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Seventy five per cent tax rate goes too far, says Paris School of Economics director

Posted on 18 January 2013

A new income tax rate proposed by French President François Hollande will not solve the problem of growing inequality, the Paris School of Economics’ director, François Bourguignon, said on 16 January.

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Speaking at the EUI about ‘The globalisation of inequality’, the former senior vice president of the World Bank argued that while redistribution policies could have a positive impact, “The French government has gone much too far”. A key part of Hollande’s 2012 election manifesto was the introduction of a 75 per cent tax band for those earning more than €1 million euros, although the measure was blocked by the country’s Constitutional Court in December.

Despite criticising Hollande’s proposal, Bourguignon said redistribution policies such as increasing income tax for the highest earners can have a positive impact, “but there must be some reasonable limit between nothing and this kind of measure [in France]”. He pointed to the UK’s decision to introduce a 50 per cent tax band, in the face of growing inequality, as an example of a strong redistribution policy.

“It is sufficient to have a few big countries doing this for other countries to consider that this is not completely ridiculous,” Bourguignon said. “I think this is really something that has to be considered…The instruments to create a real progressive tax system do exist and if countries want to be able to influence distribution [of wealth] this is something that they should do.”

“In practically all countries there has been a drop in taxation. [This links to] the mobility of capital, in particular in Europe, where in order to avoid the migration of capital you could not tax the capital income in a very different way in two different countries,” he said.

Globalisation has reduced inequality between countries, but has led to growing national inequalities which are costly at state and international level. “At some stage we may find protectionist pressure in some countries that will say, ‘Inequality is now unbearable, this is due to the globalisation of trade. We want to reintroduce some barriers’. From that point of view, inequality increasing or being too high is a possible impediment to the benefits of globalisation,” Bourguignon said. He warned that an increase in inequality could also lead to social and political tensions, which would also generate great costs.

“Growing national inequalities will have a huge economic cost at both the national and global level but there is no reason to be passive,” he said, explaining that in addition to a more progressive taxation system, social measures need to be considered.

Bourguignon pointed to Brazil, which has reduced inequality substantially over the past decade while growing to become the world’s seventh largest economy. “What is behind that? Changing fertility behaviour of families has an impact on poverty; the impact of education as you have more people that advance through secondary school who are now in the global market,” he said.  

Brazil still has “enormous” inequality, Bourguignon said, but the country’s government commitment to both competing on the global market and reducing inequality can serve as an example to others. Whether focusing on taxation or social measures, the economist concluded that “these are not policies that can be decided from one day to the next and will have an impact the day after the next; these are policies which are long-term but in the end are able to produce results”. 

François Bourguignon was speaking at the EUI as part of the Max Weber Programme’s lecture series.

(Text by Rosie Scammell)


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