Monday Note

Not against their VC overlords, mind you. No, calling themselves “Pigeons” (The Fleeced) they staged a highly visible protest  (Google translation) against their government’s latest stroke of the money pump. In a nutshell, the new Socialist administration proposed to tax an entrepreneur’s capital gains as ordinary income. In very rough numbers, the tax rate would go from 19% to 60% or, some say, 80% in extreme cases.

The outcry, obligingly amplified by the media, forced the Minister of Finance to meet with a delegation of the aggrieved and to beat a hasty, muddy, non-retreat retreat with the customary weasel words of caring for entrepreneurship, competitiveness, social justice and the country’s much-needed financial sanity.

This isn’t the first time the French government makes moves that hurt both the facts and the perception of its economy. It is, I believe, yet another manifestation of its perverted, ambivalent relationship with money.

Allow me to explain.

I’m at the Café de Flore, my Parisian neighborhood, what I call the World Centre for the Caviar Left. There, my café-crème drinking companions sometimes question my having left France to go live in the epitome of materialism, Silicon Valley. I point to the double-parked Porsches, the Louis Vuitton, Dior, Armani, Berlutti and Ralph Loren stores nearby. The answer, uttered in utmost sincerity, never varies: ‘It’s not the same…’

In a way, they’re right. Considering sex and money, Americans and French cultures exhibit truly polar opposite behaviors. The French see nothing wrong with a President having a wife, a mistress and a love child, they revel in sexual and often sexist jokes. But, if you ask someone how much they paid for their apartment, they’ll react as if you’d touched them in boundary-breaking ways. Conversely, they perceive us Americans as demonizing sex — think a past President and his “oral” office — while being obscene with money.

If, as I believe, the most honest statement of country’s values is its tax code, the French government has time and again clearly stated where it stands.

One such declaration is the ISF, the Wealth Tax. It’s not a gains tax (on income or capital), or a transaction tax (sales tax or VAT), this is a levy on your assets after you’ve paid all taxes on the path to your owning said assets. I can be seen as  a cultural indictment of the “haves”. The ISF comes with bizarre (or revealing) exclusions: You own a business, that asset is not taxed; the same goes for your expensive art collection; 75% of the forest you own is ISF-free. (I’ll stop there and warn readers the Wikipedia ISF article is woefully out of date on details, but right on the concept.)

The ISF keeps exerting a perverse influence on the country.
First, too many people with substantial assets fled the country, often to nearby Belgium and UK where they were welcomed as they were going to enrich the local economies. I personally know high-tech executives who, after paying good-size income tax bills for decades, decided to protect their savings and moved out. A loss for the French, from grocers to cab drivers and teachers.

Second, companies with European HQs in France moved out, their execs paying income tax on their wages didn’t want to pay additional levies on their assets. Apple is but one such example. Its Euro HQ is now in London. And, of course, no other company will now expose its execs to the ISF by locating a headquarter in France. Another loss in money and, just as important, in reputation, in making France look business-hostile.

Last May, France elected a new President, François Hollande, a leader of the Socialist Party who successfully presented himself as an alternative to the somewhat conservative and definitely abrasive Nicolas Sarkozy. On the stump, Hollande promised more fiscal justice and went for a new low in demagoguery, saying: ‘I hate rich people’.

Once he got in office, needing more revenue in a sinking economy, he announced he’d raise the ISF percentage, and tax incomes above 1M€ at a new 75% rate. Plus the new tax rate for capital gains discussed at the beginning.

Interestingly, besides the Pigeons’ protest (an example here, so-so translation by Google here), high functionaries in the Ministry of Finance indict their administration’s latest moves. In Le Monde (the semi-official daily) these well-informed technocrats publish a damning opinion piece (translation here) under a nom de plume, Les Arvernes. In it, they remind us that, with the rarest of exceptions, their government bosses never held real jobs. These apparatchiks have no intellectual and, most important, no emotional connection to what building a business is, to putting money and reputation at risk. When you get a wage, you don’t put money at risk. When you build a company, you do. Taxing two different risks at the same rate shows dangerous ignorance of what building a business is — and of the consequences of making France less attractive to business builders.

Here in the Valley, once we’re done slapping our foreheads, we look forward to seeing more talent flow in, looking for a friendlier ecosystem. Paradoxically perhaps, entrepreneurs moving to the Valley shouldn’t worry the money pump operators back in France. As the Israel and India examples uncontrovertibly establish, emigrating entrepreneurs end up doing a lot of good for their country. They send back money, jobs, savoir-faire, technology, culture and optimism. To them, Silicon Valley is a new Villa Medici. This is much better than the Maginot Line French politicians sometime fantasize about in order to prevent individuals to move to better business climates.

– JLG@mondaynote.com

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