Sarkozy Caps Wealth Tax To Tempt Back Wealth Creators

by Ulrika Lomas, Tax-News.com, Brussels

07 August 2007

President Nicolas Sarkozy's plans for an overhaul of the French tax system to make it more attractive to business and investment have won approval in parliament.

Chief among Sarkozy's reforms are measures creating more exemptions to France's wealth tax, which has often been cited as a key reason why France lags behind its competitors in terms of investment and economic growth, and a 50% cap on individual income tax, down from 60%.

The reforms would also cut tax on overtime - encouraging more French workers to work beyond the previously politically sacred 35 hour week, part of plans to make the domestic labour market more flexible and business-friendly - and tax cuts on mortgage interest payments.

According to Finance Minister Christine Lagarde, the tax measures, which are said to be worth about EUR13.8 billion (US$18.9 billion) overall, could add as much as 0.5% to French GDP growth in 2008.

It is hoped that Sarkozy's tax and economic reforms will tempt back the hundreds of thousands of French citizens who have left the country seeking less punitive tax regimes. Popular destinations for the estimated 500,000 French tax exiles include Belgium, Switzerland, the UK and the US.

The wealth tax issue was a key battleground during the recently contested presidential election, won by Sarkozy, and has never been very far from the headlines since veteran rock star Johnny Hallyday, fed up with French taxes, cut a deal with the Swiss canton of Gstaad last year. According to the Swiss tabloid Blick, Hallyday will pay CHF300,000 (US$242,000) on his reported earnings of about CHF10 million, provided that he spends more than six months and one day per year there. In France, Hallyday complained that he paid around 70% of his income to the government in taxes.

However, studies show that it is not just the rich and famous who have seemingly grown weary with France's high taxes, with families and investors fleeing in increasing numbers. Research by French Senator Philippe Marini, cited by Bloomberg, claims that households fleeing the fortune tax have climbed to a record 649 in 2005 from 370 in 1997. Another study by the Economic Analysis Council concluded that approximately 10,000 business directors have fled France in the past 15 years, taking as much as US$137 billion in capital to invest elsewhere.

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