Over the past week we have had reports of the deteriorating state of public finances in France and particular the drop in tax revenues. It seems like Hollande’s steep tax increases are not bringing in any extra revenue. President Hollande has been hit right in the face by the Laffer curve.
This is from BBC.com (it is not exactly news – the story is six days old):
The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year.
French President Francois Hollande has raised income tax, VAT and corporation tax since he was elected two years ago.
The Court of Auditors said receipts from all three taxes amounted to an extra 16bn euros in 2013.
That was a little more than half the government’s forecast of 30bn euros of extra tax income.
The Court of Auditors, which oversees the government’s accounts, said the Elysee Palace’s forecasts of tax revenue in 2013 were so wildly inaccurate that they cast doubt on its forecasts for this year.
It added the forecasts were overly optimistic and based on inaccurate projections.
The figures come a week after French Prime Minister Manuel Valls, who was appointed in March following the poor showing of Mr Hollande’s Socialists in municipal elections, appeared to criticise the president’s tax policy by saying that “too much tax kills tax”.
The failed policies of Mr. Hollande have reminded me of an excellent quote from Bernard Connolly’s great book “The Rotten Heart of Europe”:
“Mitterand had spoken of ‘making a clean break with capitalism’. Capital immediately decided to make a clean break with him: funds flowed out of France at a dizzy rate in the days following his triumph”
Yesterday, I finished reading Thomas Piketty’s Capital in the twenty-first century. In the book he is advocating a global tax on capital – indicating a capital gains tax in excess of 80% would be preferable. This is the kind of policies that Mitterrand tried and failed with and that Hollande is now trying again.
What strikes me is that neither Mitterrand nor Hollande had any idea about how economic incentives work. And frankly speaking when I read Piketty’s book then my main take away was exactly the same – Piketty doesn’t seem to understand incentives. It is social planing or engineering rather than economics.
The state of the France economy would be so much better if French policy makers studied the real great French economists – Jean-Baptiste Say and Frédéric Bastiat – rather than Thomas Piketty.