Strategy

France targets the rich with higher income tax rate

A new 75% tax rate for millionaires could force an exodus.

During his presidential campaign, François Hollande famously proclaimed his disdain for the rich. For Bernard Arnault, France’s richest man, the feeling is mutual. Arnault, head of global luxury brand group LVMH, confirmed last month he has applied for Belgian citizenship. This was widely interpreted as a rebuke to France’s newly minted Socialist president, who is making good on campaign promises to tax the hell out of high-income citizens as a means of bridging the country’s yawning deficits.

In late September, Hollande formally submitted a budget to Parliament, which among other things introduces a temporary 75% marginal tax rate on citizens earning more than €1 million annually. (As recently as the early 1980s, France’s top marginal rate had been 60%, but it gradually fell to 40% in recent years.)

Policy-makers in other countries will no doubt watch France’s experiment closely. Beginning in the 1980s, virtually all developed nations began lowering tax rates for top income earners. In 1994, the OECD average marginal rate stood above 49%; by 2010 it had fallen below 42%. Since the financial crisis, Portugal, Ireland, Greece, Spain and the United Kingdom have all raised taxes, but the greater emphasis has been on spending cuts. With many countries still running unsupportable deficits, the pressure to increase taxes will surely mount—including in the United States, where the Republican Party has made opposition to that eventuality its defining cause.

The dramatic rise in their incomes over the past three decades makes the ultra-rich an enticing target. There is perhaps more opportunity to soak them in France than elsewhere: the top 10% of French earners provide 28% of France’s total tax revenues, less than the average in developed countries. And the public is broadly supportive; Hollande defeated his predecessor in part because Nicolas Sarkozy was widely perceived as the “president of the rich.”

Arnault’s is not the only voice of protest, though. Jean-Paul Agon, chairman and CEO of cosmetics giant L’Oréal—who last year signed a petition advocating a greater contribution from the rich—expressed displeasure at the 75% gouge. Even thinner cats are outraged: a group calling themselves Les Pigeons, purportedly composed of French entrepreneurs, set up a protest page on Facebook. Beyond the ideologically charged rhetoric lies an important question: How will France’s wealthy actually react?

Higher taxes encourage evasion, and capital is more mobile than it was the last time rates were this high. France’s wealthy are already said to be among the most enthusiastic patrons of Swiss banks. Those seeking to escape Hollande’s new measures will find a growing industry eager to assist. Anecdotal evidence suggests a French exodus may already be in the offing. Realtors in London and Brussels report a surge in web searches and inquiries from French shopping for upscale homes.

Some politicians fear that true job creators could leave the country, crippling the economy’s capacity to rebound. But Emmanuel Saez, an economist at the University of California–Berkeley, says the impact of Hollande’s tax increases should be limited, given their expiry in two years. “Most highly paid people will be able to avoid it” through aggressive tax planning, he says. “Hence, no need to leave the country.” Perhaps. But the measure’s temporary nature is predicated on the assumption that the French economy will be growing nicely two years from now. Given the expansive dimensions of Europe’s sovereign debt crisis, this is by no means assured.