31/12/2012 05:37 GMT | Updated 01/03/2013 05:12 GMT

France Goes Back on its Planned Tax Rise for the Rich

The intended rise in tax on incomes exceeding €1 million to 75% of earnings has been stopped by a French court. The decision was made due to the proposed tax rise being deemed as unequal and in turn unconstitutional. The suggested tax rise for the wealthy was put forward in an effort to cut the national deficit which was 85.5% of GDP in 2011.

The new left wing government, led by Francois Hollande, received high levels of anger from the initiative with many wealthy nationals fleeing abroad to avoid the increased tax burden including the actor Gerard Depardieu, who put his €50 million Paris mansion up for sale to relocate to Belgium.

Personally I can see why the move has created so much animosity - 75% tax seems excessive, after-all as soon as tax exceeds 50% of earnings you are no longer working for yourself as the majority of your earnings are taken away from you. Also it is not taking into consideration the personal sacrifices made by the person who earned the money.

The entrepreneur who made the money would have had to put forward the funds needed to create the business in the first place. The initial investment required to create a business can be enormous and there is no guarantee it will be successful. There is a high level of risk involved with a new business and the likelihood of failure is great. By taking away too much in tax the risk to reward relationship will diminish deterring new business start ups.

The planned tax rise is not only likely to discourage entrepreneurs, but potentially anyone who aspires to become wealthy regardless of whether they have any personal risk involved in the business or not. Financial reward is the mechanism that creates work in the free market. By taking the incentive for working and developing new skills away, it undermines the fundamental functioning of the free market.

When an economy is liberated to become a free market economy from a centralised or planned economy it is called the 'transitional' stage. There is a transitional mechanism in the opportunity to make money that encourages the labour force to work. If this opportunity to earn money and improve living standards by working is taken away the labour force will become less productive and unemployment will rise.

This is the point that concerns me the most in regards to the French government's proposals, there seems to be no planned alternative to compensate for the lost incentive to work. If the financial reward for working is taken away then unless there is some other kind of reward or mandatory labour initiative, which I do not think would be popular, the productivity of the economy will fall.

In any event a government official has stated the plans for a 75% tax on workers earning over €1 million a year will be changed and resubmitted. So it looks like there will be some sort of a tax rise for the wealthy in France in the near future.