Europe

For France's Rich, the Tax Pain Isn't Over


An overview of the harbor in Nice, France

Photograph by Corbis

An overview of the harbor in Nice, France

France’s wealthiest households have borne the brunt of President François Hollande’s efforts to trim the budget deficit. Now he’s going to hit them again.

At a news conference last month, Hollande hinted that a broader swath of the population would have to share the pain of future deficit-cutting. “We’ve asked a lot of them,” he said of France’s wealthy, who have faced tax increases and surcharges that resulted in 8,000 households receiving 2012 tax bills that exceeded their annual incomes.

But on June 3, given the opportunity to trim a popular middle-class welfare benefit, Hollande opted to go after the rich once again. His government rejected a plan that would have reduced monthly cash payments to families with children. Instead, tax deductions for children of higher-income families will be cut, increasing the tax bills of about 1.2 million households by a total €1 billion (about $1.3 billion) annually.

The program that was spared, known as the “family allocation,” is a classic example of the kind of largesse that has gotten France into so much fiscal trouble. Any French family with two or more children—regardless of income—automatically receives a monthly cash benefit of at least €128 ($166), and often much more. A family with three kids ages 11 to 17, for example, gets almost $600 a month.

Such generosity may have political appeal, but it is strangling the French economy. Public spending now totals 57 percent of GDP, the highest share of any euro zone country. It’s a major drag on the competitiveness of French companies, which shoulder some of the highest payroll taxes in the world. And there’s that budget deficit, which totaled 4.8 percent of GDP in 2012.

What’s more, the rich are getting fed up. They’re starting to pack their bags and head to more tax-friendly locales. Most worrisome, it’s not just the wealthy who are fleeing, but also young entrepreneurs, who figure that getting rich in France isn’t worth the trouble.

Soaking the rich hasn’t helped Hollande’s popularity, either. Recent polls show his approval rating at 24 percent, the lowest of any French president in modern times.

On May 29, the European Commission gave France an extra two years, until 2015, to trim its budget deficit to the 3 percent of GDP required by the euro zone’s growth and stability pact. In return for the waiver, German Chancellor Angela Merkel and other EU leaders are pressing Hollande to step up the pace of economic reform with measures to improve France’s competitiveness.

Hollande, though, has insisted that his government will set its own economic policies. If the latest decision on taxes is any indication, the country’s most affluent citizens probably aren’t going to like them.

Matlack is a Paris correspondent for Bloomberg Businessweek.

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