A Fine Mess

by T. R. Reid

  The Nobel laureate Joseph Stiglitz—probably the only American economist whose books sell as well as Piketty’s—also makes the case for tax increases to counter inequality. Stiglitz would get rid of the reduced tax rate for capital gains. “A fair tax system would tax speculators at at least the same rate as those who work for their income,” he argues. “To provide revenues for public investment and other public needs, to help the poor and the middle class, to ensure the existence of opportunity for all segments of the population, we’ll have to impose progressive taxes, and, most importantly, do a better job in closing loopholes.”7

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  BUT FRANCE HAS GONE further than the other rich democracies when it comes to imposing a variety of taxes on les riches. “We have a long tradition in this country of going after the rich,” Professor Martin Collet told me at a charming outdoor café near the Place de la Bastille one sunny Paris afternoon in late June. “In a couple of weeks, we will celebrate Bastille Day. It’s a national holiday; we remember when the peasants rose up—it was just down the street from here—against the rich and the monarchy, in 1789. Back then, we cut off their heads. Today, we try to cut a hole in their bank accounts.”

  Dr. Collet, a professeur des universités at Université Panthéon-Assas, is one of the country’s leading tax economists. He took me through the history of taxation in France, going back to the post-Bastille First Republic. France has always been a high-tax country, even compared with its neighbors in western Europe; today, it ranks second among the world’s richest countries in total tax burden, with taxes taking about 45.5% of the nation’s total wealth, or GDP. That places it just behind Denmark (49.58%) but far ahead of the United States, where taxes total about 26% of GDP.

  The French support this heavy rate of taxation partly because the revenue funds an expansive list of government services, including universal health insurance, generous old-age pensions, free universities, cheap public transit, and free exercise clubs. The World Bank reported that France spent 24% of its GDP on government in 2015—as much as big-government meccas like Sweden (25.9%) and Denmark (26.1%). As we’ve seen earlier in this book, the United States is downright thrifty by comparison, spending 15.5% of its wealth on all levels of government combined in 2015. (The World Bank reports for government spending don’t include transfer payments like Social Security and food stamps.)

  In France, though, taxation is not merely a way to provide money for government to spend. It’s considered an element of social cohesion, a symbol of fundamental French values. The First Republic, in its zeal for new terminology, replaced the standard word for “tax” (impôt) with the French word contribution, and to this day French politicians routinely talk about taxes as “social contributions,” as a way to maintain the essential French ideal of égalité. “For most of the French left, and a chunk of the right, high taxes are a hallmark of a decent society that puts fairness before profit and public service before business,” the Economist noted. In terms of égalité, at least, this tax regime seems to have worked; France has always had a lower Gini coefficient (that is, a more even distribution of wealth) than most of its European neighbors or the United States.

  When the Great Recession hit France in 2008, Nicolas Sarkozy, a center-right politician, was president. (Sarkozy supports free higher education, a complete ban on handguns, and unemployment compensation that never ends, but in European terms that makes him “center-right.”) Along with other leaders across Europe, Sarkozy opted for a policy of austerity—tax cuts, reduced government spending, limits on labor unions—as the proper course for economic revival. This didn’t work. Sarkozy lost his bid for reelection in 2012, and the Socialist candidate, François Hollande, raced to victory by promising to increase public spending and to pay for it with a “supertax” just for the rich: a tax of 75% on income over €1 million ($1.25 million) per year. (This proposal actually made Hollande something of a moderate in the presidential race; the candidate from the Left Front pledged to impose a tax of 100% on incomes over $375,000.) Hollande’s supertax on what he called “the arrogant and grasping rich” drew strong support from liberal newspapers and from prominent economists, including Thomas Piketty. Looking across the Atlantic to the demonstrations by “the 99%” in America, Piketty said that “Hollande’s 75-percent tax is the right response to the Occupy movement. The irony is that the street movement is happening in the United States, while the political response is coming in France.”8

  Although the supertax actually touched only a minute fraction of French taxpayers, it ran into furious resistance. The Conseil Constitutionnel, a sort of Supreme Court, ruled that a tax rate of 75% amounted to a “confiscation” of wealth, in violation of the French Constitution. Hollande went back to the drawing board and came up with a slightly different implementation of the 75% rate; the Constitutional Council threw that one out as well. Eventually, Hollande was able to impose his supertax by requiring that employers pay the additional tax on incomes over €1 million, rather than directly imposing the top rate on high-earning individuals. Professor Collet argued that this alteration reflected the basic reason for the supertax in the first place. “It was never designed to bring in a great deal of revenue,” he told me. “The goal was to convince companies to rein in the compensation of their top officers. It’s insane that any CEO would earn more than a million euros in one year, in a country where the average worker makes less than one-twentieth as much.”

