Tax Break

John Fisher, international tax consultant

Archive for the tag “François Hollande”

And so this is Christmas

Exhibit A

Exhibit A

In London for a client meeting last week, I decided to take in the Oxford Street Christmas Lights on my way to the airport. While, back in the smog-filled Decembers of my childhood,  the lights adorning the length of Britain’s premier shopping street carried fairy tale themes of Hans Christian Andersen and the Brothers Grimm, this year Londoners were treated to a cosmic display of Marmite. “Merry Christmas from Marmite. You either love it or hate it”  was beamed at shoppers every few hundred yards.

At first, I thought it was a rather honest piece of marketing for a product the colour of crude oil with the consistency of vaseline and the taste of raw seaweed marinated in saltwater – a fit example of traditional English cuisine along with Pigs Trotters, Tripe and Toad in the Hole. Then, as I tossed the caption around  in my cynically-wired brain, it occurred to me that, maybe, it was not Marmite that people either loved or hated but, rather, Christmas.

Looking about me at the smiling and laughing faces of families and young couples carrying bag loads of gifts it was hard to justify that conclusion. Then I descended into the bowels of Oxford Circus Underground Station. In the concourse, a talented group of middle-aged carol singers was performing a capella version of  “Comfort and Joy” accompanied by  a pleasant Women’s Institute lady jiggling a collection box for Homeless Children. I deposited my modest sum in the slit, suspecting I heard the echo of the coins hitting the bottom, and tarried for some minutes thoroughly enjoying the informal concert. It is fair to say that at least 200 commuters passed the spot while I was standing there and NOT ONE inserted a single coin in the box. Fresh from my visit the previous day to the newly refurbished Charles Dickens Museum, not to mention a freezing walk up Shoe Lane close to where Fagin and his boys had their lair,  I thought of Ebenezer Scrooge’s exchange with the two portly gentlemen collecting for the poor. Satisfied that there were enough prisons and Union workhouses he sent them on their way suggesting that, if the poor would rather die than enter a workhouse “they had better do it, and reduce the surplus population.”

Even the National Health Service is better than this

Even the National Health Service is better than this

Of course, that is a very harsh and – in the cool, cold light of day – unfair comparison. Britain, and much of the rest of the world, is an infinitely better place to live in than in the times of Dickens. According to  blurb on the Underground advertisements, the Homeless Children are not alone in the world sweeping street crossings like poor Joe in Bleak House but they are forced to live in depressing, ever-changing temporary accommodation. Add to them the lonely elderly  who, although not condemned to the workhouse, have to get by on subsistence level state pensions, it is easy to imagine Christmas, with  its message of peace, love and goodwill to all men, as an utterly miserable time for the less fortunate.

 In the  urban, neighbourless modern world, much like Scrooge, people expect the Government to deal with the social wants of society. That is not necessarily a bad thing. The problem is that the vehicle for achieving that goal – the tax system – lacks communal ownership. That needs some explaining.

At the start of the financial crisis in 2008, the, soon-to-hang-up-his-crook, Archbishop of Canterbury wrote a brilliant newspaper article linking the crisis to the fact that credit has lost the personal relationship of  lender and borrower. Someone  borrows from a bank somebody else’s money that even the bank, having entered into a series of  complex derivative transactions against its loan book, cannot  identify. As a result, the borrower feels little guilt towards the lender for defaulting and the lender feels no compassion for the borrower’s plight.

Taxation has the same problem. Taxpayers see no connection between the taxes they are, begrudgingly, required to pay and the good they do. This is partly because they often do no good at all and partly because governments insist, for reasons best known to themselves, on behaving as if they rule the country. If governments made themselves more accountable for their taxspend, there would be a cohesive effect on society and a greater chance that taxpayers would accept tax increases where necessary.

As a responsible tax practitioner I have to stress that I am not proposing that we should all hug each other and raise the marginal income tax rate to 75% like in that Bastille of bankrupted socialism, France. The Laffer Curve would be expected to maximise government tax revenue way, way, way below that kind of rate. What is more, with all the brouhaha in America and beyond over differentiated tax rates on labour income and capital income it should be remembered that  the rate of return on human capital investment is less tax sensitive than the rate of return on non-human capital investment and there is a widespread view that if labour income tax rates are not higher than capital income tax rates there will be damaging distortions in the allocation of capital (human and otherwise) in a national economy. Furthermore, as far back as the mid-19th century John Stuart Mill recognised that tax on savings effectively represented a double tax on income already taxed once. And if you don’t believe any of this, President Wannabemitterand has discovered to his chagrin that  high tax rates drive people and capital abroad (including ,most recently, hell raiser superstar Gerard Depardieu, which proves that Christmas can still churn out its miracles).

