Sub-Optimal Tax Cuts in France

Supporters of limited government often say that there is no such thing as a bad tax cut, but it also is true that some tax cuts are better than others (for instance, see here for a comparison of the sub-par 2001 tax cuts and the supply-side 2003 rate reductions). If policy makers want to boost economic performance, they should concentrate on reducing marginal tax rates on additional economic activity. By this standard, the tax cuts advocated by the new French President generally are not well designed. He is seeking to cap the total income tax burden at 50 percent rather than 60 percent, but this change affects the total tax bill and may not have much impact on the decision to engage in additional productive behavior. A better approach would be to lower the top tax rate. Likewise, Sarkozy wants to increase wealth tax exemptions, but this approach is inferior to a rate reduction (or, better yet, repeal of the tax). He also has a gimmicky plan for tax cuts on overtime and a scheme for mortgage payments. The good news is that there will be tax cuts in France. The bad news is that they could have been better designed. Tax-news.com reports

Chief among Sarkozy’s reforms are measures creating more exemptions to France’s wealth tax, which has often been cited as a key reason why France lags behind its competitors in terms of investment and economic growth, and a 50% cap on individual income tax, down from 60%. The reforms would also cut tax on overtime - encouraging more French workers to work beyond the previously politically sacred 35 hour week, part of plans to make the domestic labour market more flexible and business-friendly - and tax cuts on mortgage interest payments. …It is hoped that Sarkozy’s tax and economic reforms will tempt back the hundreds of thousands of French citizens who have left the country seeking less punitive tax regimes. Popular destinations for the estimated 500,000 French tax exiles include Belgium, Switzerland, the UK and the US. …studies show that it is not just the rich and famous who have seemingly grown weary with France’s high taxes, with families and investors fleeing in increasing numbers. Research by French Senator Philippe Marini, cited by Bloomberg, claims that households fleeing the fortune tax have climbed to a record 649 in 2005 from 370 in 1997. Another study by the Economic Analysis Council concluded that approximately 10,000 business directors have fled France in the past 15 years, taking as much as US$137 billion in capital to invest elsewhere.