“Trench Warfare” Or “Civil War” Over Confiscatory Taxes In France
Sunday, December 23, 2012 at 3:15PM “We’re engaging in trench warfare,” proclaimed Alain Afflelou, head honcho and founder of an eyewear company with 1,200 stores in France and other countries. One of the wealthiest men in France. He was talking about the tax fiasco that split France in two. He was done with his country. He’s moving to London. One of France’s so-called fiscal exiles.
He’d set up his international headquarters in Switzerland, rather than France, 15 years ago to minimize his company’s tax burden, but now he’d personally bail out.
The clamor had started in September when it leaked out that Bernard Arnault, richest man in France and CEO of luxury-goods empires LVMH and Groupe Arnault, was applying for Belgian citizenship. In response, Economy Minister Pierre Moscovici threatened to renegotiate the tax treaties with Belgium, Luxembourg, and Switzerland. A few days ago, reports surfaced in the Belgian media that mailbox companies—a dozen at the Brussels apartment of a Groupe Arnault director alone—have allowed Arnault’s empire to escape several hundred million euros in taxes.
Belgium got cold feet. On Saturday before Christmas when nothing was supposed to happen, Anti-Fraud Secretary of State John Crombez requested that Finance Minister Steven Vanackere transfer Arnault’s tax file to the tax authorities in France, an idea the minister did not immediately reject.
Now Arnault got cold feet. LVMH and Groupe Arnault defended themselves the best they could, claiming that these mailbox companies had “economically perfectly real activities in Belgium where some of them have been implanted for decades.” Indeed, they were “surprised” by the allegations.
But no one stirred up the heat in France like iconic actor Gérard Depardieu who, turns out, set up his domicile in Néchin, a village just across the border in Belgium—as the mayor confirmed, “to escape French taxation.”
Final straw for President Hollande. Now he too threatened to renegotiate the tax treaty “to deal with cases of those who settle in some Belgian village.” He lashed out against the “fiscal dumping” that some countries in the EU were practicing. Prime Minister Jean-Marc Ayrault chimed in; Depardieu’s exile was “pretty pathetic.”
Depardieu was not amused. In an open letter, he renounced his French citizenship, broadsided the Prime Minister and the President, and shocked the nation: all taxes combined ate up 85% of his income.
Not true, explained eyewear mega-retailer Alain Afflelou during the interview. “Those who are in the 75% income-tax bracket may go well beyond 90% taxation.” He listed layers of additional taxes, small percentages here and there that added up. “We therefore have in France a confiscatory taxation that can deprive us of all of our income from work.”
Then he uttered “trench warfare” to describe the battle between the two sides. “We have to stop saying that CEOs are thieves, thugs, and dishonest people. We need people who work, who make a living, who create jobs.”
He was echoing Laurence Parisot, President of the MEDEF, France’s largest employer union. “Doubt is taking over the life force of the country,” she complained; Hollande in his confrontation with Depardieu was doing “the opposite of what he promised,” namely to pacify the country and reduce antagonism. “We are in the process of creating a climate of civil war, similar to 1789,” she said.
Hollande jumped on the airwaves and tried to impose some sort of armistice. The 75% tax bracket would be temporary, he said. And concerning Depardieu: “No citizen must be stigmatized by the President.” But by using that word, he stigmatized him—and all the others who’re trying to escape.
There are a lot of them. Le Figaro cited tax lawyers who spoke of “unprecedented waves” of fiscal exiles who were leaving France, some of them in the middle of the school year, which “had never happened before.” Moving companies confirmed it. Outflows “remain two to three times higher than normal,” said the boss of one of them. “Our trucks leave constantly in direction of Switzerland, Belgium, and Great Britain.”
And the profile of the fiscal exiles has changed. They’re no longer rich heirs or fifty-year-olds who’d sold their companies, but “young childless entrepreneurs” who wanted “to settle in another country to start up their companies,” according to one of the tax lawyers. And top executives between 40 and 55 were moving with their kids to Brussels or London “to escape” the new taxes.
