More derogation culture

The derogation culture is a stealth abolition of the rule of law and its replacement by tyrannical rule by decree. The trick is to pass a law that is inapplicable and grant selective derogations to the law in a totally discretionary and arbitrary fashion.

Last week, the French government was about to implement such a derogation to its own 75 % tax on incomes above 1 million Euros. It was obvious from start that the second-rate French football league would fall to third rate as the cost of attracting the very best players would nearly double. This is what the dismal science calls the distortionary effects of taxation: if you tax people more, people have lower incentives to work. In the case of football players, this means greater incentives to simply go away. You see, these effects also exist in the real world. How surprising. So when  you put in place a new tax, presumably you are willing to live with the consequences. If this tax is meant to confiscate almost the entire income of the 1,000 best paid workers in the country, one just expects most of these (presumably very mobile) people to go away.  This means, in the dull economist’s jargon, that the distortionary effects are large. If you put in place a tax with large costs, it must be that the benefits are large. Since the tax will eventually bring very few receipts, we can only speculate that the benefits must be that people are overall happier with fewer rich workers around. We could relabel it the hate tax: you pay a tax because others hate you. It can be viewed either as a compensation for the envidious feelings that your existence is eliciting or as a Pigovian incentive to just go away, since your absence generates welfare benefits for the others.

So what happens when the government faces the very predictable consequence of its policy that the top 100 football players in the country are going to leave? It considers implementing a derogation to the tax. This means abolishing the constitutional principle of equality before the law, in order to prevent the French football league from becoming third rate instead of second rate. (In fact it is expected that the constitutional court will veto such an exemption)

Taxes are no longer determined by a tax code (these are for the idiots), but by how much the government — or its constituency — likes you. The government does not seem to like Gerard Depardieu but it likes football players. Hence poor Gerard Depardieu has to leave for cold Russia (when I was young it was rather the Russians who were trying to come here) but the football players can stay if we can sneak in some exception to the law for their benefit.

Or is it that the government suddenly discovered, just when the league informed them that the top football players were about to leave, that this activity generates “positive externalities” so that it needs to be subsidized? Perhaps the French people want more poor people and fewer rich people in their country, except whenever the latter are football players (I suppose that top surgeons,  managers, computer scientists, architects and biochemists are, on the other hand, welcome to join Depardieu).  Perhaps the moral qualities of football players  are such that we want to keep them — despite that they are rich — to serve as an example to younger generations, unlike surgeons, architects and managers?

In any case, the government expected that such a derogation would not pass the constitutional court, so they packaged it in a clever way. They amended the law by putting a cap on the total high wage tax paid by a firm equal to 5 % of its total turnover. In the short run, the cap will obviously be binding only for firms for which a significant portion of the wage bill consists of wages above one million euros, that is for football clubs and perhaps a handful of medical clinics. In the long run, though, nothing prevents a big firm from outsourcing their top paid employees  to some small consultancy. These consultancies will be closely watched by tax authorities, though, because some law says you cannot be a de facto employee without being a de jure employee (this law is intended to prevent firms from asking employees to set up a personal business instead of hiring them, which allows the de facto employer to bypass employment protection legislation). But we can be confident that big firms will find a viable legal arrangement to benefit from the 5 % cap.

This is the problem with rules: because they are rules, everybody can adapt  to them. It is very difficult to craft a rule that would harm Emmanuel Goldstein and nobody else.  Discretion gives much more leeway to politicians in distributing rents to selected groups at the expense of the others.


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