This election cycle, some American politicians have insisted that, in order to solve the government debt problem, millionaires and billionaires must pay their “fair share,” and bankers and financiers must be “held accountable.” Their European counterparts are far ahead of them in this regard.
François Hollande, whom polls predict will be elected the next president of France this May, has promised a 75 percent top marginal tax rate on those earning more than €1 million ($1.33 million) a year. Hollande announced his tax plan on French television in February. Expressing his indignation that CEOs of companies in the CAC40, France’s equivalent of the Dow Jones Industrial Average, earn a mean of €2 million ($2.65 million) a year, he asked, “How can we accept it?”
“Over one million euros per year, well, the tax rate will be 75 percent. Because it is not possible to have these levels of income,” Hollande continued. Later, at the Paris International Agricultural Fair, Hollande insisted this was not an attack on high-earning French citizens, who already pay a 45 percent top marginal income tax rate in addition to social insurance contributions and a “Solidarity Tax” levied on net worth. Instead, he said, it is a pragmatic measure to fix the country’s fiscal problems and promote fairness. He concluded, “It is patriotism that agrees to pay an additional tax for the country to recover.”
Tobin Tax on the Table
An idea by an American Nobel Prize-winning economist apparently is shaping much of the tax debate in Europe, and catching the attention of some politicians in the United States. On both the national and increasingly important European government levels, proposals for taxes on financial transactions abound. They are commonly referred to as “Tobin taxes” in honor of James Tobin, who in 1972 suggested taxes on foreign exchange transactions to reduce speculation in international currency markets. Tobin won the Nobel Prize in economics in 1981 for research unrelated to the Tobin tax. He died at age 84 in 2002.
Current French President Nicolas Sarkozy has announced his government plans to impose such a tax this August.
The United Kingdom, home to 80 percent of Europe’s financial industry, recently vetoed a European Union-wide Tobin Tax. Undeterred, France has joined Germany and seven other Eurozone states planning to impose one over a subset of the EU. According to a statement by the finance ministers of those countries, the tax would “ensure a fair contribution from the financial sector to the costs of the financial crisis.”
Since these proposals have come to light, there has been some suggestion they may not lead to their intended outcomes. A study by the European Commission claimed an EU-wide Tobin Tax could raise €37 billion ($49.29 billion) annually.
Money is Mobile
Ernst and Young, the American accounting firm, quickly issued a statement countering that the tax would reduce financial transactions and other economic activity in Europe, causing a net €116 billion ($154.51 billion) decrease in overall tax receipts.
Chris Edwards, director of tax policy at the Cato Institute, said in today’s globalized world, “People and businesses are more willing than ever to move.” European proponents of new taxes acknowledge this problem, if not its extent, in their preference for EU-wide taxes. Edwards believes even limiting its application to Europe, however, could harm the European economy.
“They will simply shift investment and capital to Asia or anywhere else without these taxes,” he said. He also questions the wisdom of targeting upper-income earners and the financial sectors for more taxation.
“People at the top are the most able to move or hire tax lawyers. [Governments] might have been able to get away with [these taxes] in the 1950s, before globalization, but plenty of French people and businesses have already moved to Belgium or Switzerland to avoid taxes,” Edwards said. This effect is especially pertinent to financial trading, which, he points out, “Can take place anywhere.”
Similar Sentiments Here
In the United States, similar justifications are being used in calls for new taxes. During last year’s national debt ceiling debate, President Obama said of the high earners on whom he proposed increasing taxes, “I think these patriotic Americans are willing to pitch in if they’re asked.”
New York Times columnist Nicholas Kristof wrote that Europe’s movement toward a Tobin Tax “makes sense,” as similar moves in this country could raise substantial sums of tax revenue from the financial sector.
This election year these sentiments have informed proposals for a 30 percent minimum effective income tax rate and higher capital gains rates. The similarity of these underlying motivations invites comparison with the more drastic and immanent European plans.
Despite a widespread belief in American economic exceptionalism, the same obstacles facing the European taxation plans may undermine their American equivalents. The prominent role of trading and financial services in our economy might render us particularly vulnerable to the their flight.
“Even before the crash, there were concerns New York was becoming uncompetitive,” Cato’s Edwards points out. If new taxes end up driving high earners and financial businesses out of Europe, American lawmakers should by no means take their presence for granted.
Ian Mason ([email protected]) writes from Chicago.
