France's deficit plan? Soak the rich

Karine G. Barzegar, Special for USA TODAY | USATODAY

Editor's note: An earlier version of this story failed to make clear that Bernard Arnault said he would remain a resident of France for tax purposes despite his request for Belgian nationality.

PARIS -- On Avenue Montaigne, two ladies stroll out of the Dior boutique, carrying fancy shopping bags full of the brand's latest designs.

On the Champs Elysées, mothers advise their daughters on Guerlain's new fragrances, the voluptuous scents being the most expensive and renowned of French perfumes. Across the street, Japanese tourists hurry inside a huge store stamped LV, a.k.a. Louis Vuitton, the world's leading fashion house.

France is defined by its world-renowned cuisine, couture and creations that are quintessentially French, which helps explain why the disclosure that one man was seeking nationality elsewhere made headlines here and around the globe.

Bernard Arnault, head of the luxury group Louis Vuitton Moët Hennessy (LVMH), became a cause celebre when it was disclosed he had applied for Belgian citizenship. Even though Arnault insisted he would remain in France and pay taxes, the move stoked fears and anger that he and other iconic magnates might leave France to avoid a plan by the Socialist party to soak the rich as a way out of the country's debt woes.

Recently elected President Francois Hollande's Socialist government introduced France's 2013 budget with steep tax increases on the rich that include a 75% tax rate on those earning more than $1.28 million for two years and a new 45% rate for revenues of more than $193,000. Higher taxes on businesses are proposed as well.

Meanwhile, France's economy is stagnant, seeing zero growth in the second quarter. Unemployment, at 10.3% in July, is at a 10-year high.

The tax increases are supposed to reduce France's budget deficit from 4.5% to 3% of GDP by 2013. France is not the only European nation thinking of jacking up tax rates in an ailing economy. British Deputy Prime Minister Nick Clegg is proposing it; in Germany, there is a measure being pushed to raise the tax on financial transactions.

But Hollande's refusal to include cuts in government spending as part of his deficit-reduction plan has ignited a debate on whether soaking the rich is sound fiscal policy these days.

When Arnault plans for Belgian citizenship were made public, the debate became a class-war furor. A close friend of former French president Nicolas Sarkozy, he was accused by the left of treason. In a nationally televised address, Hollande even questioned Arnault's patriotism.

"(Arnault) should have reflected on what it means to ask for another nationality, because we are proud to be French," he said.

Arnault is not only the richest man in France (fourth-richest in the world and worth $41 billion, according to Forbes magazine), LVMH owns some of France's most treasured, prestigious and profitable brands: the fashion houses Louis Vuitton, Givenchy and Dior; champagnes Moët et Chandon and Dom Perignon; and Hennessy cognac, to name a few.

In a country known for its antipathy toward the privileged, the reaction to the report of a Belgian newspaper brought outrage and headlines such as "Get lost, rich jerk!"

The affair has reminded the French of a harsh reality: French fortunes -- whether made in business, sports or the arts -- are often heading over the border to Belgium, Switzerland, Luxembourg and Great Britain to escape high French income taxes.

The exact number remains unknown, says the French Ministry of Finance.

"They are less than 7,000 households out of 2.5 million French living abroad, but they represent very big fortunes," said Pouria Amirshahi, a Socialist lawmaker representing French citizens living abroad.

According to Swiss magazine Bilan, of the 300 richest residents in Switzerland, 44 are French. Some are the owners of the most prestigious French brands.

Among them are Alain and Gerard Wertheimer, owners of French fashion house Chanel; Michel Ducros, owner of the Fauchon gourmet food brand founded in 1886; and Paul Dubrule, co-founder of the Accor tourism group that owns Sofitel, Pullman and Mercure hotels around the world. Then there are the Peugeot and Rothschild heirs, two renowned names in the car and the Champagne industry. Members of the Mulliez family, owner of the French retail giant Auchan, have moved to Belgium.

"In the north, we are hearing that more and more people are preparing to leave the country," said Sebastien Huyghe, a conservative UMP lawmaker. "This autumn, a number of people may make their arrangements.

"The 75% tax will not fill the country's coffers; instead, it sends a strong signal that will both scare away those who have the means to create jobs, and prevent others from coming and investing in France," he said.

Economists and analysts say the super-tax is more symbolic than effective, saying it would affect only 2,000 to 3,000 French households while adding little to state revenue.

"From a strictly budgetary and economic point of view, the impact will be marginal, but the Socialists expect a political effect, and they are right," said Thierry Pech, editor-in-chief of Alternative Économiques monthly magazine. "There is a deep resentment (by the public) against the ultra-rich, one that could feed populism."

Many French say these super-rich must contribute more, and those seeking tax exile betray the very country that gave them the savoir-faire that led to their international success, a sort of French version of the "You didn't build that" claim that President Obama leveled against successful businesspeople in America.

"Has (Arnault) thought about all the help he has received from French investors and from the French state itself to make it where he is now?" asks French taxpayer Olivier Weber in Paris.

Last year, 16 business tycoons and other holders of French fortunes wrote an open letter in the French weekly magazine Le Nouvel Observateur with the title "Tax us!", saying that after benefiting from the "French model," they were willing to pay more in times of crisis. But that was before a super-tax.

Many of them have changed their minds, such as Jean-Paul Agon, the chief executive of L'Oréal, the biggest cosmetics company in the world.

"If there is such a new tax rule, it's going to be very, very difficult to attract talent to work in France, almost impossible at a certain level," he told The Financial Times.

Even Stéphane Richard, CEO of telecom company Orange , who is close to the Socialist party, is worried about the "accumulation" of taxes and the impact on the French economy.

"I'm worried that we start by taxing the rich, and that's it," he told French daily Le Monde. "It's one thing to call on economic patriotism, it's another to organize a looting (of the rich) that will turn on the tax exile machine."

Some French shrug their shoulders with typical Gallic distaste

"It's normal to pay your taxes -- it's important -- it means you belong to a community," said Christine Templier, 38. As for Arnault, "(He) can get out. We don't want him."