So President Francois Hollande has not given up on his election promise to levy a 75% tax on those who pay themselves, or get paid, in excess of €1m (£840,000) pa. The French high court rejected his original proposal, but it seems the revised version, to levy the tax on the payers rather than the recipients, may well prevail. The promise is that it will only be for two years, but Pitt said much the same when he introduced the first British income tax to pay for the Napoleonic wars. If it works, it will no doubt stay and perhaps be built upon
Taxing the income of the very high paid at a higher rate than the low paid is part of what made the French vote for Hollande as President. The people want it. They apparently don’t like the idea that the wealthy are sneering contemptuously from their tax avoiding havens at the poor who are being clobbered left, right and centre. And in that respect the French are probably not much different from the Brits. If a British political party were to advocate a 75% tax rate, with no escape, for those earning a million or more, would it gain support from the mass of people?
The arguments against such a tax rate would certainly be wheeled out. First, it wouldn’t bring much money into the exchequer. That’s possibly true, but that would not be the intention. The aim would be that every pound taken from the super-rich would be returned to the low paid who would undoubtedly spend it and so nudge the economy back to life. Also it might suggest the possibility of the return of some fairness in our economy.
The second argument is that it’s the rich that fund the investment to get the economy growing and create new jobs. There used to be some truth in that ‘trickle down’ argument when the real economy was the main focus of investment. But since big bang deregulation, investment professionals have made far greater returns from deliberately opaque derivative securities, betting on outcomes which have no other implications than a financial return, rather than manufacturing widgets which requires real people to work. These essentially speculative markets are now about the size of global GDP. Trickle down no longer works, as is obvious from our current predicament.
Third, if top “talent” is taxed heavily it will go elsewhere – not a terribly persuasive argument. The likes of Fred the Shred, Bob Diamond and the rest, didn’t demonstrate talent so much as incompetence or a preparedness to preside over criminality. In addition, it is they, in their incompetence, who cause the speculative bubbles, the last burst being the cause of our current problems. If they left, they would not be missed. Bob Diamond left. Do we miss him?
The financial sector has grown far too big and is still out of control, five years after the start of the recession it caused. It has become a huge predatory monster feeding off the real economy, destroying real jobs. While politicians talk about rebalancing the economy, they appear frightened to do more than talk, and offer miniscule gestures towards SMEs. But the brute fact is that the financial sector has to be reduced if a healthy long term recovery is to be achieved. Everybody knows it, even George Osborne. Few would argue now is the ideal time to act, but the longer action is delayed, the greater the trauma will be when the nettle is eventually grasped. It will be hard, but delay will make it harder.
Of course, taxing the incomes of the super-rich is only a small part of the necessary rebalancing. Other essential actions, affecting both the financial sector and the real economy, have been identified repeatedly on this site and are argued in ‘The Road to Co-operation.’ It is not an argument against capitalism, but for making capitalism more effective and successful.