Taxing the rich: Billionaires asking to be taxed more sounds like turkeys volunteering for Christmas duty. But that’s what a few rich and famous French capitalists and CEOs did this week. Seemingly emulating Warren Buffett, they said they would be happy to pay an “exceptional” tax to help France out of its budgetary woes. They may have had some idea of what was coming: two days later, the French government slapped a 3 percent surcharge on higher incomes.
But France may not remain isolated. Most Western governments now reckon that taxing the rich is back on the agenda, after three decades bowing to the “trickle down” theory that lower taxes on the wealthy benefit the whole economy. As austerity looms from Washington to Warsaw, governments may find it hard to spare the rich the pain they are preparing to inflict on everyone else. True, calls to “soak-the-rich” are fertile ground for populists everywhere, and it remains the slogan of some leftist politicians looking for an easy soundbite.
Further, most governments have long found that when it comes to budgetary matters, taxing the rich doesn’t pay. Their limited numbers don’t lead to a marginal hike of tax bills to plug governments’ budget holes. And, it depends on how the rich are defined: the higher the threshold, the lower the revenue. The French government set the bar at euro 500,000 a year — that’s more than three times higher than US President Barack Obama’s $200,000 definition of the rich.
Hence the French extra-tax on top incomes will contribute less than 2 percent of this week’s round of fiscal tightening. But these objections miss the point. In the real world, growth in the decade before the financial crisis was mostly unequal in the western world, with the widening gap partly explained by a shrinking overall tax burden on top income earners. Rising inequalities may not be resented intensely when everyone is benefiting from economic growth. But they become unacceptable in times of recession. Governments can only pass austere budgets if they can make a convincing case that pain will be shared by all. In that respect, taxing the rich is sound economics and good politics.