Analysis-Tax the rich or fall: French PM faces budget ultimatum

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By Leigh Thomas

PARIS (Reuters) -It’s the million dollar question that may decide the fate of French Prime Minister Sébastien Lecornu: how to tax France’s billionaires?

The Socialists want a 2% wealth tax on France’s 0.01% in the 2026 budget as the price for their support, making Lecornu’s political survival contingent on a measure that has massive public support but alienates his right-wing opponents.

    Lecornu, a Macron loyalist who last week became France’s fifth prime minister in less than two years, is racing to draft a budget, which is due to be sent to lawmakers by October 7.

If it is included, the so-called “Zucman tax” would likely reshape France’s approach to wealth inequality and reignite fears of capital flight from a country that already has Europe’s biggest tax burden as a share of gross domestic product. 

The tax’s brainchild, economist Gabriel Zucman, hopes it will spark similar debates across Europe.

In an interview with Reuters, Zucman said the wealthiest households in many countries pay less income tax than most citizens, but in France that gap is especially stark.

“Firstly, billionaires pay virtually no income tax in France, and secondly their wealth has grown particularly rapidly over the last 15 years,” Zucman told Reuters.

He estimates the proposed 2% tax on wealth above 100 million euros ($118 million) would affect only 1,800 households but raise up to 20 billion euros annually, helping reduce France’s budget deficit, currently estimated at 5.4% of GDP, the euro zone’s biggest.

A group of seven leading economists, writing in newspaper Le Monde, said the tax would likely yield closer to 5 billion euros and could lead the wealthy to leave France.

FRENCH VOTERS SUPPORT PROPOSAL

An Ifop poll this month for the Socialist Party found 86% support for the Zucman tax, including 92% of voters in President Emmanuel Macron’s party.

In parliament, the proposal has broad support on the left, which managed to pass it in the lower house in February before the Senate rejected it.

The proposal now stands a stronger chance in the 2026 budget, as Lecornu cannot afford to alienate the Socialists. They could topple him by joining forces with other parties in a no-confidence motion.

Lecornu has said he is open to discussion but is concerned that including business-owners’ assets, as opposed to only real estate and financial assets, could penalise job creators.

MEDEF employers’ federation chief Patrick Martin has warned that taxing business assets would discourage investment, and said such assets were excluded from France’s last wealth tax.

After his 2017 election, President Emmanuel Macron refocused that tax from general wealth – previously up to 1.5% on assets above 1.3 million euros – to now cover only real estate, earning him lasting criticism as “president of the rich”.

COMPROMISE FOR START-UPS

Critics warn that the Zucman tax would hurt investment in innovative start-ups like home-grown artificial intelligence giant Mistral AI, Europe’s best hope against better-funded U.S. rivals like OpenAI.

Mistral AI CEO Arthur Mensch said France needed more tax justice but also must remain competitive.

“There is always tension between the need for (wealth) redistribution and innovation,” he told France 2 television, adding that personally he could not afford the tax.

Start-ups often take years to turn a profit, potentially forcing founders to sell shares to pay the tax.

The Socialists are not deaf to such concerns and say they are open to negotiation – as long as the tax hits billionaires like LVMH boss Bernard Arnault, France’s richest citizen. 

“Start-ups should be encouraged. The aim is to tax billionaires,” Socialist lawmaker Philippe Brun said on franceinfo radio, proposing firms be exempt until they post five years of profits.

PROPOSAL MAY FACE CONSTITUTIONAL HURDLES

Zucman insisted there should be no exemptions, saying owners of firms like Mistral AI, now valued at 11.7 billion euros, should be able to pay with shares if they lack cash.

Even without such a clause, legal experts warn the tax could face constitutional challenges, citing jurisprudence against “confiscatory” measures and taxes that single out specific groups.

Zucman counters that the status quo violates the 1789 Declaration of the Rights of Man and of the Citizen, which states tax must be borne equally in proportion to ability to pay. The Zucman tax would not make the ultra-rich pay more than others, he said, but ensure they do not pay less.

“Therefore, it is a simple matter of bringing our tax laws into line with the fundamental constitutional principle of equality before taxation,” he said.

($1 = 0.8447 euros)

(Reporting by Leigh Thomas; additional reporting by Florence Loeve; Editing by Sharon Singleton)