U.S. conservatives have long warned that progressive policies will make America more like France, while many progressives wish the U.S. was more like France: Universal healthcare and a generous social safety net, for starters. But which is better -- for the economy and for helping more people in the long run? The answer one gives to that question is generally a function of ideology, but the contrasting trends over three decades between France and the U.S. provide some interesting fodder for the debate.
The Financial Times' columnist Martin Wolf told me in 2011, "U.S. incomes are extraordinarily under-taxed, particularly of the seriously wealthy." One basic premise of progressivism is that income of higher earners should be taxed at higher rates to redistribute wealth through a socio-economic safety net. Most Americans and certainly most Europeans have long accepted if not supported this basic principle. Passions rise over the appropriate degree and precise mechanisms of income redistribution. Marginal tax rates, entitlement levels and eligibility requirements are the primary variables in that debate.
In a free market, beneficiaries of redistribution eventually and increasingly outnumber payers. Better entitlement benefits incite more participants while negative economic feedback from higher marginal tax rates further increases the beneficiary universe by increasing unemployment and undermining real wage growth while shrinking the taxable income base. The diversion of more capital to the central government away from private/free market participants invariably results in the deployment of that capital in ways that generate lower returns. This dynamic is clearly understood by economists but difficult to measure. It is often ignored by policymakers in favor of static assumptions on the taxable production of the economy when calculating incremental revenue from tax increases or decreases. This absurd approach persists despite tax policy directly impacting the economics of capital allocation.
Can we glean any insight into the tradeoff between allowing more private sector capital reinvestment via lower tax rates and regulation versus a broader and more generous current safety net requiring higher tax rates? Of course we can. A comparison of the U.S. and France provides an instructive profile of this tradeoff.
Between 1980 and 2014, the median in annual revenues collected by the U.S. Treasury was 30% of GDP versus 49% for France. Big difference, and one that generally informs Wolf's belief that Americans are "under-taxed." By the 34th year, the U.S. had grown government expenditures per capita, excluding defense spending, by 35% more than France, despite France increasing its non-defense spending as a percentage of GDP from 43% to 55%, while the U.S. only increased from 27% to 31% (France had to keep raising more taxes as GDP growth slowed and safety net spending increased). In the same period, median unemployment in France was 9% compared to 6% in the U.S., and the real, per capita GDP growth rate was 0.8% versus 1.7%, respectively. France increased its draw on GDP from 46% to 54% between 1980 and 2014, while the US only increased from 31% to 32%.
U.S. GDP per capita grew at more than twice the compounded rate of France, while unemployment in the latter was 50% higher. These are massive differences in economic value and its distribution across the population. Advocates of social democracy might argue factors other than negative economic feedback from higher tax rates and incentives to participate in the safety net explain the massive production growth differential -- that the "counterfactual" is absent. I would not disagree that the framework does not prove cause-and-effect, but the U.S. is the counterfactual and the data is both intuitive and compelling. Alternative explanations are welcome. It would certainly be argued much social good was done in France with the extra per capita federal spending. The policy question posed, of course, is what is the optimal tax and regulatory regime for society, balancing short versus long-term benefit, and accounting for sustainability?
As President John F. Kennedy said to the Economic Club of New York in December 1962: "Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance our budget just as it will never produce enough jobs or enough profits." Apparently Kennedy didn't buy into the Keynsian multiplier.
The wealthier members of society lack the numbers to alter policy through the ballot box when contending with larger numbers of voters promised "more" by politicians. Instead, they influence policy via the impact of their actions on the economy, including reinvestment as small business owners, entrepreneurs and corporate capital allocators at larger corporations (they also donate money to political campaigns and causes). Capital investment is the single most potent factor in production growth and when it is weak, as it has been for the last decade and a half, policy makers have historically been compelled to consider whether an adjustment to tax rates and regulatory regimes is necessary to harness animal spirits in free markets.
So, who do you want to be when you grow up, France or the U.S.?