The French Connection

A recent Gallup poll indicated that less than 45% of young Americans view capitalism positively. Conversely, 51% are positive about socialism. (CNBC Money, 8/14/18). How these views translate into votes going forward will impact  your nest egg, your overall investment strategies.

Older Americans largely are in the capitalism camp, suggesting that opinions often are shaped by academic influences, but more likely, where you are economically, how you are faring with life’s challenges. Sociologist Abraham Maslow’s “Hierarchy of Needs” is at the heart of it all. At the base level, we all need to feel secure, safe. Only when our available resources (money and earning power, for example) rise above the pure survival level can we begin to think higher thoughts related to self-actualization. When one is constantly struggling to make ends meet, lacks job security, is overtaxed and overregulated, there’s a tendency to blame “the system,” however that’s defined. Witness French riots over outrageous fuel taxes (total costs over $7 a gallon) in the name of defeating climate change.

Going into the 2020 elections you will hear the term “social democrat” more often. While rejecting government ownership of the means of production, a bedrock principle of true socialism, various social democrats support a government takeover of healthcare (Medicare for all), free public college, government guaranteed Universal Basic Income (UBI), strict regulation of some industries (carbon taxes to discourage fossil fuel use). The challenge is clear: Where does the money come from?

The Wall Street Journal, “All the Taxes in France,” op-ed 12/8/18, offers a jolt of reality. France is the most heavily taxed nation in the developed world, with the overall tax take at all levels of government equal to 46.2% of GDP in 2017. Even Sweden is a bit lower at 44%. The U.S. clocks in at 27.1%, below the average of about 34% for most developed countries. Europe relies heavily on consumption taxes which fall disproportionally on middle- to lower-classes who spend more of their income on basic necessities than do the more wealthy.

Those with higher incomes, higher education levels, and/or in-demand skills, have more mobility, more choices than those in opposite circumstances. It was unhappy farmers, students, truck drivers, and rural citizens that besieged Paris. “Let them eat cake” didn’t work out well for Marie Antoinette, nor Monsieur Macron.

Our federal government is set to borrow almost $1 trillion this fiscal year, a jump of 84% over 2017. Where do we find the money to fund new initiatives, new social benefits, new safety nets?  Where do we cut spending to decrease debt buildup? Some politicians want to reverse the “Trump tax cuts” and Mr. Market already worries about that. Macron has  figured out that there are not enough “rich people” or corporations to tax. The burden always lands on the middle class.  There’s the rub.

Forget millionaires and billionaires, everyone’s “tax and spend” piñata. According to a 2017 study by the Economic Policy Institute, to land in the maligned “top 1%” of earners that year, you had to have wages of $718,766. The top 5% of earners had average wages of $299,810; the top 10%, $118,400. (Fact: $118,400 buys more in Georgia than it does in New York City, Connecticut, or coastal California for example. Wealth, in terms of “buying power,” is relative). The average annual wage in 2017 was $53,474.

Overtax corporations and business and production moves elsewhere. Factories close. Jobs vanish or relocate. Stock prices decline. Dividends decrease, impacting retirees who depend on investment cash flows. Confiscatory taxes discourage risk taking, innovation, and expansion. Raise taxes rates too high, and actual tax receipts decline. (Google “Laffer Curve”).

Charles de Calonne, Count of Hannonville (1734-1801), attempted to reform France’s virtually bankrupt fiscal system leading up to the French Revolution. Asserted Calonne in 1787, “I shall easily show that it is impossible to tax further, ruinous to be always borrowing and not enough to confine ourselves to measures of economy.” Reforms failed and Calonne fled the country. The storming of the Bastille occurred in 1789. Louis XVI was executed in 1789. What followed was a secular and democratic republic that grew increasingly authoritarian and militaristic. History is a great teacher, yet studies show that many citizens have scant understanding of history and practical economics. “Failure to read the minutes of the last meeting” is always dangerous if an informed base of voting citizenry is eroding.

So what now? If too many people are entrenched in polarized camps, where’s the civil, pragmatic, rational middle? Stay tuned. How it all shakes out will have an impact on your portfolios, your overall wealth, and potentially, job opportunities and future earning power for you and/or your soon to be adult or graduating offspring or grandchildren. Sacré bleu!


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