Bloomberg News

Fate of France’s 75% Tax Shows Limit of Ability to Tap Rich

December 30, 2012

French Actor Gerard Depardieu

In a letter published in the Journal du Dimanche this month, Gerard Depardieu said he is leaving France “because you consider that success, creativity, talent, anything different, are grounds for sanction.” Photographer: Johannes Eisele/AFP/Getty Images

A court’s rejection of President Francois Hollande’s 75 percent millionaire tax shows the limits on his ability to tap high earners, even as the ruling is unlikely to attract investors and executives back to France.

“For investors and entrepreneurs, it shows that France can’t be confiscatory, that there are rules that have to be followed,” says Laurent Dubois, a professor at the Institute of Political Studies in Paris. Still, “the government won’t drop the idea, and the commentary from the highest levels of government is anti-rich, and that’s a red flag.”

The tax, one of Hollande’s campaign promises, had become a focal point of discontent among entrepreneurs and other wealth creators, some of whom have quit French shores as a result. The ruling comes as the president seeks to cut the public deficit to 3 percent of gross domestic product next year from a projected 4.5 percent this year.

The Constitutional Court ruled yesterday that Hollande’s 75 percent band wasn’t acceptable because it applied to individuals, when French income taxes are generally based on household revenue. As a result, two households with the same total income could end up paying different rates depending on how earnings are divided among their members, counter to the rule of equal tax treatment, the Paris-based court said.

Actor Gerard Depardieu, France’s highest-profile tax exile, said the ruling changes nothing, Le Parisien reported today. Depardieu, who is moving to the Belgian community of Nechin, just across the border, has been engaged in a war of words with the government over his decision.

Green Card

His plan was described as “pathetic” by Prime Minister Jean-Marc Ayrault. Depardieu, who gained fame in the U.S. playing a cigarette-smoking, wine-swilling French bon vivant in the 1990 movie “Green Card,” replied in a letter published in the Journal du Dimanche this month. Depardieu wrote that he is leaving “because you consider that success, creativity, talent, anything different, are grounds for sanction.”

Billionaire Bernard Arnault, chief executive officer of LVMH Moet Hennessy Louis Vuitton SA (MC), filed an application for Belgian nationality in September. While he promised to continue paying taxes in France, Arnault’s action prompted fierce criticism from Hollande and his supporters.

Yesterday’s ruling, which also lowered maximum tax rates on stock options, a form of retirement benefit, and bearer bonds, cuts about 500 million euros ($660 million) from the government’s expected receipts in 2013, Ayrault said. The government plans to submit a new proposal as part of the next budget bill in 2013, he said.

Goal Remains

“We’ll be obliged to adjust the mechanism, but the goal of calling for a national effort, for a patriotic effort, from those with professional revenues of more than 1 million euros, that remains,” Ayrault said on France Info radio late yesterday.

Possible options include a similar tax applied to households with at least two people and total revenue of 2 million euros, Budget Minister Jerome Cahuzac said on France Info radio today.

“This government thinks it needs to tackle people with money in order to address its budgetary problems,” said Eric Chaney, Paris-based chief economist at insurer Axa SA. (CS) “As a result, we can’t bring high-level managers to France. They work in an international market and the market price for those salaries is well above 1 million euros.”

Amsterdam, London

Major French companies are instead beginning to look into hiring senior managers in Amsterdam or in London, which is already the site of almost all new private equity recruitment, Chaney said.

The constitutional court’s specific objection was that Hollande’s plan would have added extra levies of 18 percent on individuals’ incomes of more than 1 million euros, while the calculation of income taxes and a 4 percent exceptional contribution for high earners would have been based on household income.

The court found a series of other tax increases excessive or violations of the equality of treatment for taxpayers. The tax rate on stock options and free shares was lowered to a maximum of 64.5 percent from as much as 77 percent. The marginal tax rate on a private retirement benefit known as “retraites chapeau” was cut to a maximum of 68.34 percent from a planned rate in 2013 of 75.34 percent.

Former President Nicolas Sarkozy’s opposition Union for a Popular Movement political party had asked the court earlier this month to overturn the measure.

New Measure

The tax, which Hollande said would be in place for two years, would have gone into effect Jan. 1. The proposed new measure will be in the 2014 budget bill and apply to 2013 revenue, Ayrault said. Income taxes in France are paid the year after the revenue is earned.

Hollande has also added new charges on capital gains, an increased tax on wealth, a boost to inheritance charges and an exit tax for entrepreneurs selling their companies. His government has created a new 45 percent tax bracket for annual incomes exceeding 150,000 euros. That tax band was approved by the court.

“There is the feeling that this government is not only nominally socialist, but actually leftist, and it will continue to try to tax capital more than labor,” Dubois of the Institute of Political Studies said. “We’re far from the German situation in which business competitiveness is a political value on all sides.”

To contact the reporters on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net; Alan Katz in Paris at akatz5@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net


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