It would come as no surprise to me if it turned out that the euro got under massive pressure today. For the so-called euro bailout is courting disaster: with billions and billions spent to save Greece, the Greek go ahead and cast their ballots for extremist parties in large numbers. In fact, the extreme left has become the second-strongest party in Greece. And there is one thing that most Greeks agree on: further spending cuts are out of the question.
Even outside Greece, the attitude is gaining ground, including France where Socialist Hollande already voiced his anti-austerity attitude. Instead, he is seeking salvation in massive debt-financed government investment programmes, quite in keeping with socialist tradition.
There is more: Hollande actually intends to expropriate those with million-euro incomes. He announced his intention to raise the top tax rate for income of more than one million euros to 75%. Since you have to factor in existing other levies – such as the net worth tax -, calculations suggest that the actual tax burden for income earners in this bracket would exceed 90%. Faced with this arithmetic, Hollande was kind enough to concede that the total tax burden would in no case be higher than 85% (!). If I lived in France and had an annual income of more than a million, I would leave the country today. And it is exactly what many of the overachievers will do.
For the rest of Europe, the policy is setting the wrong kind of signal. If the top income tax rate is indeed raised to 75% or more, it will have a signal effect for social democrats in other countries, including Germany. While is it unlikely that Germany’s top tax rate will be raised to 75%, a rate of 60% is by all means conceivable. As it is, seven-digit incomes are taxed with a rate of 45% plus solidarity surcharge, which adds up to nearly 48%. Social Democrats and Greens have already announced their intention to raise the top tax rate considerably if they win the next parliamentary election. Even a number of conservative politicians have warmed to the idea and said so. Opposition has declined to a token resistance among the Liberals; and Wolfgang Kubicki of the Liberals in Schleswig-Holstein has explicitly advocated an increase of the top tax rate.
The political class is looking for a scapegoat in order to deflect the public’s rage, the candidate of choice being “the rich.” The example set by France suggests that it is a good way to win elections. The issues plaguing the euros, however, will hardly go away if you strangle those with the best performance. Neither will they be solved with massive debt-financed investment programs.