by Pater Tenebrarum
On the same day
the world's attention was focused on Greece, an arguably more important
election took place in France. As was already deemed highly likely after the
first round of the parliamentary elections a week earlier, Mr. Hollande's
socialist party received an absolute majority.
„French President Francois Hollande’s Socialist
Party and its allies won an absolute majority in the National Assembly, exit
polls showed, paving the way for them to pass legislation without the aid of
other members of parliament.
The Socialist bloc won 314 out of the 577 seats,
pollster CSA said, with 289 needed for a majority. Former
President Nicolas Sarkozy’s Union for a
Popular Movement party and its allies have 228 seats, CSA said, and the
anti-euro National Front won two seats. Turnout in the second and
decisive round of legislative elections yesterday was 56 percent.
“The French people have amplified their call for
change,” Socialist Party Head Martine Aubry, said on France 2 television.
The victory gives the Socialists control of practically every political institution in France – the presidency, the upper and lower houses of parliament, all but two of the regions and most of the country’s big cities, communes and departments – - a first in the Fifth Republic.
Control of the lower house of parliament will
allow Hollande to push through the tough decisions needed amid Europe’s debt crisis. With growth stalling at home, Hollande
now faces the task of telling the French people that the state’s depleted
coffers may mean cuts in spending and higher taxes as he makes good on his
deficit-cutting promises.“
“The result means that President Hollande and
his government have free reins to continue to govern,” said Thomas
Costerg, an economist at Standard Chartered Bank in London. (emphasis added)
So a a little
over a quarter of the eligible voters was actually responsible for this
victory, given the turnout of 56%. This has supposedly amplified the 'call for
change'? We would rather tend to interpret such a voter turnout as proof
positive that a critical mass of voters is getting completely fed up with
politics.
It appears a number of people think that the fact that Hollande surprisingly finds himself with more political power than any other French president of the 5th Republic before him is a good thing because it will allow him to push through his program without facing significant headwinds. To this we would point to our previous discussion of the breathtakingly nutty economic policies his cabinet colleagues have come out in support of in recent weeks.
It is almost a
little bit like with the rise of various dictators in Europe in the more
distant past: nobody took the political goals they clearly enunciated in
advance seriously. 'They can't be that crazy' was the general assessment. But
they were, and the subsequent reality exceeded even the worst expectations.
Hollande and his
government, in case it has not been properly understood, is socialist.
Therefore it would be naive to expect it to actually shrink the size and power
of the State. The exact opposite is likely to occur.
If the plan to
cut the deficit is actually pursued by this government (and we're not quite
sure how cutting the deficit jibes with Hollande's 'anti austerity' message,
since the two are mutually exclusive propositions), there is only one means the
government can and will most likely resort to: it will raise taxes.
That cannot
possibly suffice to attain the goals envisaged by the European 'fiscal
compact'. In fact, it will likely put them further out of reach due to the
deleterious effect on the economy that has to be expected as a result. So he
will have to cut spending, against his election promises. But he's a
tax-and-spender at heart, so what type of spending will he cut?
The Next Body
Blow to The Economy Is Coming
As reported at 'Global
Tax News', a 'plethora
of tax increases' is now expected to come down the pike in France.
Mind, this is a country that is – similar to most other European nations –
already host to egregious confiscatory taxes. If a monarch 200 or more years
ago had dared to ask for a similar tax take, his head would have been parted
from his shoulders within days at most. And now they want still more.
It is worth quoting from the report at length:
„With the French left looking set to gain an absolute
majority in the National Assembly after the first round of legislative
elections, the government is currently preparing an ‘enormous’ raft
of tax measures to redress the public finances, primarily targeting savings,
wealth and top income earners.
With scant regard for much-needed expenditure
cuts, despite the
recent publication of a report from the General Inspectorate of Finances
indicating that around EUR3.9bn (USD4.9bn) in savings is necessary each year to
achieve a budgetary balance, President François Hollande is busily preparing
behind the scenes a package of additional tax rises under the guise of tax
reform designed to ensure greater fiscal justice.
Commenting on the government’s plans, Socialist
Party (PS) leader Martine Aubry insisted that there are other means of
restoring the public finances rather than simply reducing spending. There is
“enormous” scope to realize this goal by introducing additional taxes, Aubry
stressed.
French lawmakers are due to vote on a
supplementary finance bill in July, providing for the most emblematic measures
contained in President Hollande’s election campaign, including the introduction
of a 75% rate of income tax, and plans to reform the country’s solidarity tax
imposed on wealth (ISF). Other remaining tax initiatives provided for in
the campaign programme are to be inscribed in the country’s 2013 finance bill,
due to be examined in the autumn.
The President’s last minute plans to tax at 75% income
in excess of EUR1m to secure election votes could, however, prove disastrous
for the economy, as it brings with it a real risk of increasing the number of
fiscal exiles relocating abroad.
The excessive tax burden would affect not only
top executives of large companies in France, but also the heads of small- and
medium-sized companies (SMEs). The combination of a tax levied at 75% coupled
with plans to align the taxation of capital with the taxation of work, and
critics of the proposals warn that they could prove catastrophic. Gains
realized from the sale of a company, if in excess of EUR1m, could for example
be taxed at 75%.
Hollande’s aim of reforming ISF, includes plans to
restore the wealth tax scale of between 0.55% and 1.8%, in place before the
former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m.
Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m
and 0.5% on net taxable assets above EUR3m.
Despite the legal and technical problems associated
with the reform, the government plans to increase ISF from 2012, to be achieved
possibly by means of imposing an exceptional wealth tax contribution on
taxpayers, akin to the exceptional contribution imposed on top income earners
in France at the end of 2011.
To guard against claims that the 75% tax rate is
“confiscatory” and therefore unconstitutional, the new President plans to
reinstate the so-called “Rocard cap” (plafonnement Rocard), stipulating that
the sum of income tax, wealth tax and social contributions (general social
contribution and contribution for the repayment of the social security debt)
must not exceed 85% of household income.
The new government is also busily preparing for an
assault on existing and highly costly tax breaks (niches fiscales) in France to
reduce the deficit. In accordance with the President’s campaign programme, the
government plans to cap tax breaks at EUR10,000 a year, compared to EUR18,000
plus 4% of income currently.“ (emphasis added)
Wow, what a
relief – the total tax take must not exceed 85% of one's income! So if they
leave people 15% of what they earn, this is not 'confiscatory' and hence not in
conflict with the constitution. This is worse than highway robbery – at least
highwaymen don't pretend that what they do is anything other but theft at
gunpoint. We have yet to encounter a mugger who refers to his activities as
exacting a 'solidarity contribution' in order to achive 'social justice'.
Given the likely
effect on small and medium size enterprises, we can probably rest assured that
the downward spiral of the French economy is set to continue apace. Note the
hint above that there will be 'scant regard for much-needed expenditure cuts' –
this is precisely what we are expecting as well. An initial example of
this 'scant regard' for spending cuts was already delivered with the
repudiation of Sarkozy's timid pension reform. While France has now lowered its
retirement age from 62 to 60 years, Germany has increased its retirement age from
65 to 67 years.
As we have
pointed out, this French pension extravaganza is to be funded with a 'tiny hike
in payroll taxes' to be paid by both employers and employees. The math is
untenable of course, but the point has been made that Hollande is indeed a
dyed-in-the-wool tax and spender.
Moreover, he and
his cabinet colleagues apparently labor under the misguided belief that they
can actually suspend economic laws. The hubris is astonishing – this is no
different from a politician claiming he can order the suspension of gravity. It
would be funny if it the likely consequences weren't so serious.
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