Wednesday, November 6, 2013

Are the middle classes closer to the rich or the poor?

If we need to create a just society, we need to promote equity. But that does not mean equality. Evidently, those who work more or are more gifted should be allowed to earn more? Also those who have sacrificed their childhood to make a career should earn more. This is what vertical equity is all about.

But how much more? This is the question which is now bothering French people. Some say three times more, some say five times, even ten times. But is there anyone saying hundred times?

To appreciate French reality, here is an idea of some differences between the payment of top managers and workers. This comes from manipulating figures from the Finance bill for 2014 (its not a law yet).

More and more French workers earn the minimum wage which in January 2013 was 9.43 Euros per hour or 1,430 Euros per month. After taking out social security charges and some minimal taxes, the monthly net minimum wage works out to 1,120 Euros a month or 13,440 Euros a year.

There are at least a 1000 people, according the finance bill for 2014, who earn more than a million Euros net per year. This is about 75 times what people on the minimum wage are earning. But of course they are earning more than a million and not just a million. To appreciate how much more, here are some rudimentary calculations.

The French government expects to get 260 million Euros by taxing the cmopanies who pay them at 50%. This is 260,000 Euros per person (since there are 1,000 of them).
This means that the tax base must by 520 million Euros or 520,000 Euros per person
.However, this new tax will apply only to the revenue over a million Euros.
This means that the average taxable income of these people must be 1,520,000 Euros.

This is about 113 times what a person on the minimum wage takes away.

Now, this is only income of the top managers. These thousand managers take away 1.52 billion Euros of French income. With a GDP of 2000 billion, these people earn about 0.76 % of total income. However they comprise only 0.0015 % of the French population of 65 million people.

Of course, we have compared the richest with the lowest of the middle classes. The average French income, if we divide 2000 billion by 65 million, works out to about 31,000 Euros per year. People earning 1,520,000 Euros are therefore earning about 50 times the middle classes.

Income inequalities in France
Number of people
total income in millions
Annual Income per person Euros
Monthly income
Times minimum wage
CEOs of top 120 enterprises
2 800 000
233 333
Others in top 1000
1 184
1 345 455
112 121
Average of top 1000
1 000
1 520
1 520 000
126 667
French population
65 000 000
2 000 000
30 769
2 564
Minimum wage

1 120
Source: Diverse media with my own approximations

Evidently, all the multiples are exaggerated since we are working with pre-tax figures and not post-tax. With progressive taxation, the difference should be a little less. But if the super-rich get a lot of tax cuts from their investments, this may not be evidently so. In any case, it gives you an idea. Already, for this new tax for solidarity, the rate has been reduced from 75% talked about by Fran├žois Holland to 50%. Moreover, it is not being paid by the rich but by the enterprises. So much for solidarity even within the borders of a country!

Lets go one step further. This tax is an expense for the company and reduces the profits. As a result, one-third of the solidarity tax reduces the corporate tax. Therefore for firms the solidarity tax is only 50%-17%= 33%: the same as the tax on corporate profits.

Middle classes are certainly earning more than the poor. Maybe three to ten times more. The rich are earning about fifty times more that the middle of the middle classes.

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