22 March 2019
Despite the scrapped supertax on the country's richest, the French authorities, like other governments, may seek other ways to tax the fat cats. Photo: Alamy
Despite the scrapped supertax on the country's richest, the French authorities, like other governments, may seek other ways to tax the fat cats. Photo: Alamy

More taxes for the rich: the new normal in the capitalist world

The Charlie Hebdo massacre and the massive quantitative easing by the European Central Bank reveal the profound social and economic woes the French government is now facing.

One of the François Hollande administration’s major initiatives to tackle the country’s socioeconomic issues was to increase the rate of the supertax on earnings above 1 million euros (US$1.13 million) to 75 percent.

But the move quickly ran into the pitfall posed by the “Laffer Curve” — which shows that tax revenues decrease as tax rates increase beyond a certain point.

The government collected a paltry 260 million euros in 2013 and 160 million euros in 2014 from the supertax, which affected merely 1,000 employees in 470 companies, despite an angry outcry from the country’s richest people.

The Élysée Palace decided to quietly scrap the tax from this year.

French policymakers won’t miss 2014, but last year was fruitful for the country’s academics.

Economist Thomas Piketty, known for his research on inequality in wealth and income, turned his 700-page book Capital in the 21st Century into a sensational bestseller in many countries, with translations in more than 50 languages, including simplified Chinese.

The one million copies he has sold have earned Piketty the tag of a rock-star economist despite intense debate on how well or badly the book was researched and written.

In any case, his book can serve as an important reference for decision makers in countries with a widening chasm in wealth between the rich and the poor.

Piketty’s main argument is that invested capital – in the stock market, in real estate – will grow faster than employment income, and to be able to invest capital, you must already have money.

If you rely on job income, as most people do, you will likely never catch up with people who are already rich.

Just months after Piketty’s book took the world by storm, another French scholar, Jean Tirole, was awarded the 2014 Nobel Memorial Prize in Economic Sciences for his analysis of market power and regulation.

Tirole’s areas of strength include labor organizations, government regulation and industrial monopolies.

The theories of Piketty and Tirole and the policies they endorse may come in handy in Hong Kong.

Tirole’s works may enlighten the government before the new rounds of talks with CLP Power and Hongkong Electric for the renewal of their “scheme of control” agreements (at present, the permitted annual return for the two power companies is set at 9.99 percent of the total value of the average net fixed assets for the year).

And since the Hong Kong government has made poverty alleviation one of the top items on its agenda, Piketty’s thoughts on poverty and capitalism and his policy recommendations can offer a new perspective.

Higher taxation of the rich is perhaps an inconvenient but unavoidable policy, and these days, many countries find themselves forced to enact new tax legislation or increase tax rates.

Those who belong to the most economically privileged 1 percent of society will surely fall victim to the “new normal”.

Some wealthy French citizens have fled to neighboring countries to dodge the country’s high tax rates, but I’m afraid they will soon have fewer places to escape to.

In Britain, on top of last year’s proposals for a mansion tax on upmarket homes, the government is now considering lowering the baseline tax allowance.

In the United States, President Barack Obama vowed in this year’s State of the Union address to keep taxes low for middle-class families while calling for an increase in the rate of capital gains tax for the highest-earning Americans to 28 percent from 20 percent.

The White House also seeks to close a loophole allowing capital gains on inherited funds to go untaxed — the so-called “trust fund” loophole that allows billions of US dollars to escape the net of the Internal Revenue Service each year.

Can Hong Kong, whose fat cats and well-heeled class are among the world’s most affluent, take a leaf out of their book?

I will share my thoughts in my next column.

This article appeared in the Hong Kong Economic Journal on Jan. 28.

Translation by Frank Chen

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal

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