With the initial polls out the way, major news outlets are reporting the first round victory by socialist Mr. Hollande with 28.5% of the votes to the incumbent Sarkozy’s 27%. The 1.5% margin is definitely not as big as newswires initially suggested but the French views are pretty clear. Fortunately for the Rolex, the second round of voting may redress the balance and keep Flamby (Mr. Hollande) out of office.
Assuming Mr. Hollande goes on to win these elections and brings in his 75% tax for those earning EUR1m or more what will happen to the high earners in France? Forget them! what will happen to large multinationals that Mr. Hollande has promised to tax? Will they move on to more promised lands? Finally if any exodus from France occurs, who is in line to benefit? Obviously, Hollande backtracked a little on his 75% tax rate as he realised that his beloved football team may suffer but if he can exempt sports personalities from this tax; it will go ahead.
Looking at the increases in income taxes, it is easy to see this 75% tax rate as more of a shock headline than a material tax. There are of course 2.6 million millionaires in France but you would be quick to point out that an income tax is an earnings tax not a wealth tax. In fact very few people will be lucky enough to earn over 1 million euro’s per year. Again, this is not to say that there isn’t any!
It is my opinion that those earning +1m will have considerable flexibility on how they are paid. For example, a banker who takes in +1m may ask the bank to distribute this over a few years, or take some of the payment in shares etc. What about those billionaires??? I can assure you that these people have an army of lawyers that can use one of the hundreds of loopholes available to avoid this ridiculous tax rate. In fact, I would go as far as to say the 75% tax will raise little, if any extra revenues for the state.
This headline grabber seems to be a distraction from the real redistributor of wealth which is the increase in income tax for people over 150k from 41% to 45%. Although not much, this tax bracket may bring additional money to the state and will probably not be enough to convince the higher earners from shifting their life overseas in search of an extra 6k a year.
What may be important is the increase in business rates that Mr. Hollande proposes. For big companies an increase in business rates to 35% (33% more than the uk), while decreasing smaller business rates to 17%. It is worth noting ( especially for non-French capitalists) that the current corp tax in France is 33.1% so the increase, while big, isn’t big as it seems on first glance.
“We’re already uncompetitive, so it doesn’t make much difference if we become even more uncompetitive”
Personally, I am pretty excited at his 17% tax rate for small businesses, Hollande seems to be taking a page out of Krugman’s book (or Keynesian economics) – we must spend our way out of recession! The 17% tax rate is substantially lower than most other developed countries. This will provide an incentive for the population to become enterprising and may help increase tax receipts and lower unemployment in the medium term.
With regards to Mr.Hollandes tax reforms, I do not see much of a problem. The income tax increases aren’t high enough to cause high earners to jump ship, while the increase in taxes for larger companies makes an uncompetitive country slightly more so. If the firms paying tax were upset about the tax rate, they would have jumped ship years ago.
Does this mean that socialist Mr. Hollande may actually be a welcome sign of relief? Can bankers sleep easy, safe in the knowledge that the increase in tax is not too substantial?
Not really, no.
Mr. Hollande obviously has a special place in his heart for the French banking system. While the French banks remain on the floor, beaten and bruised – Mr.Hollande has put on his metaphorical Doc. Martens and come to give them another ‘much needed’ kicking. He proposes:
-
To implement the uber-Volker rule (completely splitting retail and investment activities) as early as August.
-
To impose an additional tax on banks a-la Osbourne, with no information on how long this tax will last.
-
Ban Toxic financial products (ie derivatives), while banning French banks from operating in tax havens.
-
Create a public bank to support industry
Point 4 I love! I think that the UK needs to do the same with RBS and to be honest I am quite amazed that you cannot force a bank to lend to small businesses if you own +85% of the shares. Surely if you own a business and a member of staff continues to disobey orders, you simply sack him? I side track….
Point 3, or the banning of derivatives if akin to the Mayan sacrifice of cutting out the heart while the victim is still alive. French banks are renown for their existence in the derivatives market and the mkt remains a significant source of revenue for french banks. Furthermore, banning the use of tax havens means you provide one less reason to reside and therefore pay any tax at all in France. These rules are likely to lead to a severe backlash against an industry that provides a huge amount of tax receipts to the country and I wouldn’t be surprise if BNP Paribas or SocGen decide to relocate their whole business overseas.
Which brings us to the title of this piece. Which country??? Well the only real contenders for the business is UK and Switzerland and recalling that the Swiss are currently manipulating their currency, whilst considering a tax on foreign inflows, the decision becomes more simple.
If Hollande is elected, it is the 1 percent blog’s opinion that banks will be forced to leave their homeland and move to London. Geographical proximity as well as an already sizeable headcount makes the move an easy one to make. I could go on forever pointing out the obvious as to why the UK is such a good alternative but I shall leave that up to the reader’s imagination.
The consequences…
Increased tax receipts leading to a much faster debt reduction and govt spending down the line. Decreases in unemployment as other industries benefit. Huge property price growth together with an increase in total disposable income benefiting the consumer industries.
By the UK being more reasonable in terms of bankers punishments, they may reap the benefit of becoming the only viable business centre in Europe!
Thank you for a informative opinion on the possible outcome of a Hollande victory in the second tour,as an Englishman living in Paris I’m a little wary of some of his Economic policy’s and opinion on Europe,I would be very interested to hear your opinion on what may occur with the credit rating agencies in the summer and the possible consequences.
Thank you again for making a difficult subject approachable
Mark
Well Mark, trying to sidestep the avalanche of sarcasm, if you can short french bonds via ETF – you should! The socialist manifesto clearly delays the French book balancing excercise for another 3 years which will lead to a credit downgrade (socialist couldn’t care less, mkts think otherwise), meaning that institutional investors would sell off their French bond holdings.
Thanks for reading
Good post RedRut.
There’s certainly a large amount of posturing going on which is probably only going to intensify in the next two weeks as the two candidates draw further lines between themselves.
Hollande does seem to regards bankers as fodder in general with these kinds of statements. Whether he actually follows through with those sorts of policies – assuming he wins – will be interesting though. In the UK there seems to have been a level of backtracking w.r.t regulation – but don’t know whether French banks have quite the same lobbying power. It does seem though that many French – including politicians such as Hollande – regard banking as not far off the devil’s work and are intent on pooping on everyone else’s party also: they’ve been pushing significant reform in various EU chambers. Maybe Hollande’s overtures are just one of the first steps to him pursuing rigorous EU-wide reform.
I was recently reading in the FT about Deutsche’s successful leverage of its German roots with a global business and outlook. To your knowledge are there significant similar benefits (in France) for SocGen/BNP from being based in France which might be eroded by a move overseas?
Enjoy the blog. Keep up the good work.
Angus, thanks for the post!
First w.r.t the French. The reforms Mr Hollande proposes are far in excess of what the UK has ever put forward.
Second, I hadn’t heard of Deutsche successfully leveraging German roots as the name has been synonymous with a high quality investment bank for yonks! This mantle was similarly held by SocGen and BNP only for the last 10 years of excessive risk taking to cause massive damage. Country based reputation is fragile if non-existent and a great example of this would be UBS; 4 years ago considered one of the big 4 investment banks and now a laughing stock.
Banks are guaged on their performance and while the French banks have had a torrid few years, their reputation and indeed their presence is still putting the derivatives market in a shadow. Regardless of Paris, London, Lagos wherever – it’s the brand people care about, rather than it’s roots.
Pingback: French Overtime Tax Breaks- 1 Percent Blog