Tax Analysts Blog

French Lessons on Tax Reform: The Bad, the Worse, and the Bizarre

Posted on Apr 12, 2017

Election-year pandering is conducive to myopic tax proposals. That’s evident right now in France, which will hold its first round of national elections on April 23. Three of the tax ideas being put forward are worthy of further discussion. Spoiler alert: I don’t care for any of them.

By way of background, it’s an unusual election in that the incumbent is not running. French President Francois Hollande, a member of the Socialist Party, will not be on the ballot. He’s far too unpopular. His fiscal policies have failed to provide the promised boost to the nation’s economy. He’s also quite dull – at least when it comes to giving speeches.

The highlight of his term so far was when he was caught sneaking off for a romantic tryst with his mistress. The public was blasé about the affair, but Hollande’s image suffered a setback because he traveled to the rendezvous on a motor scooter. It made for a pathetic sight -- the French equivalent to Michael Dukakis parading as a tank commander. The incident inspired a video game parody in which a cartoonish rendering of Hollande maneuvers his scooter through the streets of Paris while dodging the paparazzi and former paramours. Note to aspiring French politicians: Use a limousine; you’ll be glad you did.

Hollande’s dismal approval ratings have spelled trouble for other Socialists, as the party has struggled to field a competitive presidential candidate. The more established figures of the French left were rejected as being too close to Hollande, leaving a field of B-team aspirants to battle it out. The two survivors are Jean-Luc Mélenchon and Benoit Hamon. Mélenchon is sitting fourth in opinion polls, projected to grab 14 percent of the national vote. Hamon is in fifth place, with an estimated 11 percent of the vote. Neither is expected to qualify for the runoff election in early May.

Strictly speaking, Mélenchon is no longer a member of the Socialist Party. He hasn’t been for almost a decade. He quit the party in 2008 to protest its platform becoming too pro-business. He formed his own mini-party, “La France Insoumise” (loosely translated: the Unsubmissive France). His support comes mostly from students and socialist voters who are declining to back the mainstream left.

Both Hamon and Mélenchon support an anti-austerity economic agenda premised on increased public spending. They want to scrap the European Union’s Growth and Stability Pact, aimed at limiting EU member states’ budget deficits to 3 percent of GDP. Fiscal responsibility is apparently not something they worry about.

Ironically, their anti-EU rhetoric is shared by France’s alt-right darling, Marine Le Pen, who heads the anti-immigrant National Front Party. Le Pen holds a narrow lead in the polls, at 24 percent. Le Pen is known to say unconventional things about the Vichy regime and claims to be an admirer of Russian President Vladimir Putin. Sound familiar?

Bad Tax Idea Number One

France has a 35-hour workweek. That doesn’t mean the French are actually limited to working only 35 hours per week. (Statistically, the average French worker puts in 39.5 hours per week.) It means that when an employee exceeds that threshold, the employer is smacked with an additional tax. It functions like an incremental payroll tax on employers, which is to say the burden of the tax is partly transferred onto workers in the form of diminished wages. At first glance it resembles a tax on capital income, but in reality it functions more like a labor tax .

Trade unions argue that even 35 hours is oppressive. Mélenchon has their ear, and wants to lower the threshold to 32 hours. How that will help the country’s economic performance is anybody’s guess. Conventional wisdom suggests that if a society wants more of something, you subsidize it, and if society wants less of something, you tax it. Does Mélenchon want less full-time employment? (The country’s unemployment rate is 10 percent.) He argues that a shortened workweek will increase hiring. That’s a dubious claim that assumes human labor is a fungible commodity. Fewer hours worked by you means more hours of work for the guy next door. If that’s so, I’d like to see my dentist fix a transmission and my auto mechanic attempt a root canal.

This is a tax disguised as labor policy. It has nothing to do with allowing families more time to go on picnics.

Bad Tax Idea Number Two

It gets worse. Mélenchon wants to increase the top marginal tax rate on individuals to 100 percent of their earnings. You read that correctly -- a 100 percent tax bracket.

Under his plan, the top bracket would be imposed on earnings that correspond to 20 times the average median income. That translates to about €396,000 of annual income, or roughly $420,000. This takes soaking the rich to an entirely new level.

