Sarkozy Seeks to Outdo Hollande in Pledges to Tax Rich

France's President Nicolas Sarkozy
Nicolas Sarkozy, president of France. Photographer: Jock Fistick/Bloomberg

France’s presidential campaign has turned into a race to tax the most.

On Feb. 27, Socialist frontrunner Francois Hollande said he plans a 75 percent levy on income over 1 million euros ($1.31 million) on top of his pledge to raise the wealth tax and eliminate exemptions for overtime work. President Nicolas Sarkozy followed with a proposed tax on the worldwide revenue of large French companies and this week a levy on fiscal exiles. Both candidates want to impose a fee on financial transactions.

Unlike in the U.S., where higher levies are a vote-killer, in France, such increases win support in the polls, more so after the European debt crisis cooled economic growth, raised jobless claims to a 12-year high and the unemployment rate to about 10 percent. An Ifop poll this month showed that 61 percent of the French are in favor of Hollande’s millionaire tax.

“A U.S. election campaign is all about who promises to cut taxes while here it’s about who will tax more,” Maurice Levy, chief executive officer of advertising company Publicis SA, said March 13 at a business conference in Paris.

France’s tax revenue as a proportion of gross domestic product is one the highest in the world at 43 percent in 2010, according to the Organization for Economic Cooperation and Development. That compares with 36.3 percent in Germany, 25 percent in the U.S. and the OECD average of 34 percent.

Ordinary French

The eagerness of French candidates to promise new taxes, and the positive response from voters stem at least in part from the sentiment that tax cuts at the start of Sarkozy’s five-year term allowed the wealthy to pay less than their fair share during the economic crisis.

“Both candidates are trying to capitalize on the issue: Sarkozy by trying to dispel the perception that he’s the ‘president of the rich,’ and Hollande by trying to show that he can be the president of redistribution.” Antonio Barroso, an analyst at Eurasia Group, said in an interview.

Les Guignols, the nightly satirical puppet show on television station Canal-Plus, often shows Sarkozy furiously criticizing his own government’s gifts to the rich and running against his own record.

The first round of the presidential election will be held on April 22, with the decisive second round set for May 6.

Taxes have become central to the campaign because neither of the two leading candidates is promising significant cuts in public spending and is constrained by government debt, which is set to be 89 percent of gross domestic product this year.

All to Pay

Both sides accuse the other of hurting the middle class. Hollande and his supporters point to Sarkozy’s plan to raise the sales levy to fund lower social charges paid by employers.

Hollande’s program calls for raising tax revenue as a percentage of economic output to 46.9 percent in 2017 from 45.1 percent now, and hiring 60,000 new teachers.

“The French will soon realize that all the French will be asked to pay, and not just the rich,” government spokeswoman Valerie Pecresse said yesterday, referring to Hollande’s plan.

Some support for higher income taxes comes from the fact that 44 percent of French households don’t pay such levies because of their low wages. They do pay 22 percent in social charges and face value-added taxes of up to 19.6 percent. The government gets a large majority of its tax revenue from VAT.

Still, Hollande’s millionaire levy scapegoats the few wealth creators in France, France Telecom SA CEO Stephane Richard said in an interview March 13.

Wrong Signal

“It depresses me,” he said. “All politicians in this election are trying to impress the electorate by talking about taxes, and pointing their finger at the rich. The 75 percent tax sends the wrong signal. It’s not by plundering a few thousand French people that you solve the problems of this country.”

Hollande’s levy, combined with other French charges, may in some cases raise the rate to more than 80 percent, said Line-Alexa Glotin, a partner at Paris law firm UGGC & Associes.

That might contravene the French constitution’s prohibition of confiscatory taxes, she said.

“But the several thousand people or so who are affected probably won’t stick around, so there will be few to challenge it,” she said in a telephone interview.

Glotin said many French taxpayers are looking to leave France, mostly for Switzerland and Belgium.

“The U.S. might tax its rich but at least they are admired,” she said. “There’s an atmosphere in France now that just doesn’t appeal to many entrepreneurs.”

Breaching Rights

Sarkozy said in an interview in weekly Le Point magazine published today that he wants “Internet giants” to pay taxes in France on the sales they make in the country.

Sarkozy’s proposed levies for companies and for overseas citizens may risk breaching broader rights, some lawyers said.

The tax framework for French multinationals and citizens living abroad will have to be carefully worded to avoid contravening European Union treaties on freedom of movement and on non-discrimination, said Michael Jaffe, a Paris-based lawyer at PricewaterhouseCoopers.

Sarkozy has said the levy will be imposed solely on tax exiles and not on French people working overseas. The distinction isn’t always so clear cut, said UGGC’s Glotin.

While the U.S. taxes its citizens abroad, no European country does since fiscal codes are based solely on territoriality. The European Court of Justice in 2004 shot down a French “exit tax” on citizens moving abroad because it was deemed to impede freedom of movement within Europe.

Rolling Stones

Sarkozy’s minister Pecresse downplayed the challenges.

“We don’t have to renegotiate tax treaties with the entire United Nations, just with three or four major neighboring countries,” she said.

None of the proposed levies is entirely new, Jaffe said. France already has a treaty with Monaco to tax French residents in the Mediterranean principality.

Nor are the levies setting any records.

The top rate in the U.S. was 94 percent during World War II and 70 percent as late as 1981, when it applied to income over the equivalent of $532,000 in today’s dollars, according to the Tax Foundation. Britain had a top rate of 83 percent in 1974 for income of 155,000 pounds ($243,000) or more, according to website MeasuringWorth.

So when the Rolling Stones wanted to escape British levies in the 1970’s they moved to another country: France.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE