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Want to Fix the Deficit? How About a 100% Tax Rate?

If you’re still licking your wounds from a big tax bill you sent to the IRS a month or so ago, take heart.

It could be worse. You could live in France.

According to the business newspaper Les Echos, more than 8,000 ultra-rich French households saw their 2012 tax bill eat up more than they earned in annual income.

According to Les Echos — which, yes, means “the echoes” in French if you’re wondering — the reason for the eye-gouging tax rate was a one-time levy pushed by current President Francois Hollande to offset big tax breaks and stimulus introduced by his predecessor, former President Nikolas Sarkozy.

The surcharge targeted only those with assets of more than $1.67 million. But still … a 100% tax rate, even for a small group of rich folks, doesn’t sit well with investors and business owners.

Or, for that manner, many aspirational French citizens who hope to climb the income ladder.

Of course the issue here is politics, with a liberal leader rolling back the low-tax policy of his predecessor in a very public and painful way. Jennifer McKeown, a Europe expert at Capital Economics told CNBC the high tax rate on the rich is tangible evidence Hollande is getting tough on the wealthiest French citizens and courting the lower and middle classes.

But this is also a case study in the philosophical question of how to pay for things in the era of weak economic growth and a creaking public sector.

Sarkozy, a conservative, chose to pump money into the economy by slashing tax rates — reducing the top rate from 60% to 50% — costing billions in tax revenue but theoretically placing more money in the hands of wealthy consumers and businessmen. He also slashed government spending to fight France’s growing debt load.

France remained in the doldrums, however, and debt levels didn’t change much. Hollande won a closely fought race in 2012 based on a socialist agenda that promised to roll back harsh budget cuts and re-energize the economy via stimulus … even if it meant deferring on debt.

So who’s right?

Well, a lot of evidence continues to roll out that, in the short term, austerity doesn’t work. Simply slashing government spending and reducing tax rates isn’t enough to fix this global crisis. Best-case scenario is that it does nothing; worst-case scenario is that plummeting public-sector spending amid a private downturn only exacerbates recessions.

Longer term, though, the jury is still out. Debt loads of many recession-crippled nations remain alarmingly high, and while lenders continue to support government bonds for now, there may come a time when the system breaks down because of unsustainable spending and a prolonged downturn that has never really abated.

It seems unlikely this debate will be resolved anytime soon. But it’s worth noting that this tax shocker is the latest proof that Europe is moving decidedly toward a bottom-up model that empowers lower-income residents at the cost of government debt and taxes on the rich.

The wealthy in America should pay close attention. While we certainly have a much more business-friendly environment with lower personal tax rates, the debate about public spending and stimulus is an important one here, too.

We may never see a 100% tax rate for the wealthiest Americans. But the fiscal cliff bumped up the burden on America’s richest 1%, with a top marginal income tax rate of 39.6% instead of the previous 35% rate.

That could be a sign of things to come.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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