- - Wednesday, October 17, 2012

PARIS — France’s Socialist government is proposing a slew of taxes — on art, on businesses, on the rich — that are drawing criticism for stifling entrepreneurship and scaring off the wealthy.

“Unfortunately, I think the politics we are leading in France will turn out to be catastrophic for the economy, which is already in bad shape,” said French economist Marc Touati, author of “When the Eurozone Explodes.” “This is a serious mistake, something you learn in [Economy 101] — it will aggravate the recession and therefore shrink the tax base.”

Led by President Francois Hollande, the French government proposed last month a series of tax measures in a bid to reduce the country’s budget deficit and help boost the economy.

The proposals included a tax increase of up to 60 percent on capital gains, up from 34.5 percent; a 75 percent tax on incomes of more than $1.29 million for two years; and a 45 percent tax rate for annual incomes exceeding $195,000.

The 2013 budget proposal already is having an effect on some entrepreneurs’ ability to raise capital — especially abroad, where many Europeans look to escape tight capital markets on the Continent.

Nicolas Voisin, 34, is chief executive officer and co-founder of Tactilize, an Internet startup that is developing a publishing network for iPad computers. He said a large New York investment fund had been very interested in his company.

“[Our contact at the fund] was very taken by Tactilize,” Mr. Voisin said. “He had said, ‘I think you are just what we are looking for.’”

But when co-founder Valentin Squirelo introduced himself last week to a senior executive there, he was asked, “Are you French? Is this a French startup?”

Mr. Squirelo nodded yes. The executive raised her hands and said, “No, we don’t go there.”

The rejection wasn’t Tactilize’s first since the tax measures were introduced.

“Our goal was to raise [$1.29 million] from U.S. investors from the media and technology industry,” said Mr. Voisin. “We had serious ongoing discussions with many. They all told us to come back in 2013.”

Leaving for greener pastures

Tactilize also is incorporated in the United States, which Mr. Voisin said was done to allow an American to keep the investment arrangement subject to U.S. law.

But with the way things are playing out in France, it may become a way for Tactilize to move across the Atlantic, he said.

“We want to stay in France. It’s not because of the higher taxes that we may leave,” Mr. Voisin said. “But we might be forced to leave to be in a position to raise the funds necessary to our growth.”

Entrepreneurs are not the only ones considering flight.

The temporary 75 percent tax rate on the rich has fanned fears of an exodus of France’s wealthiest citizens. Dozens of scions of French industry have moved to Switzerland or Belgium in the past two decades to take advantage of lower tax regimes.

When France’s richest man, Bernard Arnault, head of the luxury group Louis Vuitton Moet Hennessy, announced that he would take Belgian citizenship last month, he triggered a general outcry.

Although Mr. Arnault has said he still will pay taxes in France, his action reminded the French that he became a tax exile in the United States for a three-year stretch when the last Socialist president, Francois Mitterrand, was elected in 1981.

Meanwhile, the real estate market has been flooded with high-end properties going on sale as some wealthy French citizens seek to leave the country before the stiff tax increases hit, according to France 24 television.

“The problem is that there is a lack of economic culture in France,” said Mr. Touati. “The little culture of this type we have is politicized. We have a culture of social class conflict in which success is not valued, where success becomes suspicious.”

Killing proposals

Some are pushing back against the tax measures.

A group of French entrepreneurs, most of them in information technology, created a Facebook page to criticize a measure that would have made the transfer of assets, such as the sale of a company, subject to the capital-gains tax.

Calling themselves “the pigeons,” which is French slang for “fall guys,” the entrepreneurs received 67,000 “likes” on their Facebook page in just a few weeks. The government noticed — and dropped the plan.

In addition, the lower house of Parliament’s finance committee also backed off a measure to include artwork under the wealth tax a few days after it was introduced.

The tax currently is applicable to those who own real estate and investments valued at more than $1.7 million. It never included paintings or sculpture.

Philippe Waechter, chief economist at Natixis Asset Management in Paris, said implementation of the proposed capital-gains tax is not a certainty.

“I am not certain the taxation of capital gains will hold up,” Mr. Waechter said. “The questions today is what [tax] measures should be applied to labor and capital, a question long taboo in France. We had a situation which was deeply focused on taxing labor rather than capital.”

Others say the government’s vacillation on certain tax proposals is leading to a loss of credibility that causes potential investors to freeze or flee.

“This is proof of the actual government’s amateurism,” Mr. Touati said. “You create a measure, then there is a revolt and then you say, ‘No, finally, we are not doing this.’ It will not help build the credibility of the government.

“Today, nearly all investment has been frozen. We are in a phase where the hand brakes are on,” he said. “There is no clear vision, and since no one knows what will hit us, why should anyone be interested in investing?”

The real problem is that fiscal and tax policies change too frequently in France, some analysts say.

“It is a source of profound instability for businesses — not to know how the situation will evolve,” Mr. Waechter said. “This is true not only for companies but for investment funds as well. They are turning away from French companies.”

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