Governments take wrong approach in raising income taxes

PUBLISHED : Thursday, 10 January, 2013, 12:00am
UPDATED : Thursday, 10 January, 2013, 3:50am


French President Francois Hollande's threatened income tax of 75 per cent for the wealthiest citizens has driven actor Gerard Depardieu to Russia, where the flat rate is just 13 per cent. The mainland's richest people have also been fleeing, foremost to the US, Canada and Australia, in part to avoid having to give up 45 per cent of earnings to the taxman. America's top earners will be slugged 39.6 per cent of their income this year, 4.6 percentage points more than last, under the fiscal cliff deal agreed to by the US Congress. In these challenging economic times, governments the world over need to raise revenue, and it is to those who have been the most creative, innovative and entrepreneurial that they are first turning.

Such measures are a mistake. Depardieu's hell-raising is not looked on kindly by all in France, but he nonetheless is one of his country's best-known figures. His taking up a Russian passport as a protest against high taxes sends a symbolic message that others are already taking heed of. That is bad for France; young entrepreneurs, who hold the keys to growth, reducing unemployment and bringing down crippling national debt, are being deterred from starting job-creating companies.

China also faces the loss of jobs and economic growth as a result of the departure of millionaires. A recent study by the Centre for China and Globalisation and the Beijing Institute of Technology determined that 150,000 Chinese, many of them wealthy, emigrated overseas in 2011. Apart from high taxes, they are leaving for improved quality of life, asset security and better education and healthcare. With more than 60 per cent of GDP coming from the private economy, the loss of successful business people and their capital stifles development.

Russia has taken a leaf from Hong Kong's book, introducing a low tax regime to nurture and attract talent and capital. The reasoning is simple enough: high taxes sap the incentive to work hard and create businesses. Taxes should be raised from the wealthy, but it is better to do this through consumption of luxury goods and property transactions than income.