France is Raising Taxes on Wealthy Individuals and Businesses to Stimulate Economic Activity

Posted by PITHOCRATES - September 30th, 2012

Week in Review

When a store wants to increase sales what do they do?  Raise prices?  Or lower prices?  Well, based on those sales papers, one has to say they lower prices to increase sales.  Because if someone stops buying from a store raising prices just isn’t going to bring them back to that store.  For how many people ever say they would shop more at a store if only they would raise their prices?  Zero people.  For no one ever shops where their money will buy less.

The higher the price of something the less we buy.  Something few people will dispute.  Unless, of course, it’s rich people investing in job-creating businesses.  As government people believe that rich investors will spend more money the less they can make from their investments.  Especially in France (see Hollande opts to punish French rich with €20bn of new taxes by John Lichfield posted 9/29/2012 on The Independent).

France’s Socialist government insisted yesterday that it could solve the conundrum of simultaneous deficit-cutting and growth which has eluded every other European country from Greece to Britain.

As new clouds gathered over the eurozone, President François Hollande pushed ahead with the country’s toughest budget for three decades, taking €20bn (£16bn) of new taxes from big businesses and the wealthy but imposing relatively moderate €10bn cuts on state spending.

With growth stagnant and unemployment rising sharply, the success or failure of the 2013 budget could decide whether Europe’s second-largest economy becomes part of solution to the eurozone crisis or a new, and devastating, part of the problem.

If we can learn anything from history it’s this.  Tax cuts stimulate economic activity.  Tax hikes don’t.  So growth will remain stagnant in France.  And unemployment will rise even further.  Especially when they will tax very successful business people at 75% on earnings and eliminate business tax breaks.

Among other things, the budget introduces Mr Hollande’s “temporary” 75 per cent tax on personal earnings over €1m and abolishes the tax breaks on large firms introduced by his predecessor, Nicolas Sarkozy.

The Prime Minister, Jean-Marc Ayrault, spoke of a “fighting budget” which would help to get France “back on track” after 38 years of successive state deficits. He insisted the target of 0.8 per cent growth next year was realistic and would be achieved.

But opposition politicians said the budget had been “muddled together”, and was more concerned with preserving Mr Hollande’s campaign promises than addressing France’s – and Europe’s – deepening economic crisis. They pointed out that, while almost all European countries were cutting back spending, the French budget for 2013 preserved the 56 per cent of GDP spent by the state and marginally increased the number of state employees, by 6,000…

Critics complained, however, that the budget did nothing to tackle the erosion of France’s international competitiveness, which has been blamed for large-scale redundancies in the car industry and other sectors. The cost of employing a worker in France has increase by 28 per cent in the past decade, compared with an 8 per cent increase in Germany.

A growth rate of 0.8%?  They’ll be able to achieve what many call a recessionary level of growth?  Not much of a goal.  No wonder France has one of the most uncompetitive workforces.  That massive welfare state costs money.  And there’s only one way to get the money to pay for that massive welfare state.  Taxes.  Even if a government runs a deficit they finance with borrowing.  Because they have to pay the interest on that debt with taxes.

Everything comes back to jobs.  The more jobs there are the more tax revenue the government can collect.  But to create more jobs businesses have to grow larger.  But when governments tax businesses (and business investors) so excessively there is little incentive to grow these businesses larger.  So France’s actions are not likely to have any of the intended results.  In fact they will probably only make a bad situation worse.  And may make them part of the problem in the Eurozone crisis.

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France uses Renewable Energy to offset a Decline in Nuclear Power Generated Electricity

Posted by PITHOCRATES - August 4th, 2012

Week in Review

France may be moving ahead in renewable energies but they are only a sideshow to the major electricity producer.  Nuclear power.  In the grand scheme of things there is only one renewable energy that is a serious player.  Hydroelectric power.  Which is picking up the slack during some planned outages at their nuke plants (see French utility EDF sees profit up 4.6 percent as renewable energy offsets lower nuclear output by Associated Press posted 7/31/2012 on The Washington Post).

Electricite de France saw profits rise 4.6 percent in the first half of the year as growth in renewable energy offset lower nuclear output…

The increase in profits and sales came despite more planned outages at nuclear plants — and also unexpected extensions of those outages — this year than last. The company’s chief financial officer Thomas Piquemal said those issues should be resolved by August.

Hydropower, which struggled last year, and other renewable energies made up the difference. Excluding one-off charges, the group’s net income grew 10.3 percent.

