Forum Post: French government targets rich with tax rises [Can We Please Copy Them?]

French government targets rich with tax rises

Tax increases come as a deeply indebted France battles to stick to its deficit reduction targets and keep Brussels and the markets at bay

Angelique Chrisafis in Paris and John Hooper in Rome
guardian.co.uk, Wednesday 4 July 2012 14.32 EDT    

France's president, Francois Hollande (R), and prime minister, Jean-Marc Ayrault, are pushing through tax rises. Photograph: Philippe Wojazer/Reuters

France's new Socialist government has announced tax rises worth €7.2bn (£5.78bn), mainly targeting the wealthiest households and biggest corporations, as the country struggles to plug a gaping hole in its budget.

The tax increases come as a deeply indebted France battles to stick to its deficit-reduction targets and keep Brussels and the markets at bay. A grim economic assessment by state auditors this week warned of a €40bn hole in state coffers over the next two years and the government has lowered its growth predictions.

The raid on the wealthy is in line with François Hollande's election promise: "If there are sacrifices to be made – and there will be – then it will be for the wealthiest to make them."

More than half the measures target households, mainly the country's richest, and just under half target big business. They include lowering France's wealth tax threshold, which had been raised by Nicolas Sarkozy. France's wealth tax is unique in the EU and Hollande will now add a one-off higher levy on those with net wealth of more than €1.3m.

Inheritance tax, which had been loosened by Sarkozy, will be tightened. Banks will face higher taxes, as will petrol companies through a new tax on energy firms holding oil stocks. A 3% "dividend tax" must be paid by companies on dividends distributed to shareholders. This aims to encourage firms to use cashflow for investment as France seeks to close the competitiveness gap with its industrial powerhouse neighbour, Germany. The tax on financial transactions will be doubled to 0.2%.

The prime minister, Jean-Marc Ayrault, told parliament this week: "I'm not the enemy of money." He said tax increases would focus on the biggest corporations while small companies would get favourable tax initiatives. He said poorer households and the lower middle classes would be spared.

The government will axe two key initiatives by Nicolas Sarkozy: it will reintroduce tax on overtime hours and repeal a law which was about to shift labour charges on to the consumer with a rise in VAT sales tax.

The measures are part of an amended 2012 budget. In the autumn, Hollande will launch his deeper tax reforms for 2013 including, introducing his signature 75% tax on income above €1m – a measure that is popular with the French public.

Hollande, who campaigned on a ticket opposing one-size-fits-all austerity, now faces the extremely difficult task of dragging France out of the red while avoiding the taboo word "austerity" and refusing axe-swinging cuts to the public sector and the welfare system.

Tax increases are the first step, but they will be coupled with a freeze on public spending in certain ministries which has yet to be fully spelled out. The state auditor warned that streamlining France's massive public sector appeared unavoidable.

"The immediate effort will come from tax revenues but there will be an effort on spending during the rest of the government's term," said the budget minister, Jérôme Cahuzac. "Cutting spending is like slowing down a supertanker: it takes time."

Meanwhile after a meeting in Rome on Wednesday, the German chancellor Angela Merkel and the Italian prime minister Mario Monti appeared to be no closer to resolving their differences on how to contain Italian interest rates, which have soared as a result of the crisis. Monti asked the last European summit for a new mechanism that could be deployed if the yields on Italian government bonds spiralled out of control for reasons that had nothing to do with the economic fundamentals.

But, speaking after an Italo-German ministers' meeting in Rome, the chancellor once again insisted that the existing procedures approved for the new European stability mechanism were sufficient. Renato Brunetta, the finance spokesman for Silvio Berlusconi's Freedom People movement said that the two leaders' comments on the proposed shield for Italian bonds were "very vague".