Hollande’s problem

Last year new French president Francois Hollande was elected after campaigning on a socialistic platform that emphasised increasing taxes on the rich. However, he is quickly realising the inherent flaws in the socialist economic model.

By attempting to raise more revenue through punitive taxes on high earners, Hollande has instead succeeded in driving capital – and by extension many of the nation's job creators – out of the country.

A recent article in The Telegraph notes how “Fresh data from the Banque de France show a sudden rise in [capital] outflows in October and November”. The article also notes how “Simon Ward from Henderson Global Investors said the net loss of funds was €53bn (£43.8bn) over the two months, roughly the period when Mr Hollande unveiled a string of tax rises – and suffered a collapse in relations with French business.” The reaction is hardly a surprise and was quite predictable to those that understand basic economics.

Capital naturally flows to where it is treated most favourably. A simple way to think about this is to consider the perspective of an entrepreneur. To start a business you need capital. This requires either using one's own savings or else raising equity or borrowing money. In either case the entrepreneur is putting something at risk. If he loses money the government does not make any contribution to the loss. However if he is successful and is able to turn a profit the government taxes it.

In addition to providing products that customers value and purchase, the entrepreneur is also the one who creates jobs as the business expands. Hollande decided they weren’t paying enough and now many of them are taking their efforts where they are more appreciated. Especially when they see their tax money being used to bail out insolvent governments and banks across Europe, it is hard to criticise their decision.

The higher tax rates are also making it extremely difficult to run businesses successfully. The Telegraph comments on some of the effects:

“The employers group MEDEF said business was "in revolt across the country", warning that bankruptcies were accelerating and firms were slashing investment. "Large foreign investors are shunning France altogether.”

While some businesses are having profits squeezed, some are being pushed into insolvency. Rather than help resolve France’s economic problems, Hollande’s policy is wrecking further destruction.

Politicians often like to demagogue about what they feel is fair or not. One can form one’s own opinion of what fairness actually is, although it is important to recognise that economic law has its own definition. Raising taxes as a response to excessive government spending will exacerbate the problem rather than address it. Sadly, despite the failures of these policies, they are often only increased in the strength of their application. Do politicians ever learn?

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