Why France is on the brink of bringing back wealth taxes

President Emmanuel Macron’s snap election has triggered fears that France could reinstate a controversial wealth tax.

According to the latest polls, Marine Le Pen’s hard-Right National Rally party may not secure a majority in the second round of elections despite making gains in the first.

This suggests efforts by President Emmanuel Macron’s centrists and the leftist New Popular Front (NFP) to block a hard-Right government could be successful.

But the wealthy may have even more to fear from Mr Macron’s decision to align himself with the Left.

The National Rally’s promises of unfunded tax cuts and anti-immigration policies have spooked French investors and business owners.

However they are not as costly as the NFP’s plans, which include raising the minimum wage, lowering the age of retirement and investing in the green transition.

It intends to fund this huge public spending increase with an aggressive tax-raising programme.

One proposal is to introduce and increase France’s wealth tax, which was abolished by Mr Macron in 2018. The party hopes this will raise €15bn (£12.7bn).

Law firms say the possibility of its reinstatement has rattled wealthy clients.

Alban Séverac, of French law firm Squair, said: “The political landscape – with the possible rise of the NFP – raises concerns among affluent taxpayers, particularly regarding dividend, gift, inheritance taxation and wealth tax.”

A wealth tax gone wrong

France’s wealth tax was first introduced in 1982 by Francois Mitterrand, the then-president. Since then it has been scrapped, reinstated and reformed by successive governments 

The “impôt de solidarité sur la fortune” – as it is known in France – was in place until 2017 when Mr Macron ditched it during his first budget, for which he was branded “the president of the rich”.

From 2011 individuals with a net worth of over €1.3m faced a rate ranging from between 0.5pc to a top rate of 1.5pc for those with assets over €10m.

In 2016 it yielded about €5bn from about 350,000 households – accounting for less than 2pc of France’s tax receipts. By comparison Britain’s inheritance tax raised £7.5bn from about 30,000 families last year.

Between 2000 and the year it was abolished, the wealth tax led to the outflow of 60,000 millionaires, according to research group New World Wealth.

Mr Macron scrapped the wealth tax on everything except property assets and introduced a flat 30pc rate on capital gains tax, dividends and interest.

Mr Séverac said this has been a popular move. 

“This reform, initiated during Emmanuel Macron’s presidency, aimed to encourage financial investments by reducing taxation on them. 

“Although this tax affects less than 1pc of households, it remains popular, partly due to current political discussions about its potential reinstatement, including financial wealth, by the NFP.”

But the wealth tax Mr Macron abolished was not the only one introduced in France in recent years.

Francois Hollande’s controversial “supertax” was first unveiled in 2012.

It imposed a 75pc rate on earnings above €1m – far higher than the maximum tax rates of other European countries 

Mr Macron, then an economic adviser, called it “Cuba without the sun”.

The levy immediately caused outrage among the wealthy in France. The actor Gérard Depardieu retreated to Belgium and millionaire footballers briefly threatened strikes in the winter of 2013, warning the supertax could trigger an exodus of top players on huge salaries.

It also damaged France’s business reputation internationally.

Speaking at the Conservative Party conference Boris Johnson, then-Mayor of London, said: “Not since 1789 has there been such tyranny in France. 

“I am very keen to welcome talented French people to London.”

But Mr Hollande’s original proposal for a wealth tax never came into being. In an embarrassing blow for the president, the supertax was shot down in December 2012 by the country’s highest court, who ruled it was unfair and unconstitutional.

In its place came a 75pc levy on businesses employing people who earned more than €1m a year.

Mr Hollande said this tax – capped at 5pc of a company’s turnover – was aimed at reducing executives’ pay at a time of high unemployment and fiscal prudence. 

But the policy made France a less attractive place to become a top executive. 

Jorg Stegemann, of executive search firm Kennedy Executive, said at the time: “It clearly has become harder to attract international senior managers to come to France than it was.”

Despite all the noise and publicity, between 2013 and 2014, the tax raised a meagre €400m, which led to it being dropped after just two years.