France drops 75% tax rate for millionaires

2014-12-31 12:26

It was supposed to force millionaires to pay tax rates of up to 75%: “Cuba without the sun,” as described by a critic from the banking industry.

Socialist President Francois Hollande’s super tax was rejected by a court, rewritten and ultimately netted just a sliver of its projected proceeds. It ends today and will not be renewed.

And that critic of the tax? He’s now Hollande’s economy minister, trying mightily to undo the damage to France’s image in international business circles.

The tax of 75% on income earned above €1 million ($1.22 million) was promoted in 2012 by the newly-elected Hollande as a symbol of a fairer policy for the middle class, a financial contribution of the wealthiest at a time of economic crisis.

But the government was never able to fully implement the measure. It was overturned by France’s highest court and rewritten as a 50% tax paid by employers.

Faced with a stalling economy and rising unemployment, the government reversed course in 2014 with a plan to cut payroll taxes by up to €40 billion ($49 billion) by 2017, hoping to boost hiring and attract more investments.

All the while, Prime Minister Manuel Valls kept repeating his new credo: “My government is pro-business”.

Ultimately, while the super tax affected only a small number of taxpayers, it triggered huge protests in business, sporting and artistic communities.

French actor Gerard Depardieu decried it vociferously and took Russian citizenship. Soccer clubs threatened to boycott matches for fear that 114 of their players or coaches would be taxed. The final version of the tax allowed them to minimise the burden.

The announcement of the 75% tax had “a very bad psychological effect” in business circles, says Sandra Hazan, a lawyer who heads Dentons Global Tax Group. Even if most of the companies were able to minimise or avoid the tax, “I think it had an extremely devastating impact on the attractiveness of France for foreigners.”

At the time of its proposal, British Prime minister David Cameron ironically proposed to “roll out the red carpet” to French companies willing to avoid the tax.

Economist Thomas Piketty, author of the book “Capital in the Twenty-First Century”, criticised it as “a millstone around the neck” of the government, asking instead for global reform of tax laws.

Proceeds from the tax are estimated to total €420 million ($512 million) for about 1000 employees in 470 companies, according to the government. By comparison, France’s budget deficit has soared well over €80 billion ($97 billion).

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