What IS needed is, similar to the 3% budget deficit limits now imposed on Eurozone governments in Europe,  statutorily agreed percentages of government income earmarked individually for Health, Welfare of the Elderly, Child Welfare and Education. Whatever is left could continue to be spent on expensive toys that go bang-bang in faraway lands, ministers’  stretch limousines and cows suspended in formaldehyde at state sponsored excuses-for-art-galleries. Governments should also be required to provide user-friendly annual summaries breaking down to each assessee  how, based on national averages, his, her or its money was spent. If the Government foresees a shortfall of tax revenues requiring a tax increase, it should be required to announce what, precisely, the additional revenue to be raised is for.

One day

One day

Should this plan be implemented successfully there may be no more need for a lady to stand with a half-empty collection box. However, the singers must be persuaded to stay, as they are so good. One possibility would be for the whip around to be for repairs to St Martin-in-the-Fields Church in Trafalgar Square  for, if there is one thing those American Founding Fathers got right, it is that no Government cash should ever go to organized religion. I am sure Mr Scrooge would agree with me. The chiming of the neighbouring church bells on Christmas Eve drove him mad.

Left luggage

Hitler or just the bloody tyrant next door?

It was during the Bosnian War that the BBC’s Martin Bell and his colleagues developed the concept of Journalism of Attachment.  While war correspondents stretching back  to William Howard Russell a century and a half earlier had reported the good and evil of war, it was this new generation that took sides and, effectively, became unarmed combatants on behalf of  the chosen good guys.

I am, personally, not entirely comfortable with this approach since the arguments surrounding war are often complex. The future of world peace would be better served by presenting the stories dispassionately and letting the public decide. Having said that, at least the underlying morality of each situation is normative.  Judeo-Christian morality, that has finally evolved into what Judeo-Christian morality was supposed to be before nasty little men spent thousands of years distorting it beyond recognition, has little difficulty identifying the rights and wrongs of war and conflict.

But when Journalism of Attachment reached the battlefield of taxation  last week,  moral compasses went spinning out of control.

For many of you, this will be the first sighting of the Belgian ruler

The French left-leaning newspaper Liberation ran a story about Bernard Arnault, the founder of LVMH the luxury goods group who happens to be France’s richest dude. It transpired that he had applied for Belgian nationality  to add to the French one that came free of charge with his birth certificate. Apart from the affront to Liberation’s French sensibilities that one of France’s favourite sons wants to be associated with a country that many French view as nothing more than a playground for European wars incapable even of sporting its own King (Whateverhisname  is King of the Belgians – not Belgium), they smelt a tax exile in the making.

Reading the headline, I dusted off my 40 year old French textbooks to try and work out the meaning, but to no avail. The reason for this became clearer when the Economist informed its readers (I am one of them) that, allowing for poetic  licence, it meant “Sod off, you rich bastard”. Mr Arnault is using some of what defines him as France’s wealthiest individual to sue Liberation out of existence.

Now there is nothing strange in a newspaper having a clear political philosophy and taking a stand against anyone whose actions diverge from that philosophy. Newspapers have, after all, been recognized since as far back as the 18th century as the “Fourth Estate”  in  parliamentary (or, more generally, democratic) systems.

What is worrying in the case of Liberation is that the self-righteous outburst is not just the statement of an opinion, it is a critical (and probably the only) component in ensuring the success of the Government’s policy. Liberation has become a combatant in Francois Hollande’s ill-advised war on the rich.

The French budget, unveiled last Friday, included, as expected. a provision taxing earners of over €1 million at the incredibly punitive rate of 75% – put another way, it is telling top executives to work for the Treasury who will , in turn, give them pocket money. This was a significant Hollande campaign pledge along with other  Disneylike  fantasies . The concept is completely unworkable because France is unable to impose a meaningful exit tax on individuals escaping to other EU countries and some of those, especially Britain, have remarkably cosy tax regimes for tax residents who are not domiciled there. The only way to stop a brain-drain is to use moral pressure. Since modern governments are not good at the morality thing  (politicians are not high on the international ethics league table) and France’s dominant Catholic Church is having a bit of a moral crisis of its own, it falls on left-obsessed journals like Liberation to do the Government’s bidding. The big problem is that the moral issue here is anything but normative – there are widely differing views under the circumstances as to whether there is anything wrong with Mr Arnault leaving. Indeed,  Freedom of Movement is one of the EU’s central freedoms.

Hollande has been at pains to paint himself as Mr Normal after 5 years of Sarkozy who, it is implied, was abnormal. What the president does not seem to comprendez-vous is that, while France may be pleased to have a leader who LOOKS like a bank clerk , they do not want a leader who THINKS like a bank clerk. They like their presidents to be intelligent. Even a bit foxy.

The French President reading his watch strap

Mr Hollande seems to have had sufficient intelligence to restrict the tax hike to 2 years, but that could still be a critical 24 months when France is trying to get back on its feet. Top executives will delay coming to France (if they come at all) and some of those already there will do their utmost to leave – even if only for a few years. One weapon the French do have in their armory is their language. While monolingual Americans can strut the planet asking for a Big Mac and Fries everywhere they go, French who want to venture beyond Belgium, Luxembourg, Monaco and select bits of Switzerland without resorting to their phrase books will need to head for such desirable locations as Democratic Republic of Congo and Burkina-Faso.


