential mandate. Nice going.

Now what?

The Economist notably described M Hollande, before his election, as "rather dangerous". I think the article tried to explain precisely what he was a danger to, but I must admit I didn't follow its logic. As far as I can tell, the "danger" is that France will fail to do the things The Economist thinks it should. That seems a rather egocentric definition.

The most salient feature of M Hollande's platform is his promise of punitive taxes on the rich. This is a policy that serious publications (like The Economist) - which, incidentally, tend to be owned by very rich people - have been telling us for decades is a formula for disaster. This wisdom has gone unchallenged for the best part of 25 years: every major country has steadily cut its top marginal tax rate, and enjoyed the "growth" that followed. In 2010 Britain bucked the trend gently, only to change its mind almost immediately. Now, if M Hollande keeps his promise, France will buck it much harder.

It's a test case. If the Serious Publications are right, France's economy should implode like a broken light bulb: rich people will flee the country, new businesses will fail to appear, established companies will stagnate and collapse, unemployment will rocket and M Hollande will be facing riots, revolt and the ascent of fascism, probably within two years.

On the other hand, it's possible none of that will happen. It's possible that the rich in France (who are historically accustomed to higher taxes than their peers in places like the UK, or New Zealand for that matter) will grin and bear it, or simply use tried and tested tax-avoidance methods to reduce the total burden to something they think is more reasonable. And then the economy will continue doing no worse than, say, Britain's or Italy's - but with less inequality.

Already the evidence for the received opinion - that low marginal tax rates stimulate growth - is shaky. America's tax cuts since 2000 signally failed either to create growth (except for the rich), or to increase the total tax take. Japan cut its top tax rate from 75% in 1979 to 50% in 1990, and was rewarded with a "lost decade". In Europe, highly-taxed Belgium, Denmark and Germany are, if not exactly going gangbusters, at least better off than their lower-taxed neighbours in Italy (and, one might mischievously add, Greece).

Here in Antipodea: in the late 1980s New Zealand and Australia were roughly at parity in terms of GDP per head. Then New Zealand slashed its top tax rate (Australia also cut its, but much more modestly), and since then the Australians have outpaced us steadily. Today, even after their (higher) taxes are deducted from their payroll, the average Australian takes home a substantial 30% more than the average Kiwi.

Okay, I'm cherrypicking data. Each country has its own story - Australia is propelled by Asian demands for its mining exports, Japan's long decline was more to do with demographics, the US's tax cuts were accompanied by a huge boom in government spending, and so on. But I think there is more than enough evidence to question the assumption that a high top marginal tax rate is necessarily and in itself bad for the economy.

So, what if M Hollande implements his policies and France doesn't implode? What if his gamble actually pays off?

The Economist could argue that he was merely delaying the inevitable. The same "inevitable", mind you, that successive French presidents have been staving off now for more than 30 years. That's a whole generation of French people for whom "the inevitable" has, in fact, been evited.