Thursday, May 17, 2007

France: The best intentioned legislation can have unintended consequences

James Miller points to how easily even the best intentioned legislation can have unintended consequences. I am glad that the new President of France seems to be willing to do a lot to get that country going again, I just don't want him to get attacked for well meaning legislaiton that goes wrong.

France's new President has proposed that there "should be no income tax on earnings in excess of 35 hours a week." This proposal is obviously designed to get the French to work longer hours. But this proposal will cause huge compliance problems.

To understand why let's say someone was earning $10 an hour and working for 35 hours a week, making $350 a week. Further assume that they pay 50% of their income in taxes so they get to keep $175.

Now imagine that the employee and firm come to a new arrangement. The employee will start sleeping at the office and the firm will consider this office sleeping time to be work. The employee will now be paid for working 60 hours a week. The firm, however, will also cut the worker's salary to $5 an hour. The firm now pays $5(60)=$300 a week. This is less than before so the firm is better off. The worker, however, is also better off. . . . .

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