, , , , , , , , , , , ,

France’s Wealthy Consider Exiting With Major Tax Increase

France over the past three decades is a case study of what not to do in economics.  Of all the developed economies in the world, only Japan and Italy have performed worse than France over the past 20 years.  This new tax increase will only exacerbate things further.

The real problem with higher taxes is that it takes resources out of the hands of individuals.  Individuals will invest, build new business, and create innovative new products and services.  They also tend to be held very accountable for their decisions; if I invest in a company and that company fails, I lose all my money; this gives me an incentive to invest wisely.

With higher taxes, resources are taken away from individuals, and instead, that money is directed towards a giant, centralized, and wholly inefficient state bureaucracy that allocates resources based on political connections, rather than market needs.  If I invest a $100,000 and fail, I lose $100,000.  The logic is very  different for the state.  If I’m a politician, I do not directly own $100,000, but I do control how it is allocated.  While it’s theoretically possible that I could allocate it wisely, that’s not my incentive.  Rather, my incentive is to allocate it in a way that benefits myself; I could achieve that by rewarding friends and family; or possibly by rewarding political supporters that will help keep me in office.  Regardless, the incentives are radically different for an individual investor and a politician; and it should be no surprise that the state tends to invest very inefficiently as a result.  For this reason, the larger the state becomes, the more stagnant the broader economy tends to become.

Support for higher taxes is frequently framed in terms of “fairness” and “balancing the budget”, but both strains of logic tend to ignore the underlying realities.  As to balancing the budget; Milton Friedman said it best:

Higher taxes never reduce the deficit.  Governments spend whatever they take in and then, whatever they can get away with.

Don’t be surprised to see France’s latest attempt to enlargen the state even more fail miserably.  At this point, over half of France’s economy must be controlled by its government, a recipe for disaster if there ever were one.