Executives said that the group’s better-than-expected results were also due to a reduction in costs.

One would almost get the impression that the French, too, are abandoning nuclear power in favor of renewable energy sources.  To save the planet.  Well, they are pursuing renewable energy sources.  But they’re not abandoning nuclear power.  Because they can’t.  Taking a look at French electricity production explains why.  (These numbers are pulled from Table 6 in The French wholesale electricity, natural gas and CO2 markets in 2010-2011 and Part V in THE FREN CH ELECTRICITY REPORT 2010).

(Note: The variation is in electricity produced.)

Nuclear power produces the majority of French electricity.  About three-quarters of it.  And they were increasing their nuclear capacity in 2010.  And of all their electricity sources nuclear power is operating nearest full capacity.  Of all the nuclear reactor capacity they installed 74% is producing electricity.

The next largest producer of electricity is hydroelectric power.  And it only produces 12.4% of all electricity.  Of all the generating capacity of hydroelectric power only 31% actually produced electricity.  So more than two thirds of hydroelectric dam capacity sat idle.  Hydroelectric power increased 9.9% in 2010 “as a result of changes in the availability of water resources and the use of reservoirs” according the French Electricity Report.  Which means hydroelectric power is only as good as the volume of water behind those dams.  And once they build those dams it’s up to the weather to snow in the winter (in places that have winters with snowfall) and rain in the the spring, summer and fall.  With more than two-thirds of installed capacity sitting idle either it hasn’t rained or snowed enough in the mountains.  Or that water is being diverted for other uses.

The next largest producer of electricity is natural gas producing 5.5% of the total.  Because of the speed they can bring a gas turbine on line we often use these to handle peaks in demand.  So they don’t run all of the time like the nuclear power plants that provide the baseload.  Based on these numbers the baseload handled the electrical demand most of the time as these gas turbines only produced at 42% of their installed capacity.

After natural gas comes coal at 3.5% of the total.  A 7.6% drop from the previous year.  With 72% of installed capacity sitting idle.  A basic shuttering of the coal industry to make way for renewable energy.

Wind power produced 1.7% of all electricity.  An increase of 22.2% from the previous year.  So they’re increasing wind power.  But it’s almost statistically insignificant.  Worse, of the installed capacity only 24% is producing electricity.  That’s because they can only produce electricity when the wind blows.  But not too fast.  Or too slow.  Only a narrow band of wind speeds can produce electricity at the same frequency (typically 50 Hertz in Europe) that matches the grid.

And solar power produced a statistically insignificant 0.1% of the electricity total.  And this is a 281.6% increase over the previous year.  But of the total installed capacity only 34% of it produced electricity.  Because it is sometimes night.  And sometimes cloudy.  Which is why it will be difficult to get a large percentage of our electricity from solar power.  The fuel may be free.  But it’s just not always there.  Also, photocells are semiconductor devices that produced low DC currents.  So you need a lot of solar arrays to produce useable power.  And additional electrical equipment to convert the DC power into AC power.  And more if you want to store power during the day to use at night.  So even though the fuel is free solar power can be very expensive.

So nuclear power isn’t going anywhere in France.  It’s too reliable.  And it’s just too prevalent.  To replace that capacity would require enormous amounts of money.  Which just isn’t that prevalent during a European sovereign debt crisis.

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Class Warfare Escalates in France to pay for Out of Control Government Spending

Posted by PITHOCRATES - July 8th, 2012

Week in Review

Once again a government is asking the rich to pay their fair share.  Well, not asking so much.  More confiscating their wealth.  In the name of fairness (see Socialists in France Announce New Taxes by STEVEN ERLANGER posted 7/4/2012 on The New York Times).

France’s new Socialist government announced on Wednesday billions of euros in tax increases and new taxes, to be borne by businesses and the wealthy, in a revision of the 2012 budget designed to meet promised deficit targets in a period of nearly stagnant growth…

For this year alone, the government announced about $9 billion in higher taxes, with about $7.6 billion more to come next year. A freeze on government spending is expected to save $1.8 billion.

So that’s $16.6 billion in new taxes and only spending cuts of $1.8 billion.  That’s $9.22 in new taxes for every dollar cut in spending.  When the Democrats snookered Ronald Reagan into increasing taxes they dangled $3 in spending cuts for each dollar in new taxes.  A deal he accepted and lived to regret.  Because governments just don’t cut spending.  Especially if they get the new taxes up front.  For Reagan it was about the reverse of the deal they offered.  There was $3 in new taxes for every $1 in spending cuts.  Guess the French are much more receptive to paying taxes than the Americans.  Or should I say, they are much more receptive to forcing higher tax rates on those who pay taxes.

