Why Elon Musk Is Wrong About France
Retirement ages need not rise at all. With the right tax policies they could go back to the Mitterrand Model of age 60!
Elon Musk's recent tweet regarding France's retirement age has sparked debate about the best way to address the country's pension challenges.
The austerian approach, as seen with President Emmanuel Macron's pension reform bill, which he decided to push through without input from the French National Assembly has led to social unrest and a fractious political environment.
By 2030, the retirement age is expected to rise to 64 from 62 and the length of annual worker contributions will increase to 43 years from 41 years. All this to save €10 billion ($10.8 billion) a year.
The main problem in France is the wrong focus by its political class. The pension discussion is centered all around cutting benefits/raising retirements and increasing contributions and possibly even raising taxes. Rioters in the streets may not understand there is a better solution but they are absolutely rejecting austerity today.
The status quo assumption that the retirement age must rise or benefits must be cut is burning down Paris.
But there’s a better way.
A growth solution would scope out a path to reduce French tax rates, specifically targeting lower corporate taxes and taking bold reductions in capital gains taxes to boost productivity and raise revenues sufficient to support the pension system.
To better understand the potential impact of lowering capital gains tax rates, we can look at historical examples in the United States. During the 1980s, President Reagan and Congress reduced the capital gains tax rate to 20% from 28%. As a result, revenue from capital gains taxes more than tripled over the next five years, from $12.82 billion in 1981 to $52.92 billion in 1986 — a 313% increase. Similarly, when President Clinton lowered the capital gains tax rate from 28% to 20% in 1997, capital gains revenue surged from $66.4 billion in 1996 to $111.8 billion in 1999 — a 68% increase.
Credit: Alan Reynolds Source: https://www.cato.org/blog/politics-economics-capital-gain-tax
Of course, GDP growth was robust during these periods, averaging more than a 4% clip in real terms.
When President François Mitterrand swept into office in the early 1980s on the promise to lower the French retirement age to 60 from 65, France had gone through a period of relative abundance. Between 1973 and 1981, real GDP averaged 3% annually. But Mitterrand’s policies were not so growth-oriented.
Between 1981 and 2010 real GDP growth declined to an annualized average of 2%. In 2010, Sarkozy raised the retirement age to 62. Since 2010, real GDP has averaged 1.2%.
Unfortunately, many French economists and politicians are convinced such a state of anemic growth is the norm and anything approaching 3% or 4% is unsustainable, or worse, inflationary. Although that is a false assumption, it is the European Central Bank’s job to manage inflation.
More important for the French government is to focus on raising the rate economic growth. Doing so effectively punts doomsday projections for pensions far off into the future. Any durable social contract must assume a growing economy or the French system will fail.
If we extrapolate the pro-growth impetus from the American example to France and assume a proportional impact if it reduces its 34.5% capital gains tax by a similar margin (say 24.84%), we can estimate the potential increase in revenue as offsetting the need to raise retirement ages. French capital gains tax revenues from 2019 (pre-COVID) amounted to €13.5 billion. The expected revenue increase expected based on a reduction in the capital gains tax to 24.84% could mean revenues jump somewhere between 313%-68%. In terms of euros, this could mean bringing somewhere between €42.25 billion and €9.18 billion. A likely uptick in GDP would furnish the additional €10 billion per year Macron is seeking.
In other words, with the right tax policies, Musk is wrong; the retirement age is not too low. French workers just need more capital and greater economic growth.
The politics of austerity go hand-in-hand with slower economic growth and contraction. Unfortunately, the ECB’s hawkish rate policies are of little help for France’s pension outlook. On Macron’s current path, we should expect more austerity and pitched battles in the street.
Therefore, reducing France’s corporate tax rate to 19% would be an additional aid. Corporate tax revenues between 2017 and 2022 have grown more than 40% — to $424 billion from $297 billion. Such a jump in French corporate tax revenues — using French 2020 corporate tax revenues of €59.9 billion — would more than make up the gap. Meanwhile, it would significantly improve France’s attractiveness to investors and businesses, encourage more investment and foster a more competitive business environment.
With the double-barrel boost of a reduced capital gains tax rate and lower corporate tax rates, France could reintroduce the Mitterrand Model of retiring at 60, but securing its foundations in pursuing greater economic growth. A flood of capital would likely swell into the country. Instead of riots, there would be celebrations.
This could spark a fiscal revolution on the continent and could flip on its head the whole dreaded discussion of having to reduce retirement benefits or raising retirement ages in the West.
Instead, by focusing on positive changes to the French tax code with an eye toward increasing economic growth French politicians could provide a more viable and sustainable solution to the country's pension challenges, without resorting to the contentious austerian measures that have already proven to cause social unrest. By reducing the corporate tax rate and capital gains tax, France could create an environment that supports both businesses and pensioners, while avoiding the pitfalls of raising the retirement age.
Exactly right. Growth also requires stable money, though.
I fear the Wanniski / Bartley / Laffer WSJ prescriptions are dead and gone; modern economics is Piketty (sp) redistribution. If Macron / Xiden had any interest in economic prosperity, the solution is out there for anyone to see, per the examples you cited, but they don't even just refuse to implement policies with a known track record, they actively go in the opposite direction. And they do so with greater alactrity in the wake of Trump due to the possibility of a future Trump. The clear objective is to collapse as much as possible as quickly as possible.
The west is over, it is just a matter of how ugly it gets on the way to the bottom.