Sept. 26 (Bloomberg) -- The success of French President Francois Hollande’s millionaire tax may hinge on what he gets labor unions to concede in return.
Hollande’s election pledge to tax income of more than 1 million euros ($1.29 million) at a rate of 75 percent will be detailed when the 2013 budget is presented on Sept. 28 in Paris. The levy may allow him to squeeze out concessions to reduce unit labor costs that are among the highest in Europe and make the work environment more flexible.
“Hollande has to give something serious to the left, so they can bank it, and say this is why it’s worth having a Socialist president,” Alex White, an economist at JPMorgan Chase & Co. in London, said in an interview. “If it turns out that in five years’ time there’s been serious structural reform as the flip side of the tax, maybe it will turn out to be a long-term positive.”
Entrepreneurs and opposition politicians say the levy will drive talent and capital out of France and worsen the country’s economic slump. Yet confronted with plunging poll ratings and a mutinous support base as he struggles to cut France’s budget deficit, Hollande may be able to use the tax as leverage to push through unpopular labor measures.
Since returning from his summer holiday six weeks ago, Hollande has promised to reduce France’s budget deficit, implement a European fiscal treaty and press unions to accept increased labor flexibility by year end. Over that period, his approval rating dropped by 11 points to 43 percent, according to an Ifop poll released this week.
Hollande also has rebellious lawmakers in his own party opposing the ratification of the euro area’s deficit-capping fiscal pact and faces a call from the CGT union for protests against austerity on Oct. 9.
The president’s budget comes against a backdrop of an economy that hasn’t grown in three quarters and joblessness that is at a 13-year high. He is struggling to plug a budget hole of more than 30 billion euros for next year.
Displeasure within Hollande’s political base has given the millionaire tax added significance even though economists estimate it will raise just 200 million euros out of a total of 20 billion euros in tax increases.
“We consider it a largely symbolic step that reflects the mindset of the Socialist Party,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in Paris. “This measure is in keeping with the platform of tax justice on which Francois Hollande campaigned.”
French Finance Minister Pierre Moscovici said this month that the 75 percent tax will remain in place for two years.
“Those that got very rich over the past period can help in a patriotic way to turn around the country,” he said in an interview on RTL radio.
French billionaire Bernard Arnault, chief executive officer of LVMH Moet Hennessy Louis Vuitton SA, said this month that he’s seeking Belgian citizenship, while insisting he wasn’t doing it to escape the 75 percent tax. Some French executives say the levy is bearable for a limited time as long as Hollande works to improve French competitiveness at the same time.
“France is in an exceptional situation that requires exceptional measures, so it’s very natural that everybody contributes, and that those who can do more contribute more than those who can’t,” Vinci SA CEO Xavier Huillard said last week. The government also needs to stabilize “the regulatory, fiscal and social framework” to encourage investment, he said.
Corporate investment, which drove France’s recovery from the last recession since 2009, is now declining, according to national statistics office Insee. Investment fell 1.4 percent in the first quarter and 0.1 percent in the second quarter and will probably be flat for the rest of this year, Insee estimates.
In July, French business leaders urged Hollande to give Europe’s second-largest economy a “competitiveness shock.” Louis Gallois, former CEO of European Aeronautic, Defence & Space Co, called for cuts in taxes and social charges of as much as 50 billion euros. “It has to be quite massive,” he said.
France has the euro area’s second-highest unit cost of labor after Belgium, according to an April 2012 Eurostat report. France’s cost of 34.20 euros an hour compares with Germany’s 30.10 euros, Italy’s 26.80 euros and 20.60 euros for Spain.
Companies also say one of the biggest obstacles to hiring is the “Code du Travail,” a 3,200-page labor rulebook that decrees everything from job classifications to leave for training to the ability to fire.
As Hollande seeks ways to make France more competitive, his “social justice” pledge is driving him to show he will make the rich pay, too.
Receipts from the 75 percent tax are unlikely to make a significant dent in France’s budget deficit, which stood at 5.2 percent of gross domestic product last year and is targeted by the government to fall to 3 percent next year.
Even before being elected, Hollande said that cash generation wasn’t the point of the millionaire tax.
“This measure isn’t intended to bring a single euro into the coffers of the state,” Hollande said campaigning in Lyon on March 1. Instead, dealing with the “shocking” levels of pay “is quite simply about patriotism,” he said.
To contact the reporter on this story: Mark Deen in Paris at email@example.com