I’ve never taken the Laffer Curve seriously, but in the case of a 100 percent marginal rate, one might start to ponder whether the ripple effects include disincentives to work and invest. If you want the most successful people in your country to relocate to Switzerland or Monaco, this is probably the best way to do it. True, families are less mobile than financial capital. But again, when the rate tops out at 100 percent, you can expect a behavioral response. I’m guessing the concept of capital flight is not something that keeps Mélenchon up at night.

His campaign has released a video game intended to condemn income inequality and glorify the redistribution of wealth. It’s called “Fiscal Kombat,” a nod to the Mortal Kombat entertainment series.

Bad Tax Idea Number 3

Are Hamon’s tax policies less troubling? Sadly, no. He wants the French government to tax robots – a notion that, although baffling, isn’t going away easily. No less a figure than Microsoft founder Bill Gates recently went out of his way to float it as a possibility, and Gates isn’t pandering for votes. So what exactly are we talking about?

It’s less about taxing robots themselves and more about taxing the installation of robotics in an industrialized setting-- in particular, modernization that eliminates the need for jobs involving humans. Firms are taxed when they install new equipment, and the proceeds are used to retrain those workers who lost their jobs in the process. As The Economist recently put it, “Automation can be understood as the replacement of labor with capital.” 

Hamon and Gates are essentially saying that automation is akin to pollution. It carries a negative externality that the private marketplace fails to capture. Seen in that light, a robot tax is not unlike a carbon tax. If fully explained to the public, it could have enormous appeal in a populist environment. But it’s still a bad idea.

Industrial modernization affects labor markets all over the world, not just in France. What will happen to the American trucker if self-driving vehicles become a reality? And low-wage markets are not immune. Taiwan-based FoxConn, the world’s leading contract manufacturer, recently replaced 60,000 workers with robotics. As a long-term socioeconomic phenomenon, this is something governments will need to address. That said, I don’t believe imposing a tax on productivity is the best means of dealing with displaced workers. If the objective is to increase GDP, we need more efficiency, not less.

As for the forthcoming French elections, expect them to be highly entertaining. Stay tuned. 

Read Comments (5)

Steve HindmanApr 11, 2017

An alternative to taxing robots is proposed by Yanis Varoufakis, the former finance minister of Greece. He advocates a universal basic dividend (UBD), financed from the returns on all capital. He claims that there would be no new taxes and no impact to existing tax code...
https://www.project-syndicate.org/commentary/bill-gates-tax-on-robots-by...

Bob GoulderApr 11, 2017

UBD is an interesting idea; raises a lot of issues w/r/t income inequality. Thanks for commenting, Steve.

Edmund DantesApr 12, 2017

Sweden tried a 102% marginal income tax rate for a few years. They had to abandon it when all the doctors stopped working for the year in August or September.

Le Pen does not fall neatly onto the left-right spectrum. Some of her economic prescriptions are as socialist as Hollande's.

There can be no doubt that unfettered immigration already has profoundly changed France. I'm not surprised that a significant segment of voters is unhappy with the development.

Bob GoulderApr 13, 2017

I think you're probably right about Le Pen. If there's no socialist candidate on the final ballot (which now looks very likely), it will be interesting to see if she can peel off voters from the Left for the very reason you mentioned w/r/t her economic prescriptions. If so, the national opinion polls could be underestimating the chances of her winning. As we've seen, the pollsters have been wrong before (e.g., Brexit, Trump).

Mike55Apr 12, 2017

Great article as per usual, and I agree with each conclusion. One tangential observation: Gates' argument for robotaxes differs from Harmon's,* despite the end result being the same.

Unlike Harmon, Gates does not think robotics will create a displaced worker problem. Gates thinks market forces will result in MORE new jobs in healthcare and education than are lost to robotics elsewhere. His concern is how we'll pay for all those new jobs, given that education and healthcare require disproportionate levels of government funding. So in other words Gates is not trying to help truck drivers, but instead figure out how we'll be able to afford all those new teachers once the truck drivers get fired and stop paying their taxes.

The Gates position still fails for exactly the reasons you've noted. I mention the distinction only because I find it intriguing: two people with opposing views on the societal impact of robotics (Harmon sees negative externalities, while Gates sees a positive externalities) have somehow managed to land on the same tax policy response to robotics.

*News sources took one partial sentence from the original Gates interview horrendously out of context to create inaccurate, but click-baiting, "tech billionaire turns out to be a robotics luddite!" story lines.

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