January 19, 2014

Socialist Hollande Reverses Course. Does The White House Get It?

by Hal Gershowitz

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So another Socialist-leaning régime has learned that if you squeeze the goose that lays the golden eggs long enough, and hard enough, you get fewer – not more – golden eggs. The more French President Francois Hollande squeezed French business to pay for the country’s lavish welfare entitlements, the more the French economy (Europe’s second largest) contracted.  So, last week Hollande announced that he was planning to slash the onerous tax French businesses are required to pay (based on size of payroll) by 30 Billion Euro’s. While the size of the turnaround is not nearly enough to rescue France from its economic doldrums, it is an acknowledgement that wealth grows best when an economy grows, producing more jobs, and not when governments try to redistribute wealth by fiat.

It finally seemed to dawn on Hollande that diverting resources from France’s business sector to make good on promises he made to those who were recipients of government entitlements, merely meant that business had fewer resources with which to grow the economy, which, in turn, was, ultimately, diminishing job creation. For some reason, this is a lesson populist politicians never seem to learn.  Which brings us back to 1600 Pennsylvania Avenue.

Business is what produces economic growth, yet Washington still imposes the world’s highest top tax rates on business.  Well, not quite.  Bangladesh still out taxes us on top corporate rates.

Private-sector commerce, of one kind or another, is what drives economic growth.  The taxes derived from private-sector commerce is what, ultimately, funds every government payroll, and every government initiative. Of course, the government can, as an alternative, simply print money or borrow it, but that is never a prudent way to fund current operations, absent a war or a natural disaster. Unduly encumbering private enterprise and initiative is never in anyone’s long-term best interest. That’s really what Francois Hollande has finally come around to understanding.

As might be expected, the response to France’s u-turn has varied; based on what side of the political center the comments were coming from.  His left leaning base is up in arms.  Ironically, he is earning praise of sorts from the right leaning business sector.  Louis Gallois, a French industrialist, had called for shock therapy to halt the relentless decline of France’s exports, and the loss of 60,000 industrial jobs a year. Christian Schulz of Germany’s Berenberg Bank said, “President Hollande is finally starting to back away from some of his economically dangerous campaign promises.”

So what should our “takeaway” be from France’s sharp u-turn on tax policy? Well, one thing everyone seems to agree on is the need for tax reform.  We’re not tax experts but we’ve been intrigued by an idea being floated by Sanjay Sanghoee, a noted business commentator and writer.  Sanghoee poses what seems to us to be a very logical question. Why not vary tax rates with the strength of the economy?

When the economy is poor and unemployment is high, it really makes no sense for the government to suck money out of the economy through high taxes. As much as possible of what people and companies earn should be left in the hands of the nation’s employees and employers.  Tax rates should slide lower as the economy slides lower.  On the other hand (as consultants like to say), taxes could be allowed to rise to, say, something like current levels when the economy is strong. President Obama’s insistence on raising taxes in a weak economy has probably caused the current recovery to be one of the weakest post-recession recoveries in history.

Sanghoee suggests pegging tax rates to GDP, unemployment, and other indicators of economic health, reducing them during a recession and ratcheting them back up as the economy improves.  He argues this would have the dual benefit of providing an immediate stimulus to the people, while vastly diminishing the need for the government to increase the money supply as it has been doing for the past four years. Any deficits the government accumulated during bad times would be made up by the taxes generated in better times.

Given that tax receipts are lower during a recession simply because people make less money, and raising taxes will almost certainly stifle a recovery, lowering taxes in a lousy economy may be the most prudent policy. Then, as the economy recovers, the Treasury can increase its tax receipts, allowing tax rates to rise as economic strength grows.  Certainly, everyone who pays taxes would welcome tax relief during tough times.

In a sense, what Sanghoee’s proposes is rather Keynesian.  John Maynard Keynes, the famous British economist, who liberals love to embrace and conservatives love to demonize, had it right.  He argued that government should save during strong economies, and invest during bad economies.  Of course, here in America we have along history of spending like crazy regardless of the state of the economy. That sort of economic mismanagement probably has Keynes spinning in his grave. By varying tax rates with the strength of the economy, we could accumulate revenues during good times to invest during bad times.  Our problem has been that we generally don’t accumulate revenue. We have a habit of spending money faster than we can accumulate it.  As the widely respected American economist Herb Stein used to say, “Anything that can’t go on sooner or later doesn’t.” French President Hollande, at last, seems to get it. Does American President Obama?

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2 responses to “Socialist Hollande Reverses Course. Does The White House Get It?”

  1. John Fairfield says:

    As I understand our fiscal procedures, we can’t simply accumulate revenue. If higher tax rates in good times put us in a budget surplus, we would be required to buy back outstanding treasury bonds. You may remember a brief period of this in the Clinton years. In lower tax rate bad times, we would find ourselves in deficit and would of necessity sell treasury bonds. Wouldn’t it be lovely to find ourselves in such a rational set of fiscal procedures and outcomes?

  2. Mark J Levick says:

    Pegging taxes to economic indicators is problematic given the ability of the Government to play fast and loose with the formulation of those indicators. We need only look at our current 6.7 percent unemployment rate which is a fiction resulting from excluding those who have quit seeking employment from the equation or the mysterious drop in the unemployment rate during the presidential election campaign. As long as big business is making ever increasing profits and its executives are receiving stratospheric compensation packages, income inequality will be the focus of our President, the liberal left, unions, the entitlement set, people of color and students. While lowering corporate taxes and reducing regulations would stimulate economic recovery this will never happen under Barak Obama who abhors capitalism and has benefited greatly from the politics of racial and economic division. Given our propensity to spend ever increasing sums of money we don’t have, there is no reason to enable our Government to increase its tax base unless required by law to apply the money raised to debt reduction which is highly unlikely to happen any time soon.

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