Tuesday, January 31, 2012

Sarkozy and the VAT

IMF head LaGarde, German chancellor Merkel and French president Sarkozy examine the sheet of clues for a European scavenger hunt.

French president Nicholas Sarkozy proposes raising that country's Value Added Tax rate to 21.2%. Ostensibly, the increased tax revenues will be used to offset reductions in government-mandated employer expenses related to payroll, ie. French social security programs. The French tax system confiscates between 40% & 45% of national GDP. Sarkozy says that increasing the national sales tax will allow French manufacturers and exporters to more effectively compete with their foreign rivals. He also intends to institute a "financial transactions tax" of .1%, meant to discourage short term speculation as well as raise state revenues. The French president's popularity is rapidly declining and he will soon face an election that will be considered a referendum on his stewardship of an ailing economy with an unemployment rate hovering near 10% and a Standard & Poor reduction in sovereign debt rating from AAA to AA+.

The word now in Europe is "austerity". The most proficient money manager in the Eurozone, Germany, intends to protect the integrity of the Euro and its own economy by reining in the profligate spending of its neighbors like Greece, Spain, Portugal and Italy by establishing central control over member states' budgets. Lots of luck with that. France, too, is being pressured, like all social democratic states, by the insoluble situation of increasing demands for state services that must be paid for by bonds that seem less and less likely to be redeemed at face value, plus interest. The austerity lamented by some economists and other observers is a reduction in government spending on social services while taxes are increased to pay off an interlocking web of international bondholders. Politicians have borrowed massive sums to purchase votes in the vain hope that economic growth, hamstrung by growing government regulation and parasitic tax policies, will provide the tax base for repayment. Such is not to be. A wave of financial woes are moving across Europe, Great Britain will feel more discomfort soon. As always, there are really only two ways out of the situation, monetizing the debt (print more money) and enduring inflation that wipes out the savings of ordinary people and requires a new form of fiat currency or repudiation of the debt, which is often a cause of war and eliminates the possibility of future sovereign debt, at least in the short term.

The small (at least for now) financial transactions tax is the nose of the camel under the tent. Other countries will see how it works out for the French and if there isn't outright rebellion it will be adopted across the globe in a more insidious form. Its future configuration will be the registration of all contracts, accompanied by a graduated fee, with the government to guarantee their enforceability. A real property lease, for instance, will have to be registered with a government agency if either party to it wishes to enforce its terms. Independent adjudication, such as with arbitration panels, will be required to abide by the terms as well. There will be no escape.

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