The question of fiscal austerity has become very aligned with partisan and ideological debates in the United States even though really it’s a separate issue. And that’s something you can see on full display in France, where the recently elected Socialist Party government is going all-in on fiscal austerity in its new budget, but doing so in a very left-wing way. The government is convinced that it needs a debt-reduction program and is determined to do it through progressive taxation. The most eye-catching headline element is that President François Holllande and Prime Minister Jean-Marc Ayrault are proposing a new 75 percent top marginal income tax bracket.
That’s higher than we’ve seen in major developed countries in a long time, and some are saying it will lead the rich to flee France en masse. At the same time, this rate is very much in line with what Thomas Piketty and Emannuel Saez, two of France’s most accomplished economists, say would be best practice in contemporary circumstances.
Many more details about the Hollande/Ayrault tax plans are available in the French language media, including the fact that (also in line with Piketty/Saez research) the 75 percent rate will apply only to “earned income” and not to investment capital. But they also want to bring back a small wealth tax on holdings of more than 1.31 million euros, impose some reduction of the amount of tax deductions people can claim, decrease taxes on some low-income families, and what I think is an increase in capital gains taxes.
So one good question people might ask is, does France really need to do this? Call me skeptical. Financial markets don’t have the level of confidence in French debt that they have in German bonds, but look at this chart:
Nothing about that screams to me “let’s freak out about government borrowing costs.” French debt seems to be pretty cheap and on a generally downward trajectory as a result of general economic pessimism. It’s a cliché but also quite true that what France really needs is growth-oriented policies, not obsession about the debt. Maybe let supermarkets stay open past 1 p.m. on Sundays.