Wednesday, August 08, 2012

France's François Hollande Will Test The Laffer Curve

Apparently, Socialists do raise taxes.  In France,  some of the rich are packing their bags.  Here is a quote from this article:

"President François Hollande is vowing to impose a 75 percent tax on the portion of anyone’s income above a million euros ($1.24 million) a year. “Should I be preparing to leave the country?” the executive asked Mr. Grandil. The lawyer’s counsel: Wait and see. For now, at least.  “We’re getting a lot of calls from high earners who are asking whether they should get out of France,” said Mr. Grandil, a partner at Altexis, which specializes in tax matters for corporations and the wealthy. “Even young, dynamic people pulling in 200,000 euros are wondering whether to remain in a country where making money is not considered a good thing.”
Way back in 1999, Austan Goolsbee wrote an important paper studying how the rich respond to higher taxes.  Here is his paper's abstract. 
"This paper examines the responsiveness of taxable income to changes in marginal tax rates using
detailed compensation data on several thousand corporate executives from 1991 to 1995.  The
data confirm that the higher marginal rates of 1993 led to a significant decline in taxable income.
Indeed, this small group of executives can account for as much as 20% of the aggregate change in
wage and salary income for approximately the one million richest taxpayers; one person alone can
account for more than 2%.  The decline, however, is almost entirely a short-run shift in the timing
of compensation rather than a permanent reduction in taxable income.  The short-run elasticity of
taxable income with respect to the net of tax share exceeds one but the elasticity after one year is
at most 0.4 and probably closer to zero.  Breaking out the tax responsiveness of different types of
compensation shows that the large short-run responses come almost entirely from a large increase
in the exercise of stock options by the highest income executives in anticipation of the rate
increases.  Executives without stock options, executives with relatively lower incomes, and more
conventional forms of taxable compensation such as salary and bonus show little responsiveness
to tax changes."

But, geographic migration is another tax evasion strategy that the rich can use. It worked for Mick Jagger and there are many possible destinations to move to.  Some may choose not to raise their taxes on the rich and become "tax havens".  If the rich French view other nations in Europe as roughly "similar products" in terms of quality of life then they don't suffer much loss in quality of life by moving.   If you believe that soccer superstars provide a good preview of how other rich people will respond, then read this paper.  Its results suggest that the President of France is likely to not receive as much revenue as he expects from taxing the rich.