Among the main new taxes is a special surcharge on the assets of individuals with more than $1.62 million of global wealth, which is expected to bring in $2.87 billion; the tax is expected to be made permanent next year, when there will also be a new tax bracket of 75 percent on incomes of more than $1.25 million a year…

There will also be a one-time tax on oil stocks, which is expected to raise $688 million and will hit refineries and gasoline stations, which supposedly have benefited from higher oil prices. About $1.13 billion is to come from ending a tax exemption for overtime income, a major effort by former President Nicolas Sarkozy to raise take-home pay, and there will be a new tax on dividends and stock options…

The figures are based on assumptions that the economy will grow by 0.3 percent this year, 1.2 percent in 2013 and then by 2 percent each year after that, which some economists find overly optimistic.

Taxing wealth.  Ouch.  This isn’t taxing capital gains on your investments.  This is taxing the value of your investments.  Even if those investments lose money.  Which means the rich may end up paying for the privilege of losing money in France.  It’s a good thing Europe is bilingual.  It’ll help the French rich as they settle in their new home.  Britain.  So those overly optimistic tax revenue figures will bring even in less revenue.  Making the French economy worse.  And the deficit bigger.  Requiring even deeper spending cuts later.

The auditors urged the government to cut spending more than raise taxes, because the latter hurts economic growth, but the prime minister, Jean-Marc Ayrault, insisted that the key to growth was investment, not austerity. Still, spending cuts would seem to be inevitable to meet the 2013 target. For its 2013-15 budget, the government said it would reduce operating costs. It promises to balance the budget by 2017.

France’s government accounts for 56.6 percent of gross domestic product, one of the highest in the euro zone. It is projected to fall to only 56.2 percent this year and decline slowly after that.

Companies have complained that already thin profit margins are being hit and that France is losing competitiveness in a global market. The auditors said the same, and urged structural changes to better calibrate social welfare benefits to deal with France’s aging population and reduce the debt.

It’s the spending that’s too high.  Taxes aren’t too low.  In fact, taxes are too high.  They’ve transferred over half of private sector wealth to the government.  Over half!  That is an incredible burden on the private sector.  Which will simply collapse as they add the full weight of pension and health care costs of their aging population to their burden.  There will simply be no more wealth to tax.  Which will require draconian spending cuts.  Or a return to subsistence farming.

We may be witnessing the end of the European social democracy.  Which will end as all democracies end.  When the people learn that they have the key to the treasury.  And can vote themselves benefits.  When they learn this all spending restraint is gone.  And politicians pander for votes by promising to spend ever more irresponsibly.  Never worrying about the mess they’re making.  Leaving that to future generations.  Well, that future generation is here.  It’s why the Eurozone is suffering a sovereign debt crisis.  Because all of this social spending has come to a head.  And they can no longer sustain it.  But they still refuse to cut spending.  Instead, they escalate the class warfare.  And when that fails, as it will, then comes the subsistence farming.

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The French Socialists to Advance Policies that will drive the Wealth Creators out of France

Posted by PITHOCRATES - July 1st, 2012

Week in Review

No one likes austerity.  Even the nations who agreed to it to join the Eurozone.  Back when they were joining they all said they would keep their deficits and debt within Eurozone requirements.  But after a prolonged recession few are willing to cut back on government spending.  In fact, in France, they’re going to increase government spending by beating up on the rich (see Adieu, la France posted 6/23/2012 on The Economist).

AFTER the French Socialists last came to power in 1981, under François Mitterrand, the new government went on a spree of nationalisations, taking over 36 banks and several industrial groups, before quietly abandoning the policy and even reprivatising a few firms. Small wonder that French bosses greeted François Hollande’s election as president with more than a frisson of foreboding. What would the Socialists do this time…?

Even before the parliamentary elections on June 17th, at which the Socialists won a majority of seats, rhetoric against factory closures had been mounting…

Michel Sapin, the labour minister, has promised to make it so expensive for companies to lay off workers that it will no longer be worth their while. Firms that fire people while still paying dividends may be penalised. Another planned ruse is to force companies to sell factories, presumably along with the brands manufactured there, to competitors rather than close them down…

[The Socialist] party’s most popular campaign promises was to tax incomes of more than €1m at a marginal rate of 75%. The likely consequences will be much less admired. Some big companies will leave France or move management abroad in order to shield their executives from the tax. That will lead them to invest and hire more overseas rather than at home. Already, top foreign executives no longer want to join French firms. A new extra tax on dividends has further angered the business world…

But the most important consequence of stratospheric taxes will be less visible, at least at first. Marc Simoncini is one of France’s best-known entrepreneurs—and one of the few business leaders to denounce the new measures publicly. Why, he recently asked, would anyone want to start a business, invest and succeed in the most taxed country in the world?

