There is a case for the French government to scrap its 75 per cent tax on top-earners as it only brings in a modest sum and controversy over the measure is eroding the president Francois Hollande’ political capital and France’s reputation, according to Barclays.

The UK bank analysed the battle over the tax in France after the country’s highest court recently ruled against the tax as unconstitutional.

The top rate, which is levied on people earning €1 million ($1.3 million) or more, has already been cited as a reason why thousands of high net worth French nationals have left the country. Among high-profile émigrés are Gérard Depardieu, the actor, who has taken Russian citizenship. Lawyers, for example, say French citizens have been applying in droves to enter the UK, already home to the sixth-largest concentration of French people in the world.  

Barclays said the 75 per cent rate is expected to raise around only €200 million a year, making a tiny contribution to the country’s large fiscal deficit.

“All in all, the government, but especially the president, are using a lot of energy and political capital to discuss and defend this measure. Initially, the move by Francois Hollande as a candidate probably helped him to win votes during the presidential election as he was campaigning on fiscal justice in times of austerity,” the bank said.

“However, given the few benefits for public finance (€200 million additional tax revenues for the state) and the negative impact on French fiscal policy and image abroad, there is increasingly a case for watering down the measure significantly or even dropping it altogether. This would allow the government to refocus on more important topics like structural reforms and the spending review,” the bank said.

Late last December, the French constitutional court voted down the tax, saying it was designed to apply to individual income while taxes in France are levied on fiscal households only. Hence, the court ruled that the individual would no longer be equal in the face of the law under the new tax. Two different households with the same joint revenues could pay different sums of tax depending on distribution of their income.

Confiscation

And the confiscatory nature of the tax is also a major obstacle to its being enacted, as far as the court is concerned, Barclays said.

“While the constitutional court didn’t even have to rule on the confiscatory nature of the measure to reject it, it did reject some other changes included in the budget bill because of this very reason. For instance, changes yielding an increase in marginal tax rates on complementary pensions from 75.04 per cent to 75.34 per cent were rejected,” Barclays said.

“Hence, it is quite likely that, if the government was to simply translate the 75 per cent tax rate from an individual basis to a fiscal household basis, it would still be rejected, this time because of it confiscatory nature,” the bank continued.

The bank noted that initial statements from French government officials indicated that the administration will attempt a new measure that keeps to the spirit of the original tax although there appear wide differences of view on the tax rate, duration and timing.