Entire skill sets were leaving. International companies were “progressively relocating part of their teams abroad,” said le Figaro’s source within the MEDEF. Among them more and more secondary functions, such as human resources or finance—”much less visible and symbolic than relocating headquarters.”
With heavy consequences for the economy. When talent, entrepreneurial energy, capital, and profits leave the country all at the same time, it’s hard to imagine how economic growth and job creation could miraculously reappear.
Also on Friday before Christmas when nobody was supposed to pay attention, the European Commission issued a mind-boggling report on bank bailouts in the EU: Member States had committed over $2 trillion at the expense of current and future taxpayers to bail out stockholders, bondholders, and speculators. Read.... The EU Bailout Oligarchy Issues A Report About Itself.
Reader Comments (5)
You also have to understand that European countries need to tax middle incomes pretty stiff, no way they come even remotely close to getting enough revenue out off their population.
It is not only income tax. There are substantial duties with import (especially food), turnover tax around 20%, and a lot of 'minor taxes' (like luxury taxes, transfer of real estate, alcohol and tobacco etc).
Start with international business since decades they have lost the battle. And will keep doing that as if they would win, international business would most likley move and take taxrevenue and a lot of jobs with them.
Rich non business investors basically similar.
Now the third group looks to on the way to move. Business and businesslike persons with high incomes.
-Take a law or audit firm (something that might happen in a not that far future). Organise direct client contacts around a limited group of workers. Keep a relatively small office in say France. Move 2/3 of the staff that do the actual work abroad. French speaking low tax, low cost of living but with all Western stuff present. Get a proper tax arrangement overthere and you probably can get away with 50% lower labour and other costs for the 2/3.
-Designers or international consultant living in a low tax jurisdiction, just move temporary to another place when the job requires it.
-More usual, smaller companies outsourcing. Let jobs do in say India.
Lot of other possibilities, probably more well known. A university professors told me eg that all his high flying students left the country for greener pastures (northern Europe).
Problem in Europe and in effect all of the Western world government is simply too expensive and unsustainable. They were even in the good times running deficits. That is the centre of the problem.
To keep the dream alive you constantly need more taxrevenue. As costs go up eg by way of aging. Seen from another side society is not willing and able to pay for the things government supplies. At least not the fiull amount. And yet governments have a tendency (see also Obama) to increase production.
But the real base for taxation is moving out of your country. Meaning the middlegroups will be hit harder to get the revenue.
But with much talent and a lot of capital leaving and in the age of deleveraging growth is hardly there so the middlegroups get hit in their nett real income. So not by way of moving abroad, but by simply having enough of having to pay more and more there is likley also a brake on tax income.
Europe and France in particular is burning the candle at both ends. Potential revenue is moving away (or cannot be taxed as it will move) while state costs keep rising. Basically THE problem now in Europe. And at the worst possible time. As debts have to get under control and the whole South sees the rise of stiff competition in mainly EMs.
They might want to change the tax regulations. But as said that will not work for multinationals unless it is done all over the world, but that won't happen.
Even the EU has its own taxhavens that will not be given up so all over the world will certainly not happen.
Changing tax treaties is a lengthy thing. Plus it will most likley also affect real business. A provision that taxation is on basis of nationality like the US is against EU law so that would most likley have to be changed. And all would have to agree which is nearly impossible. Say Belgium would give its right away to tax French nationals but wouldnot get anything back unless they change their whole tax system themselves as well. At best not eager to agree.
France looks simply on the way down on the wrong side of the Laffercurve.
Probably however we will see more of this 75% nonsense as it is mainly about the homecrowd not about tax revenue. The illusional picture of being fair (an European obsession). It first has to be fair and after that we have a look if it does work.
I also do think that Hollande and Co donot have a clue how the world ticks in this respect. They probably really thought this would bring some revenue.