Tax is not the only threat to executive pay. Last week Pierre Moscovici, the finance minister, announced that pay for bosses of companies in which the French state holds the majority of shares will be capped at a flat rate of €450,000, or roughly 20 times the wage of the lowest-paid worker… In some cases it will lead to a 70% pay cut… Measures to limit pay at fully private firms are expected before long.

Most French business leaders don’t think that the government is deliberately targeting them. They reckon that its motives are purely political—and that the Socialists are simply not aware of the damage their plans will do (most ministers have hardly any experience of business).

Behold class warfare on a grand scale.  This is socialism.  This is what being ‘fair’ is.  This is egalitarianism.  Everyone is equal.  Except the rich and successful.  Who the state enslaves.  To serve the people.  By forcing these executives to continue to do what so few people can do.  Run these big corporations profitably.  But they won’t reward them for their unique talents.  No.  Instead, they’ll enslave them.  Force them to keep producing wealth.  To keep creating jobs.  But to do so for a paycheck that’s less than most sports stars, movie stars, singers, writers, reality stars, etc., get.  Because these executives don’t earn their pay like these people who contribute so much to the world’s economies.

The Socialists believe these rich executives don’t do anything worthy for their pay.  That these corporations run themselves and only create wealth because of the workers in the trenches.  These are the important people.  Of course if they don’t need these rich executives why not just fire them?  Let these corporations spontaneously produce wealth and create jobs?  Because even the Socialists know that these rich executives are the only ones who can run these corporations and produce the wealth they so want to confiscate.  And if they fired these rich executives and tried to run these corporations themselves there would be no wealth to confiscate.  Because they have no business experience.  And they would only run these companies into the ground.  Just like the Soviet state planners did in the Soviet Union.

How did they get here?  Their social democracies.  Cradle to grave state welfare.  The people like it.  They love the free stuff.  The problem is it’s free only to them.  Someone has to pay for it.  Primarily those who work for the rich executives.  And the rich executives themselves.  Via confiscatory tax rates on the wealth they create.  But as they drive out these wealth creators from the country what will they tax?  As populations age there are more people consuming government benefits than there are paying for them.  Which means they need to raise tax rates ever higher.  Going so far as to nationalizing businesses.  Eventually there comes a point where even class warfare won’t work anymore.  Because there just won’t be enough wealth left in the country to tax.

These policies are not likely to make things better in France.  It may feel good for a little while to punish the rich.  But punishing the rich won’t reduce your taxes.  Or improve the economy so you can advance into a better and higher paying job.  But it makes good politics.  Which is why these politicians can win elections.  In Europe.  And in the United States. 

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Hollande’s Win in France sends a Message to the Wealthy and Job Creators – You are Not Welcomed Here

Posted by PITHOCRATES - May 13th, 2012

Week in Review

The French elections are over.  Hollande is in.  Sarkozy is out.  As are the job creators.  The wealthy.  Who are looking to leave France with their talent and skills.  Because they got the message.  Hollande doesn’t like them.  And he’s coming after their wealth (see France Entrepreneurs Flee From Hollande Wealth Rejection by Anne-Sylvaine Chassany and Jacqueline Simmons posted 5/10/2012 on Bloomberg).

France, the fifth-richest country and home to some of the world’s wealthiest people, including LVMH Moet Hennessy Louis Vuitton SA Chief Executive Officer Bernard Arnault, doesn’t celebrate its affluent. Hollande, a Socialist who once said “I don’t like the rich,” and who plans to slap a 75 percent tax on income of more than 1 million euros ($1.29 million), reinforces the sentiment that in France to be rich is not glorious…

Hollande’s rhetoric against wealth and finance is prompting some in France to consider leaving, and European rivals are welcoming them. “Bienvenue a Londres,” or welcome to London, Mayor Boris Johnson quipped in January. Switzerland and Belgium have been just as warm…

“Seen from abroad, France is the last country where an entrepreneur wants to go,” Marc Simoncini, the founder of French dating site Meetic.com, said in an interview on BFM TV yesterday. “I don’t know of any British person who’s come to set up a business in France. But I know plenty of young French people who’ve gone to London to do that…”

The attitude toward business and wealth creators is driving people away, said Diane Segalen, founder of Segalen & Associes, an executive search firm specializing in top management and board members.

