Recently, France's labor minister confirmed again that the government wouldn't allow any exception to a plan to tax top earners 75%. This police had been repealed in 2012, which leaded to several problems before the approvement of the police. The government wanted to use the capital raised from the high tax to cut the country's 33bln euro budget shortfall in 2013, but it is obviously not a wise choice for France. Let's see what will happen if French parliament passes the high tax to super rich people.
Actually, the police will just affect 1500 people whose income are higher than 1mn euro. These people may try to leave France in order to safe their property. It can be seen as an immigration moved out from France, but I would rather see it as capital moved out from France. Because 1500 is just a small amount of French population, inversely, they own a large amount of French property. Let's assume that France is a capital-intensive country and there are two sectors, manufacturing and agriculture respectively, and there is a outflow of French capital.
In my opinion, outflow of capital can be seen similarly as the opposite side of FDI. In the short term, using the specific-factors model, the outflow of capital will decrease the marginal product of labor in manufacturing sector because less machines are provided to the same amount of workers. And it will also leads to decline of the wage. The rental earned by land will increase since marginal product of land is risen. And the rental earned by capital will also increase because marginal product of capital increase. In the long run, using the heckscher-olin model, both rental and wage will not change because capital-labor ratios remain unchanged. And I am not sure about the effect of output in these two sectors. I think the output of manufacturing sector may decrease because less workers are available to manufacturing sector due to the decrease of wage. But the workers who are pulled out from manufacturing sector might not willing to enter agriculture sector since the wage in agriculture sector is even lower. Thus, if we assume that the output of agriculture remains unchanged, the overall output of France will decrease.
http://rt.com/business/france-rich-tax-repeal-060/
http://online.wsj.com/article/BT-CO-20131025-702979.html
I think the output of the manufacturing sector will decrease but not because the labor in the sector has not decreased. The rich French that may move are probably not working in the labor sector unless it is a high-skilled job. The high-skilled jobs will not affect output because there are not many moving as you said. If capital is moving, then the output in the manufacturing sector will decrease because there is not as much capital. If capital decreases, it is more likely the workers that did operate the capital will move to the agricultural sector. In the agricultural sector, the labor shift may increase the ag output. However the overall output of France will most likely stay the same but the country will most likely become labor-abundant.
ReplyDeleteWe could see such a significant drop in the manufacturing that the agriculture industry wouldn't have enough jobs to fill the requirement from jobs lost. If this happened we would see a high unemployment rate in France. We would see a labor abundant France though it wouldn't be able to increase output enough to create anymore jobs. This would lead to an overall decrease in output from France. We would have a fixed amount of output from Agriculture from the maximization of labor. Though the capital output would fall dramatically leading to the decrease in overall output from France.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteThis is a bad idea for a few reasons. First of all, high-skilled labor from France will emigrate to other developed countries (the tax doesn't applies to everyone with an annual income of above 1 million euros). As we discussed in class in Chapter 7, a loss of skilled labor will have a negative effect on France. Furthermore, the countries acquiring these skilled laborers will experience an increase in their competitive advantage in this skilled labor section, causing France to experience a decrease in terms of trade. It is also important to keep in mind that skilled laborers that do make incomes in this range will not come to work for France in the future due to the extremely high tax. Although open trade itself does not cause these things to happen, the governmental action being taken here is the key factor.
ReplyDeleteMoving on, this spells a bad situation for France's Ligue 1 (the highest soccer league there). For anyone familiar with global soccer, many European countries and their people are very passionate about their respective teams and leagues. France has had a few teams acquired by some extremely rich owners over the last few years. With this influx of cash these clubs have purchased world-renown players, paying them small fortunes, making these teams global powerhouses and at the same time providing great publicity for the French league (teams such as Paris Saint Germain and FC Monaco for in particular). With this tax, it is sure that many of these players will be looking to leave, strengthening other European leagues instead and leaving the French league to contract in overall appeal and skill. This is a great example of what I explained above dealing with the long-term effects of the tax on the country's terms of trade as a whole.
In the short run, when the FDI happened, the less capitals and equipments will be used in manufacturing sector and less marginal product of labor; the more marginal product of land, the more rental earned by land. But in the long run, capital-labor ratios are fixed so both rental and wage will remain the same. In my opinion, even though many labors who were used in manufacturing sector would like to work for agriculture, the agriculture industry wouldn't have enough jobs to fill the requirement from jobs lost. So I think this action will cause a serious drop for France.
ReplyDeleteThis same topic was in the news in 2012 and many of the people who own a lot of money were starting to leave the country to live in Marocco. The French players were also leaving the country and starting live elsewhere. Many were leaving France to go to Spain.
ReplyDeleteIf capitalists aren't increasing their wealth their not going to continue to create jobs. When you start getting into these obscenely high tax rates wealthy people have no incentive to create opportunity for others through investment because they will be taxed out of the majority of what they worked for. People in the U.S might look at a 75% tax rate in France and say no way that happens here. But what has Washington done lately to indicate in anyway that we will not be facing such crippling taxes in our future. The U.S has plenty of examples to look to indicating we're heading down a dangerous path, France and Greece for example but it doesn't seem like our country is going to learn from history and take the hint. At what tax rate in the future will you quit working?
ReplyDelete