French President Francois Hollande has made good on a campaign pledge to make the wealthiest in France pay up to 75 percent income tax. The U.S. Congress, meanwhile, is debating an Obama proposal to allow the top tax rates to rise from 35 percent to nearly 40 percent.
Although the new taxes will not make a major dent in France’s budget, they have delighted the country’s labor unions and others who thought that former president Nicolas Sarkozy, nicknamed President Bling-Bling, gave the wealthy a pass as he called for deep cuts in government spending on the poor. But the rapidly rising tax rates have some businesses and investors saying that economic growth, forecast at a catatonic 0.2 percent this year, will further suffer.
The debate echoes the one playing out in Washington but also illustrates the deep divide — in policy and politics — between the United States and Europe as the countries struggle to crawl their way out of a slowing global economy. Policies that would be considered laughably extreme on the campaign trail in Ohio or Florida have found a champion in the Elysee Palace.
Hollande’s balancing act will test whether higher taxes can work in an age when money hops borders with the click of a mouse and nervous investors display little allegiance to individual countries. Many of France’s neighbors are focusing on cutting spending to balance their budgets rather than raising taxes. Hollande plans a mixture of both, and his aides are gambling that growth will result.
Constrained by a bad economy and commitments to balance the French budget by 2017, the plans are far from the rallying cry of stimulus-led growth on which Hollande based his campaign.
Many of the 17 countries that use the euro are fundamentally reevaluating the sustainability of their model. British Prime Minister David Cameron, whose country uses the pound, has said he would welcome investors and wealthy French people taking flight from Hollande’s taxes.
Hollande’s advisers say new taxes won’t scare away investors if the government follows up with convincing plans for how it will shrink spending, open the labor market and implement other business-friendly measures. In doing so, the advisers say, they hope to reduce France’s 10.2 percent unemployment rate while being fairer to the most vulnerable parts of society by putting the weight of service cuts and tax increases on the wealthy.
“If it’s necessary to have reforms, we will do them . . .
based on fiscal elements that are just,” Hollande said in a recent television interview.
Uncertainty about the future
France is contemplating rates dramatically higher than those proposed by Obama. Paris’s conservative Figaro newspaper blazed in a front-page editorial last month about “confiscation” — dredging up memories of Soviet property seizures — reprinting a famous complaint from Tour de France great Bernard Hinault that three pumps of his bike pedal went to the government for every one dedicated to pushing himself forward in the race.
Although the 75 percent tax on earnings over $1.23 million a year, up from a previous top marginal rate of 48 percent, is more a political symbol than an economic measure — because it raises too little money to make a dent in France’s funding needs — analysts say it will help give Hollande political cover to cut government spending and open the labor market, making France more competitive with its neighbors. Parliament approved a one-off wealth tax on people whose assets total more than $1.6 million, and new taxes will raise $8.7 billion this year alone.
“From a strictly economic point of view, I wouldn’t recommend these policies. But that’s not what this is,” said Elie Cohen, an economist who has advised Sarkozy and Hollande. “This is clearly designed to create some kind of consensus in this country for structural reforms” — the kinds of measures otherwise known as austerity.
Many business owners say that they are waiting to see what will happen but that they are nervous about the future.
“We pay a pretty high level of tax already. The money we earned was not stolen,” said Stanislas de Bentzmann, co-chief executive of Devoteam, a computer systems company. “I switch on the radio and I hear the news that the government is doing the opposite of what I think it should do. In this kind of mood, investment decisions are not stimulated in this country.”
But he added that investors would probably tolerate temporary tax increases if there were a “real reorganization of the welfare state” at the same time. French Budget Minister Jerome Cahuzac has said that the 75 percent income tax might be reduced once the country balances its budget.
Some economists say they think the prospect of French wealth and investment flowing out of the country is more bogeyman than real.
“French people don’t want to give up the level of service they’re getting,” said Fabrice Montagne, the chief French economist at Barclays Bank. “I wouldn’t overestimate” people leaving the country, he said.
A fragile moment
This is a fragile moment for France. Last month, Peugeot, Europe’s second largest car manufacturer, announced plans to shut down a plant and lay off 8,000 workers. Hollande has fought the plans, but he has little recourse, and his advisers are bracing for more bad news and layoffs in the fall. And with borrowing costs soaring in Spain and Italy, the euro zone’s overall prospects look dim.
Painful policy changes could be easier, with France temporarily benefiting from the fears about its neighbors. Its borrowing rates are close to record lows as nervous investors shift their euros from Spain and Italy to Germany and France, which are seen as more stable. But if markets become nervous about France’s future, rates could spike quickly.
Although France’s income taxes are high and getting higher, the country also has a national sales tax of 19.6 percent and a financial transactions tax and a social services tax of 7.5 percent of earnings, among others. French workers have long accepted the costs as the price of a government that offers cradle-to-grave social protections, but businesses have complained that the high cost of contributions to pension plans and the health-care system have made French workers more expensive than those elsewhere in Europe.
Hollande’s advisers agree there is a problem, and they have signaled that they will cut employers’ required social-safety-net contributions and shift more of the burden onto workers. Nor has the government increased every tax it can find: One of the new president’s first actions when he came into office was to halt a rise in the national sales tax that had been planned by Sarkozy, reasoning that it disproportionately hurt the poor and middle class.
Sarkozy’s associates have slammed the moves.
“I’m quite sure it will be a fiscal shock, which will be very bad for growth, and I’m quite sure that a lot of people who have money or run firms are looking at going outside France,” former finance minister Francois Baroin said in a telephone interview.
For now, with Paris emptying for summer holidays, shuttered businesses with signs saying they’ll be back in September are a reminder that some traditions are hallowed on both sides of the political aisle.