Talent and skills will go where they are welcome, she said…

On the other side of the Channel, Conservative London Mayor Johnson laid out the welcome carpet.

“This is the global capital of finance,” he said. “It’s on your doorstep and if your own president does not want the jobs, the opportunities and the economic growth that you generate, we do.”

Here’s another reason for those who aren’t rich to hate those who are.  Because they won’t just sit there and take it.  These selfish bastards won’t stay in France and continue to use their talent and skill to make great wealth so the state can take it away from them.  You just can’t depend on the rich, can you?  Only those who aren’t rich are caring and decent.  With other people’s money, of course.  For if they won a fortune in a lottery they’d want to pack up their wealth and leave just like everyone else that has wealth.  Because it’s an entirely different picture when it’s YOUR wealth.  Taking wealth from others, why, that’s okay.  But it just isn’t fair to take YOUR wealth.

People need jobs.  And government needs people to have jobs.  So they can pay the taxes that fund their welfare state.  And to create jobs you need people with talent and skills.  To create wealth by investing wealth.  Because that’s the only way you can create jobs.  And tax revenue.  For only someone with a job can pay an income tax.  So it all starts with jobs.  You gotta have them.  And they just don’t spontaneously appear.  If they did France wouldn’t be in the economic mess they’re in requiring a 75% tax rate on millionaires.

This is the future of the welfare state.  High taxation that encourages all those with talent and skill to leave your country.  Leaving only those consuming the benefits of the welfare state.  Without anyone left to pay for it.  Which leads to more government borrowing.  Greater deficits.  Higher debt.  And, well, you can look to Greece to see where it goes from there.

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France may be next to go in Crisis as the Weight of the Crushing Costs of her Social Democracy threatens the Euro

Posted by PITHOCRATES - March 31st, 2012

Week in Review

France is in big trouble.  Or is about to be.  For they have put the ‘social’ in social democracy.  And the French people are about to learn how all that government largess can kill an economy.  And take with it all the social benefits they’ve come to enjoy (see A country in denial posed 3/31/2012 on The Economist).

France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country—more even than in Sweden. The banks are undercapitalised. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities. Exports are stagnating while they roar ahead in Germany. France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not any more. Indeed, a sluggish and unreformed France might even find itself at the centre of the next euro crisis.

It is not unusual for politicians to avoid some ugly truths during elections; but it is unusual, in recent times in Europe, to ignore them as completely as French politicians are doing. In Britain, Ireland, Portugal and Spain voters have plumped for parties that promised painful realism. Part of the problem is that French voters are notorious for their belief in the state’s benevolence and the market’s heartless cruelty. Almost uniquely among developed countries, French voters tend to see globalisation as a blind threat rather than a source of prosperity.  With the far left and the far right preaching protectionism, any candidate will feel he must shore up his base.

In America they say no president can win a reelection with unemployment at 8%.  The French have been 1% below that rate for 30 years.  Their banking system is not that far away from cascading bank runs.  Their big cities are surrounded by tinderboxes of unemployed youth just waiting for something to set them off.  And a large current account deficit means they are uncompetitive in international trade.  Which means that their economy is not about to create a lot of new jobs to employ the unemployed.  And with the government already spending over half of their GDP they’re not going to be able to throw much at the unemployed youth to keep them from expressing their discontent at being unemployed.  And with France’s history of generous state benefits the unemployed will not take kindly to any austerity programs.  Nor will those who have jobs.

Could France be the country to break the Euro’s back?  Perhaps.  For they are definitely too big for Germany to save.  And if France goes the grand experiment of the common currency will come to an end.  For a common currency without a political unity is doomed to fail.  For there is no way to stop a member state from not meeting the requirements of the Maastricht Treaty (which created the Euro).  So their financial problems are everyone’s financial problems.  Because of the common currency.  And if you think the French are going to take austerity orders from Germany you don’t know the French.  Or Franco-German history.  For they will cooperate.  But one will never subordinate themselves to the other.

So don’t be surprised if the next round of austerity fills the streets of French cities and towns with discontent.  For it looks like it will soon be their turn in this unfolding saga of the decline and fall of the Euro.  Pity to see this befall such a great people.  For much of the Enlightenment came from French thinkers.  And to see her collapse under the weight of her social democracy is painful to watch indeed.

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