Why France May Scrap Its Planned Millionaire Tax

French President Francois Hollande delivers his year's end message from Elysee Palace in Paris, on Dec. 31, 2012 Photograph by Lionel Bonaventure/EPA

François Hollande’s promise of a 75 percent income tax rate on millionaires was a winner on the campaign trail, with polls showing that six in 10 voters supported it. But now that Hollande is president of France, the plan has caused so many headaches that even some leftists are saying it should be scrapped.

At a Jan. 3 press briefing, Hollande’s spokeswoman said the government would modify and reintroduce the levy, which was struck down by France’s constitutional court on Dec. 29. “The tax remains a part of the government’s aim of reviving France with justice,” spokeswoman Najat Vallaud-Belkacem said. A revised tax would take effect in 2014, a year later than the original plan, she said.

Addressing the court’s objections would be relatively easy. The judges said the levy was inequitable because it applied to individual rather than household incomes—so that, say, a couple with a combined income of more than €1 million ($1.32 million) could escape the tax, while a single-breadwinner household earning the same amount would have to pay it. Budget Minister Jérôme Cahuzac has said the government could apply it to all households, raising the threshold to €2 million for those with more than one income.

Politically, though, resuscitating the tax may be more trouble than it’s worth. It has already sparked an outcry among entrepreneurs and other wealthy French, including the actor Gérard Depardieu, who said last month he was giving up his French citizenship and moving to Belgium. President Vladimir Putin fanned the flames on Jan. 3 by saying he would grant Russian citizenship to Depardieu (a spokesman for the actor declined to comment). “The psychological impact on the attractiveness of the French economy has been quite negative,” Philippe Gudin, a Paris-based analyst at Barclays Capital, said in a research note.

And while the tax is forecast to raise €210 million in revenue, it could lead to revenue losses if highly compensated jobs disappear from France. Eric Chaney, the chief economist in Paris for insurance group Axa, says major French companies and private-equity firms are increasingly shifting their recruitment to London and elsewhere. “We can’t bring high-level managers to France,” he told Bloomberg News. “They work in an international market.”

Hollande, speaking in Paris on Jan. 2, said he had instructed the government to “rework” the millionaire tax “without changing its objective.” The revised measure would be presented as part of the 2014 budget law voted on next fall, government officials have said.

But the prospect of a debate dragging on for months—giving affluent French more time to ponder leaving the country—could create still more problems. There’s a precedent for this situation: Hollande’s conservative predecessor, Nicolas Sarkozy, quietly shelved a carbon tax on automotive and household fuel, after French courts ruled it was unfair to apply the tax to individuals but not to companies.

Even some on Hollande’s left are saying the millionaire tax should be left to die. ”There’s not much use sticking with it,” Roger-Gérard Schwartzenberg, head of the Radical Left party, said in a statement after the court ruling. The tax “has been wrongly perceived as a sanction against professional success,” although the original measure would have applied to only 1,500 individual taxpayers, he said. “We should cut short this controversy.”

With reporting by Alan Katz and Greg Viscusi of Bloomberg News

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