Mish's Global Economic Trend Analysis

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• Tax Hike Indigestion in France
• French Central Bank Admits the Obvious: France Back in Recession
• Interview With Roger Bootle, Who Won the Wolfson Prize for Developing a Practical Plan to Dissolve the Eurozone

Tax Hike Indigestion in France Posted: 08 Aug 2012 02:43 PM PDT French president Francois Hollande wants to set the top tax rate in France at 75%, for those who make over €1,000,000 a year. As a result "Les Riches" Have Tax Indigestion and are looking to move outside France. "We're getting a lot of calls from high earners who are asking whether they should get out of France," said Mr. Grandil, a partner at Altexis, which specializes in tax matters for corporations and the wealthy. "Even young, dynamic people pulling in 200,000 euros are wondering whether to remain in a country where making money is not considered a good thing." Because there are relatively few people in France whose income would incur such a tax — perhaps no more than 30,000 in a country of 65 million — the gains might contribute but a small fraction of the 33 billion euros in new revenue the government wants to raise next year to help balance the budget. There is no question Mr. Hollande is under fiscal pressure. He has pledged to reduce France's budget deficit, currently 4.5 percent of the nation's gross domestic product, to 3 percent by next year, to meet euro zone rules. The matter of how best to hit that target, though, is as much a political question as a fiscal one. Mr. Hollande was elected in May on a wave of resentment against "les riches" — company executives, bankers, sports stars and celebrities whose paychecks tend to be seen as scandalous in a country where the growing divide between rich and poor touches a cultural nerve whose roots predate Robespierre. Half the nation's households earn less than 19,000 euros a year; only about 10 percent of households earn more than 60,000 euros annually, according to the French statistics agency, Insee. There is currently no plan to change the tax rates for most people, which is 14 percent for the poorest and 30 percent for the next rung. For higher earners — people with incomes above 70,830 euros a year — the tax rate will soon rise to 44 percent, up from 41, in a change that was already set before Mr. Hollande's election. Taxes are high in France for a reason: they pay for one of Europe's most generous social welfare systems and a large government. As Mr. Hollande has described it, the tax plan is about "justice," and "sending out a signal, a message of social cohesion." France has a 33 percent corporate tax rate — the euro zone's second-highest, after Malta's 35 percent. That contrasts with the 12.5 percent rate in Ireland, which has deliberately kept a lid on corporate taxes as a lure to businesses. "It is a ridiculous proposal, but it's great for us," said Jean Dekerchove, the manager of Immobilièr Le Lion, a high-end real estate agency based in Brussels. Calls to his office have picked up in recent months, he said, as wealthy French citizens look to invest or simply move across the border amid worries about the latest tax. "It's a huge loss for France because people and businesses come to Belgium and bring their wealth with them," Mr. Dekerchove said. "But we're thrilled because they create jobs, they buy houses and spend money — and it's our economy that profits." Essential Math The New York Times estimates that fewer than 30,000 make more than 1 million euros. However, Sophie Pedder, writing for The Economist came up with a much lower number in an NPR interview. "Probably no more than about 3,000 French households will be affected by this. But that's an absolutely tiny fraction of the whole. So, once you start looking at numbers like that, you realize how this is very much a symbolic gesture," said Pedder. That's a big difference. But whatever the number is, the government will collect far less than it thinks. The current top tax rate is 41%. It's a big jump to 75%. And the more someone makes over €1,000,000 a year, the bigger the incentive to move. Tax Rate Comparison According to Pedder the UK lowered its top tax rate to 45% from 50%. Sweden has a top rate of 57%, and Belgium at 55% so "France sticks out really like a sore thumb on this one." I strongly suggest this move by France will backfire. When it does, Hollande will probably seek to raise taxes on the next rung lower to make up for it. Government Spending Over Half of French GDP In Quick Facts on France, Heritage says "Government spending has increased to a level equivalent to 55 percent of total domestic output. The deficit remains more than 6 percent of GDP, pushing public debt up to more than 80 percent of GDP." In a recent panel discussion in Spain, Paul Krugman said he would start to worry when government spending is over 50% of GDP. France is there now, and the US headed there unless we rein in the deficit, which Krugman does not want to do. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

French Central Bank Admits the Obvious: France Back in Recession Posted: 08 Aug 2012 08:40 AM PDT For those who who view matters on a practical basis, France has been in recession the entire year. For those who need to see two quarters of negative growth first, France slides back in recession. France is headed back into recession for the second time in just over three years, the country's central bank warned on Wednesday. The Bank of France predicted a 0.1 percent contraction in gross domestic product (GDP) for the third quarter of this year, an outcome which, if confirmed, would follow a similar fall in output for the three months to June. Economists define a recession as two consecutive quarters of negative growth.   The economy was flat in the first three months of 2012 but the deteriorating outlook has forced the Socialist government to cut its growth forecast for the full year from 0.4 to 0.3 percent, and for 2013 from 1.7 to 1.2 percent. Definition of Recession Bear in mind that a recession, at least is the US, does not require two consecutive quarters of negative GDP. Rather, the NBER, the official arbiter of recessions, looks at a whole gamut of factors. The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.  Recessions frequently start (as did the last one), without even a single quarter of negative GDP. Two quarters of negative GDP is a sufficient but not necessary condition so the statement in the article "Economists define a recession as two consecutive quarters of negative growth" is simply wrong. Europe in Recession Recall that back in January IMF head Christine Lagarde said she thought it was possible for the eurozone to avoid a recession. On January 9th, my take was Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year". Even those waiting for two quarters of negative growth cannot hide the obvious: Italy, Spain, Greece, Portugal, and France are all in recession. Germany is headed there. The recession in Europe is about to get much worse because of preposterous tax hikes nearly everywhere, coupled with inane policy moves in France, notably Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It" Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Interview With Roger Bootle, Who Won the Wolfson Prize for Developing a Practical Plan to Dissolve the Eurozone Posted: 08 Aug 2012 12:34 AM PDT RT's Laura Smith interviews economist Roger Bootle, who won the £250,000 Wolfson Prize for developing a practical plan to dissolve the Eurozone. This was a very good interview, well worth the 12 minutes of time it takes to play it. A transcript is available in the RT post Economic growth in eurozone impossible without break-up To download the winning entry, please see Wolfson Economics Prize. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.