Hollande is at risk of slaying France’s golden tax geese

PRESIDENT François Hollande is only just settling into the Elysée, but ripples of unrest towards his tax policies are already being felt, both in France and further afield.

The headline figure is the proposed 75 per cent rate of income tax, which will apply to income of over €1m (£793,000) a year. This will be a substantial increase for those taxpayers – albeit few in number – whose income falls within this bracket. Of wider impact are the proposed changes announced by the French government on 4 July. These involve not only increased rates of income tax, but also wealth tax, capital gains tax and inheritance tax. Some of the changes will affect a considerably larger proportion of the population, including non-resident owners of residential property in France.

These significant increases in taxation may result in less revenue being generated, partly because some who would be affected by the new rules will simply move abroad until the tax climate improves. This would have the wider consequence that France could lose the sort of people who are helpful to have around in difficult economic times – entrepreneurs and high-achievers.

Prime Minister David Cameron recently quipped that England would be “rolling out the red carpet” for French taxpayers seeking to escape the 75 per cent charge. This remark was, for obvious reasons, not well received across the Channel. Economies in the developed world all seek to attract organisations and talented individuals who will stimulate economic growth. The UK is not alone in doing so, and one of the balancing acts facing the new government in France will be to avoid frightening off those who fall within this category – either currently based in France or looking where to invest.

Where governments wish to retain internationally mobile entrepreneurs and investors, the way in which they introduce tax and the language they use about it can be important. An example of how not to do it was seen in the unrest caused within the international community in the UK in 2008 when, without warning, the previous UK government proposed sweeping changes to the tax system affecting non UK domiciliaries.

The tipping point at which any individual decides to move from one country to another, or to cease investing in one economy in favour of another, will always depend on a range of circumstances – by no means only to do with tax. But as governments the world over have learned, there is a point at which raising taxes can become counter-productive.

In the 1970s, when tax rates in this country had reached 98 per cent, some took the view that France was a pleasanter place to be resident. It will be interesting to see how many residents of France decide to reverse that trend.

James Johnston is a private wealth partner and head of the French group at Bircham Dyson Bell.