Perhaps the biggest irony in this story is that Bernard Arnault, as founder of LVMH, makes some of the best luggage in the world. Just as nations  rarely amass weapons for peaceful purposes, would  it be so strange if Mr Arnault were to consider using some of his suitcases for his personal use? In the meantime he is reported to have categorically denied that he is considering a change of fiscal residence.

Vive L’ Hollande

The quiet ones are the worst

The swashbuckling  Alexandre Dumas  coined the phrase “cherchez la femme” (literally: look for the woman) that has haunted French culture ever since. In the run up to the French Presidential election it is generally agreed that, had Dominique Strauss-Kahn not fumbled in the wrong pocket of his bathrobe  for the gratuity for the chamber maid of his New York hotel room, he would now be  a shoo-in to the Elysee Palace and the rest of Europe would be nodding approval at the  election of a former head of the IMF. Instead, Europe is aghast at the prospect of an old-style left-wing candidate (more of that nonsense below) who is about as exciting as a stale baguette and, whilst by all accounts of high intellectual ability, brings  recollections of Lyndon Johnson’s comment about that other President-by-mistake,  Gerald R Ford – “He cannot fart and chew gum at the same time”.

HE left HER!

But, however daft and outdated many of Francois Hollande’s policies are, and however unlike Maurice Chevalier and Alain Delon this slightly owlish chap is – judging by the two women in his life, there has to be some magnetism somewhere. Although he seems to have never got round to paying for a wedding licence, the mother of his four children is none other than the delectable Segolene Royale who is best remembered for losing the presidency the last time to little Sarkozy. Not satisfied with his lot, he started up with a drop-dead-gorgeous Paris Match journalist two years before he finally split up from Royale and it is Valerie Trierweiler  who is expected to become First Lady (or First Mistress, or whatever they call girlfriends in the Elysee Palace).

And SHE took HIM!

Among Hollande’s policies are: the renegotiation of the latest Eurozone treaty which is what has led European leaders from Merkel to Cameron to refuse photo-ops with him; the batty idea to return the retirement age to 60 from 62; and, battiest yet, a proposal to tax people making over € 1 million at a new 75% rate earning him the nickname “Monsieur 75%”.

The background to the 75% top rate is not economics. In 2012 everybody knows that punitive rates (and that does not even take into account wealth tax and social taxes that get dumped on top) do not bring in significant revenue. No. Mr Hollande is out to take revenge on the rich, especially the demonic financial sector- as he speaks you can hear the cart rattling into the Place de la Concorde, the hapless aristocratic occupant being pelted by the rabble as he approaches his doom at the hands of Madame La Guillotine.

Apart from the effect on the incentive to work, mad tax rates on the highly paid simply cannot work in the European Union. Shortly after making his madcap announcement Hollande traveled to London to canvass the 300,000 plus French living there ( London is the 6th largest French city). The French no longer buy left wing panic mongering about life beyond France’s borders, normally accompanied by Gitanes smoke and the fruity aroma of  un bon vin rouge; instead they master English and go abroad.

The one policy that might have prevented a wholesale decamping from Gaul is the imposition of an Exit Tax – the crystallization of  a capital gains tax liability on assets on the day of departure irrespective of  if, and when, the asset is disposed of and the capital gain realized. The European Union has been playing with this concept for years – most recently in the November 2011 European Court of Justice decision in the National Grid Indus case. The problem with exit taxes is that they tamper with a basic freedom of the EU – The Freedom of Establishment . On the other hand, the EU is concerned not to deny members the right to a balanced allocation of taxing rights (territoriality). As such, the Court considered the imposition of an immediate Exit Tax as not “proportionate” – instructing that, if an exit tax is to be imposed, the assessee should have the option to pay the tax at a later date when the asset is realized.

The French government, in fact, prophesied this situation when advancing new exit tax legislation in 2011. The legislation applies to shareholdings in companies, does not require immediate payment if breaking residence for another EU country and – in the event that the asset is not sold within 8 years – eliminates the liability. As one commentator noted, the new exit tax does not appear to have had any effect on slowing emigration.

Thank heaven for little girls

Of course, the peculiarities of the French election system could see Mr Hollande crowned but unable to enact his manifesto. If the elections to the National Assembly, a month after the second round of the presidential election, return a right wing majority (the current composition is heavily tilted to the right) , the Fifth Republic will enter into its fourth period of Cohabitation – a President and Prime Minister from opposing parties sharing government.  Mr Hollande has already proven himself a master of Cohabitation – cohabiting successfully with Ms Royale and Ms Trierweiler – so he is well placed to make a go of things at the national level.

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