  Regardless of who actually paid, the supertax meant that France would have the highest top income tax rate in the world. As if that weren’t enough, les riches also face the wealth tax, which Professor Piketty called for in his book. In France, this is formally called “l’impôt de solidarité sur la fortune”—that is, “the tax on fortunes for the good of society”—but it is broadly known as the ISF, the tax on fortunes. If the tax assessor determines that your bank accounts, real estate, stocks, cars, jewelry, and so on have a total value greater than about $1.5 million, you have to pay the ISF. The least rich of the rich are taxed at 0.5%—that is, about $7,500 on a “fortune” of $1.5 million. The tax goes up from there; the top rate, 1.5%, applies to any French family with total wealth around $12 million or more. In total, the ISF is paid by half of 1% of all French families. It raises less than 2% of tax revenues. It could be eliminated with minimal impact on the national budget. “It brings in perhaps €4 billion per year—essentially nothing!” Professor Collet explained. “But if any government were to drop it, you’re sure to lose the next election.”

  This is a Willie Sutton approach. Sutton, a Depression-era crook, was asked why he kept robbing banks and famously answered, “Because that’s where the money is.” Still, this form of tax has been decidedly out of favor for the last ten years or so. It used to be common for developed countries to have a wealth tax that worked like the French ISF; in 1990, more than half of the members of the rich nations’ group, the OECD, had a wealth tax in place, in addition to the normal income, property, corporate, and sales taxes. But most nations repealed the wealth tax around the start of the twenty-first century.

  In 2016, only a handful of countries still imposed an annual tax on overall wealth. France, Norway, Switzerland, and India all have permanent wealth tax regimes. In France and Switzerland, the tax only hits millionaires. In contrast, Norway imposes the tax at a fairly low level; anybody with total wealth greater than about $130,000 gets hit with the wealth tax. The widest definition of “wealthy” is in India, where a 1% wealth tax kicks in for anybody whose net worth is more than 3 million rupees, which comes to about $45,000. (In India, that still means a small percentage of the population.)

  Responding to the economic strictures of the Great Recession, Iceland and Spain reinstituted the wealth tax in 2008, but both governments called this a “temporary” measure. When Cyprus faced a collapse of its banking system in 2013, the government imposed a onetime wealth tax on bank deposits; it simply seized between 4% and 20% of the savings o
f anybody who had more than €100,000 (about $130,000 at the time) in a Cypriot bank. (This was unpopular, of course, but less so than it might have been because many of the biggest depositors in the banks of Cyprus were rich Russians trying to evade taxes back home.)

  One big problem with a wealth tax is that it is intrusive—much more so than the familiar property tax. A county appraiser trying to gauge the value of your house for property tax purposes can get a decent estimate just from public records—like how much that house down the street sold for last month. But if the government decides to tax everything you own, the appraiser has to probe your bank accounts, investment accounts, safe-deposit box, living room, closet, jewelry drawer, garage, and so on. It’s offensive enough to have government snooping around like that for any reason, let alone to increase your tax bill.

  That’s why another form of wealth tax, different from the ISF, is much more common. This is the inheritance tax. Sometimes it takes the form of a tax on the dead person’s “estate”—a legal entity that holds the wealth of the deceased until it is distributed to the heirs. Sometimes it’s a tax the lucky daughters or nephews have to pay after they inherit the money. Any jurisdiction that has an estate or inheritance tax also has to put in place a gift tax at roughly the same tax rate; without that, a rich person on his deathbed would give away all the money in the form of gifts to avoid the inheritance tax.

  The United States, naturally, has made this whole process more complicated than any other country by adding yet another variation, the generation-skipping transfer tax, with its own five-page form (Form 709), two worksheets, and nineteen pages of instructions. Whether it’s an “estate tax,” an “inheritance tax,” a “gift tax,” or a “transfer tax,” the result is the same: the government gets some of the money that was meant for the heirs. This is considered preferable to an ISF-style wealth tax for several reasons. First, it’s less intrusive. When somebody dies, a court—in the United States, it’s called a probate court—has to determine the precise value of his entire estate. So the appraisal is being done anyway; it’s not just for tax purposes. Second, it doesn’t penalize people for their hard work. By definition, you pay inheritance tax only on money you didn’t work for at all. Third, because almost every country imposes the tax only on wealthy people—in the United States, it only applies to estates of about $11 million or more—the heirs will come out just fine, thank you, even after the estate tax is paid. If some rich American leaves $100 million to his granddaughter, the estate tax could be as high as $41 million. That’s a hefty tax bill, but it still leaves the lucky kid $59 million to scratch by on. It’s hard to feel sorry for a sudden millionaire because the tax man took a share before she got her windfall.

  In the United States, the estate tax is designed so that it affects only a tiny fraction of American families. There’s no tax at all on an estate worth less than $5.45 million; if you leave your money to your spouse, the exemption is doubled, which means there’s no estate tax due unless you leave behind more than $10.9 million. About 2.6 million Americans die each year, but only 4,700 leave behind a legacy large enough to incur an estate tax; that’s about two-tenths of 1% of all the decedents. In the United States, at the start of 2017, there was a single tax rate (40%) for all estates over $10.9 million, and the same rate applied to all heirs. (In many countries, a sibling or a child inheriting money pays a lower rate of tax than a friend or a distant relative.) With the $10.9 million exclusion, a lucky spouse inheriting $50 million from her late husband would lose $15.64 million to the estate tax, but she’d still have a hefty $34.36 million left. About twenty states and the District of Columbia have an estate tax that has to be paid in addition to the federal levy.