Anyway the situation looks to move quickly to a French style cliff. My guess is that it will play out different in different countries. The French will go for more taxes and fall of a deeper cliff lateron. Some other countries will probably avoid that. However even in Germany (where so called right wing Merkel has increased entitlements and want to increase them more, or in Holland where the deficit is mainly closed by increasing taxes) at best it moves very slowly. A continent of fairness for the non competitive and aged until they run out of money of course.
Europe’s approach has been high taxes to try to keep deficits from totally exploding, and that might not be very helpful; in the US, the approach has been relatively low taxes (compared to much of Europe), but deficits have totally exploded, and the Fed is now printing $85 billion a month, thus monetizing just about the entire deficit. Japan, of course, is in a category of its own, and how long they can keep it up without some kind major “realignment” is the big question there.
Basically all three look at a no growth scenario (with the exception of Southern Europe which is negative growth) if you adjust for over-deficits (with a multiplier or so) and overborrowing. Overdeficits being everything over growth (adjusted to normal deficit scenario) plus inflation.
And they really need a shock to do something about it. France, Holland, Germany all wait basically for the economy to get so bad that their people will accept the cuts in things they should never have started in the first place.
My idea was that countries like Holland and Germany would start with adjustments more or less directly. They make some but nowhere near enough. France was probably always going this way (Belgium as well unless the Flanders break up gets really on the agenda). But it appears to be even worse than I expected.
With aging starting to hit in now(roughly 1/2% less growth and 1/2% more costs), Southern markets falling away, costs of the Euro-rescue, they are around zero growth, from the original say 2%. Basically all the books say cut taxes for the in-country entrepreneurs (they spend and create jobs). You donot solve that by more consumption only. But it is keep entitlements as much as possible in place (and so taxes go up). They also rather cut R&D iso entitlements.
Still mainly politics iso economics. In the UK 50% tax simply doesnot bring a penny, but very difficult to abolish it for political reasons. France's 75% probably worse. Holland is cutting deductions for mortgage interest, in a market that was already going down with 1 or 2 % a year. Result prices now go down 6-8%. While it will only bring a few Bn revenue annually and 100 000s get under water ths way (value drop around 50 Bn or so). Simple politics no economic sense whatsoever.
Obama is pretty French in that respect. He sees welfarestate systems collapsing around him (Southern Europe, or coming under heavy stress Northern Europe) and still increases the entitlement system in the US (Obamacare) and does nothing on the existing entitlements. Tries to copy a system that is collapsing. A bit like becoming a communist in the mid 80s. I personally donot have that much trouble with extending unemployment benefits in these times. You cannot create a solidarity system when the people that are normally nett payers when the one time they need it it is not giving cover. Not that the system should not be changed itself btw.
My guess still is that in Europe the middleclasses will start making problems and donot accept higher taxes and no real income growth. Effectively Wilders in Holland gets most of his votes on that ticket. People who like the welfarestate and contribute themselves enough to keep it, but not wanting to pay for all sorts of other stuff. 3rd World, immigrants from the Balkan, political refugees, structural unemployed etc.
US is a bit different it has that 2party system which makes things as open for new things as an Egyptian mummy.
Look at Germany Merkel is also still going on as always as there are no alternative parties. But something will happen there imho. You only need 5% of the vote and Danemark, Finland, Holland show one popular guy brings you 10-20%
The UK has the UKIP and now the existing parties wake up first the Conservatives as the were leaking most voters but via them the rest as well. But that is mainly focussing on Europe.
But it simply takes too long more than 5 year in the crisis that had stuctural problems written all over it and hardly structural measures have been taken. As you say addicted to spending. Sloterdijk calls it something like social deficit (people not willing to pay for the state-services what these cost) and still the state trying to sell more of it.
Poor French billionaires - why don't they just structure things like their U.S. brethren? Oh, they have a democracy? And the vast majority of the population voted? And the socialists won? Thank God that will never happen in the U.S. where just 40% vote and the masses adore the rich and are grateful to work for $10/hour.