Conflict on tax or class warfare?

Conflict on tax or class warfare?

As the “fiscal cliff” has become an endless and boring story, some new and interesting ideas have emerged amid the Democrats and Republicans’ different approaches on tax policy. Is this conflict mainly on the principles of attaining a balanced budget or a conflict of interests between the rich and the poor or, in short, a kind of “class war?” If similar discussions in some European countries are taken into account, it is understood that it is not only an American but an international issue.

For example, during the presidential election campaigns both in the U.S. and France, candidates used their approaches on tax policy as an effective tool of propaganda. The approach of the president-elect, Barack Obama, was (and still is) no tax cuts for the rich and no social benefit cuts for the poor. During his campaign, French President François Hollande announced openly that he would introduce a tax policy which would target the rich and he was also elected .The Republicans in the United States, the political parties on the right in France and business lobbies in both countries naturally tried to challenge that approach but could not gain enough ground during the campaigns.

Is this conflict defined as a class war, and, if it is, what kind of repercussions should political parties expect? Answering this question in terms of a U.S. perspective is easy: First the fiscal cliff, then concessions from both parties and be ready for next year’s cliff. It means that it will not be turned into a class war. However, to answer the same question from a French perspective is not so easy, especially after Mr. Gérard Depardieu’s sensational tax exile and a long list of businesspeople who might follow him – or already have – reminding one of the previous exodus of important people, including famous artists, 30 years ago when another Socialist president, François Mitterand, tried to implement a similar tax policy and almost destroyed the French economy in a very short time. Then, it was understood that even though it is ideologically accepted as a conflict of interests between the rich and the poor, the French case will also not cause a class war as Hollande’s popularity is eroding rapidly and France’s Constitutional Council rejected a 75 percent tax rate for higher incomes.

The U.S. and France are of course not alone in tax wars. The Liberal Democrat Party of the United Kingdom not too long ago also proposed a “tycoon” tax. This tax’s name is naturally very attractive for people facing economic problems. It is also very attractive for political parties of the left in every democratic country. It’s not just the majority of the common people but some scholars and important politicians that also love the idea of taking from the rich and giving to the poor. It is believed that the best way to solve the problem of poverty created by unjust income distribution is income and wealth transfer from the rich to the poor. The most simple and practical way of doing that, they think, is a suitable tax policy.

The failure stories of such tax policies that were once implemented in some Western countries in the past are well-known. Then why do even some seasoned politicians insist on making the same mistake? While the approach of European politicians on tax policy is mainly ideological, Americans are more pragmatic. Democrats say no tax cuts for the rich and propose higher taxes for them; on the other hand, they advocate no benefit cuts for the poor but also no dramatic tax cuts for lower incomes.

A little while ago, Turkish Finance Minister Mehmet Şimşek announced a similar approach. As growth is slowing down and new price hikes are becoming necessary to stop the deterioration in the budgetary balance, proposing higher taxes for the rich might seem politically attractive but not practical as all historical facts and past failure stories indicate. There is no clear evidence or past experience to indicate that higher direct tax rates for the rich provide more tax revenue. On the contrary, higher taxes might cause further tax evasion as has occurred in many Western countries, where control methods are more sophisticated.