  Many other developed countries tax estates. Most of them have a tax that kicks in at a much lower point than the $5.45 million minimum in the United States. The rates vary widely, as this chart shows:

  Country

  Tax begins at (in U.S. dollars)

  Tax rate

  France

  106,000

  5% to 45%

  Netherlands

  128,620

  10% to 40%

  Germany

  423,782

  30%

  Japan

  247,000

  55%

  U.K.

  488,280

  40%

  Spain

  872,000

  34%

  Finland

  1,009,000

  19% to 35%

  In the United States, the estate tax has been hotly controversial, even though it touches only one out of every seventy thousand Americans. In the 1990s, a group of wealthy families hired a consultant, Frank Luntz, to wage a political campaign against this form of wealth tax. Luntz is a master of political euphemism; when the George W. Bush administration agreed to let timber companies clear-cut the trees on sizable stretches of federal land, Luntz named the initiative “Healthy Forests.” To battle the estate tax, he came up with the label that has stuck: the “death tax.” He designed a campaign around the idea that government shouldn’t penalize you for dying. (Of course, the tax burden falls on the living heir, not the decedent, but those who campaign against the “death tax” ignore this nuance.) Supporters of the tax have come up with politically charged labels of their own; they call the estate tax the “lucky rich kids’ tax” or the “Paris Hilton tax”; in his stump speeches during the 2016 presidential campaign, the Democratic contender Bernie Sanders used to remind his audiences that “Paris Hilton never built a hotel.”

  Under George W. Bush, opponents of the “death tax” won a temporary victory. Bush’s 2001 tax-reform plan phased out the estate tax over the following decade so that the rate fell to zero in the year 2010. For budget reasons, though, the death of the “death tax” was short-lived; the zero rate lasted only one year. This led to anecdotes (none proven, so far) about financial advisers’ telling their rich clients, “If you’re going to die anyway, it would make fiscal sense to do it in 2010.” After Barack Obama’s reelection in 2012, the “lucky rich kids’ tax” was made permanent at the current rate of 40%; the minimum estate that triggers this tax (as noted, it was $5.45 million in 2016) goes up slightly every year.

  The tax on a large inheritance used to be a standard element of revenue raising in all developed countries. In recent years, though, several nations—including high-tax venues like Austria, the Czech Republic, Norway, and Sweden—have eliminated the tax. In general, the reasons for dumping this tax are related to the “death tax” idea; that is, enough is enough. If some poor guy paid taxes for sixty years, we ought to give him a break when he’s dead. In Canada, the argument against the inheritance tax was a clever slogan: “No taxation without respiration.” (Canada, though, imposes a capital gains tax and a “probate fee” that heirs have to pay; these increase with the amount inherited, so the impact is roughly equal to an inheritance tax for large estates.) After Sweden repealed its inheritance tax in 2005, the economist Henry Ohlsson explained, perhaps tongue in cheek, that Sweden taxes rich people so heavily in their lifetime that there was not much revenue to be gained by taxing what little they had left when they died.9

  France, of course, had both the inheritance tax and the wealth tax—not to mention the health insurance tax, the Social Security tax, the carbon tax, the income tax, the capital gains tax, and a national sales tax of 20% on almost everything you could buy—when François Hollande finally imposed the 75% top income tax rate in 2013. Although the
“supertax” was popular with Frenchmen earning an average income, some of the wealthiest French taxpayers viewed it as the last straw in a relentless effort by the national government to milk them dry. Near the end of 2012, with the new tax due to take effect with the New Year, Hollande came face-to-face with a basic fact about high taxes: at some point, people just refuse to pay. When rates get too high, it’s cheaper to hire a lawyer who can design some intricate scheme of tax avoidance than it is to pay the tax. Or, it’s cheaper just to flee the tax altogether. For Hollande, this predictable backlash took the form of l’affaire Depardieu.

  For more than four decades, Gérard Depardieu was a shining light of French cinema, as leading man, national heartthrob, producer, and financial angel. He played in or produced more than 170 films. This made him an extremely rich man, and he became even richer through wise investments in real estate, works of art, vineyards, and so on. Like many self-made millionaires, Depardieu grew more conservative politically as he grew more rich. He supported Sarkozy in that 2012 election and was already complaining about the heavy taxes he had to pay long before Hollande targeted his ilk with the supertax. When the 75% tax rate took effect, Depardieu swore that he would never pay it. To prove that he was serious about this, he left France and took up official residence in Néchin, Belgium, a farm village just north of the French border. In a letter to a Paris newspaper, Depardieu declared himself finished with French taxation. “I have paid €145 million in taxes over 45 years,” he said. With the advent of the supertax, he concluded that enough is enough. He would give up his French passport rather than pay another centime to a voracious government determined to penalize hard work and success.