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PARIS — France is in dire need of investment from companies that can create both jobs and wealth.
But with its recent budget and surrounding antiwealth rhetoric, the country’s Socialist government is sending out the message that rich people are not welcome, and will likely discourage entrepreneurs tempted to invest in the country’s economy.
“[The government] must be faithful to what it was elected for, but without business being given the impression that it is the enemy,” said Pascal Morand, professor of economics at ESCP Europe and former director of the French Fashion Institute, or IFM.
“It is important that all French people, both individuals and entrepreneurs, understand that reducing the country’s deficit is not optional,” said Pierre-Antoine Gailly, president of the Paris Chamber of Commerce. “The budget is clear in this respect, as it proposes a significant reduction in France’s deficit. But we consider that the effort asked of business is too high in proportion to that asked of the state itself.”
France’s 2013 Finance Bill, which was passed by the National Assembly on Tuesday, must now go before the country’s senate on Thursday, and is expected to be ratified by parliament around Dec. 20. Observers suggest the essence of the bill will remain unchanged.
Despite the recent developments to boost France’s economy, international ratings agency Moody’s on Monday downgraded the country’s sovereign bond rating one notch to “Aa1,” from an “AAA” rating, and maintained its negative outlook for France, citing “persistent structural economic challenges,” including rigidities in the labor market and a lack of international competitiveness as causes for its lack of confidence in the country’s financial outlook.
Key elements of the September budget in the bill include the controversial 75 percent tax rate on individuals earning more than 1 million euros, or $1.3 million at current exchange, annually.
A controversial increase in capital gains tax, however, was amended after a group of entrepreneurs self-named “The Pigeons” protested against the measure, which they considered would penalize risk-taking in an economy that needs precisely that.
The amendment concedes that company founders, providing they own at least 10 percent of share capital for a minimum of two years and remain a shareholder for at least five, will not see their capital gains taxes increase when selling their shares. Other shareholders will still have to pay the higher amounts — up to around 60 percent, compared with 35 percent previously.
“We have observed that, having been called upon to do so, the government has come back to more reasonable measures, and has reduced the negative impact of certain measures,” said the chamber of commerce’s Gailly.
Beyond the budgetary measures, business leaders had high hopes for a competitiveness report earlier this month by investment commissioner Louis Gallois. The report’s key recommendation was a 30 billion euro, or $38.22 billion, reduction in employment costs, with two-thirds of that being reductions in costs to employers.
France’s employers pay some of the highest taxes on salaries in the world, approximately a third on top of a member of staff’s take-home pay, which is often prohibitive to combating unemployment, currently at a 13-year high of around 10 percent.
The subsequent pact signed by the government, issued Nov. 6, allows companies tax credits on the cost of employment, starting in 2013 for smaller companies. The allotment totals up to 20 billion euros, or $25.48 billion, annually.
In terms of income tax, while most international media have fixated on the 75 percent tax band, a second bracket, for salaries of more than 150,000 euros, or $193,364, is likely to have a more significant impact on how attractive France is to individuals.
“What is now being played out is an international competition for talent,” said Marc Ivaldi, professor of economics at the Toulouse School of Economics. “Applying a 45 percent tax bracket for salaries over 150,000 euros will penalize the French market for researchers, where innovation is created. The same problem applies to fashion, for creative talent. That is where the strength of a country to innovate lies.”
So far, French luxury and high-end fashion have largely defied the downturn, and are often held up as a best-in-class example of how a country can turn its industry around.
“We are very conscious that there is a crisis, and that difficult measures must be taken,” Didier Grumbach, president of the Chambre Syndicale, said of the budgetary measures. “But from our respect and that of our members, we are not suffering. We are in a period of growth despite the crisis.”
“French luxury is considered a reference by economists, as it has shown how it is possible to develop, from France, more high-end goods and to develop competitiveness that transcends price positioning,” said the professor Morand.
“Since the Eighties and Nineties, production capacity has been brought back to France and there has been an evolution toward more branding, more luxury and more design,” he added.
On global brand strategy and financial consultancy Millward Brown Optimor’s top 10 list of luxury names, six are French, with Louis Vuitton as number one.
Yet despite its strength in luxury goods, France’s relationship with wealth is an ambiguous one that goes back a long way. “French antirich sentiment is nothing new,” said Morand, suggesting that in some respects, it dates back as far as the 1789 French Revolution.