More on my ongoing frustration with the French Presidential elections

OK then, France decided. They’ve decided to go with the socialist. I was right on that one, and now it remains to be seen if I was right in the more significant part of my prediction. I didn’t intend to do anything else on current events, and certainly not so soon, but… oh God, I just saw Hollande on the news promising that he’d have a tax rate of 75% on the rich. No you won’t. Not if you have an ounce of sanity in your body, you won’t.

OK then, let me introduce you into a rather interesting (to me) bit of economics called the ‘laffer curve’. The laffer curve goes like this: at 0% tax revenue, obviously, you’re not going to raise any money in tax. Similarly, at 100% tax, you’re also not going to raise anything in tax (no one has any incentive to work, and noone can actually afford to pay anyone for anything, etc.). It follows that there must be some kind of theoretical maximum tax, increasing from which one is actually reducing one’s revenue*. Now, there’s not really much agreement on what, exactly, this maximum rate is – especially since it’s going to vary from time to time, and economy to economy, but the midrange tends to be about 70%.

Those of you who’re good at maths might have worked out where this is going. But I said that it was variable, didn’t I, and that there wasn’t much agreement. So there’s quite a bit of leeway, isn’t there? 75% could work, couldn’t it? Well, there’s two problems here. Firstly, the laffer curve tends to shift to the left as you get richer. The richer someone is, the more incentive they have to avoid taxes (1% is quite a bit when you’re on a five figure salary), and the more capable you are of doing so – through clever accounting, straight up leaving the country, or whatever else. The more money someone has, the less you can charge them before they just stop paying you. There is no way 75% is going to work out here.

Then there’s the reason why we don’t know where the peak of the laffer curve is – why we don’t go for the tip of the laffer curve in our tax-raising. Taxation has a bit of a distorting effect on the economy, even before you reach the maximum tax revenue, since laffer curves are just focused on immediate tax revenue. The more taxes you have, the less people can spend, and the less benefit companies get from the money they actually do earn, so the slower the economy grows and the less tax revenue you get over time, since you have less total money to take your taxes from. There are some more technical reasons why more tax is a good thing, like an increase in what’s called deadweight loss. OK, how do I explain that? It’s sort of similar to the ‘consumers have less money to spend idea. Hmmm… there’s a level of cost for something at which point it’s not actually worth it for the company to make it. Obviously. And there’s a level of cost at which an individual stops wanting to actually buy a product, because the benefit they get from buying it is less than the cost of buying it in the first place. That one’s probably pretty obvious too. In a perfectly competitive free market, a company is going to have to charge the absolute minimum level at which it’s actually worthwhile for them to make it in the first place, and anyone for whom that minimum price has them end up getting more benefit from the object than they end up losing from the amount they had to pay.

Now, when you tax someone, you effectively create a gap, meaning that the amount of money that the company has to charge for something before it’s worth it for them to make it, and the less the consumer can pay before it stops being worth it**.

Now, the economy is not perfectly competitive. But the tax thing still works, anyway. Utility is lost, and the economy suffers as a result. That’s as far as I’m willing to go in explaining that. You also don’t get jobs coming in at the rate you used to, since multinational corporations tend to avoid 75% tax rates. Basically, taxes go too high, the economy suffers for it. Don’t get me wrong, there are plenty of different reasons for taxation, kept to a reasonable level. I’m just not getting into them here, since they don’t really fit with the point I’m making at the moment. A 75% tax rate is a serious problem for the economy long term, and it’s not even going to be raising more money for them in the short term.

Reducing the French reliance on nuclear power is stupid too, by the way.

Hopefully, this’ll be the last economics-y current events thing I’m going to do in a while. And before I finish, I’ll make clear that there is still a chance for Europe, even if I’m entirely accurate. You see, all my predictions are based on a single premise. I’m assuming that Hollande actually is going to do what he’s said he’s going to do. If he ends up being a pathetic wishy-washy wet rag who changes basically nothing, then France will probably be fine, or at least get by with the relatively minor immediate damage that’s going to come from market panic.

So Europe’s only hope of salvation is if a politician breaks his promises. As if that would happen.

*Actually, there could, in theory, be more than one. Quiet.

**Wow I’m simplifying economics a lot today.