French Lobster Leaders Debate Best Way to Pull Their Economy Down

by Guest Author Rodger Malcolm Mitchell, www.nofica.com

The following WSJ article brings to mind the old saw about why lobsters never can get out of a pail. As soon as one starts to climb up, the others pull it down.

Wall Street Journal, February 29, 2012
French Front-Runner Pledges 75% Tax Bracket
By Gabrielle Parussini

PARIS—French presidential front-runner François Hollande said taxpayers earning over €1 million ($1.35 million) a year would be subjected to a special 75% tax bracket should he be elected, underscoring heightened interest across Europe in raising taxes on the wealthiest individuals.

“It’s a message of social cohesion….It’s a matter of patriotism,” he told journalists on his way in to Paris’s annual agriculture fair.”

Across Europe, the idea of raising taxes on high-income earners began to burgeon three years ago, when the Continent started to descend into recession. In 2009, the U.K. government increased its top marginal income-tax rate to 50% from 40%. In the U.S., the top 1% of earners have been the target of widespread protests under the umbrella of the Occupy Wall Street movement.

Mr. Sarkozy’s government has already slapped a 3% temporary levy on high revenue to be applied to those with a taxable income exceeding €500,000 a year.

Revenue disparity, which has been on the rise in most industrialized economies since the 1980s, has remained relatively contained in France, according to an Organization for Economic Cooperation and Development study published in December. The top 1% taxpayers in France earn less than half the average earned by the top 1% in the U.S.

The Monetarily Sovereign U.S. destroys tax money upon receipt. The monetarily non-sovereign France spends tax money. French tax money flows through the government’s hands, back out into the economy.

While the U.S. government is a creator and destroyer of its sovereign currency, the dollar, the French government is only a conduit for its non-sovereign currency, the euro. Few people, including most economists, politicians and media writers understand this difference.

Hypothetically, raising the tax rate on the rich could be an effective way for a monetarily non-sovereign government to close the gap between the 1% and the 99%. (A Monetarily Sovereign goverenment could do it simply by giving money to the 99%.)

However, to the degree French debt is owned by outsiders, debt service reduces the nation’s total money supply, negatively affecting GDP growth. France cannot overcome this the way the U.S. does – by creating money ad hoc as it pays its bills.

When any government takes from its citizens to pay foreign debt, those taxes temporarily mask a serious problem: Domestic money loss. The government can appear to be prudent, while its economy suffers austerity.

Seemingly, this is what the EU leaders want: Support the public sector at the expense of the private sector. That is why they urge the PIIGS to reduce government debt by increasing private debt (i.e. raising taxes), while offering to lend more euros to the “offending” nations.

The combination of more taxes and more outside borrowing, leads to recessions, while giving the false appearance of a government being financially wise. Whether the euro nations’ leaders want this consciously – these leaders are, after all, creatures of the public sector – or do it out of ignorance, the effect is the same: Deeper and deeper recession, with the reason hidden, thus preventing positive efforts to cure the recession (“We already are doing everything we can.”)

If France is to remain monetarily non-sovereign (a terrible, but likely, path), it never should borrow from outsiders. If 100% of France’s debt were domestic, all tax increases to support debt service, merely would recirculate euros within France, thus delaying the inevitable bankruptcy all monetarly non-sovereign governments face, if their balance of payments is negative.

Of course, the above begs the question: Is it economically wise or morally fair to take away 75% of anyone’s marginal income? The rich are not stupid, you know.

Related Articles

Articles and blogs about France

Articles and blogs about Taxes

Articles and blogs about Money

About the Author

Rodger Mitchell, MBA is a “turnaround specialist”, who saves troubled companies. He is the author of the book, “Free Money, Plan for Prosperity” and founder of his own blog, Rodger M Mitchell.com.

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.