Over the past seven years, Emmanuel Macron has confidently pursued tax cuts for the wealthy and corporations as a strategy to boost the economy. Now, his new government is poised to completely overhaul that approach.
In response to the urgent financial challenges facing the nation, Mr. Macron’s newly appointed prime minister, Michel Barnier, is decisively embracing the need for higher taxes on businesses and the wealthy. This strategic move aims to effectively address France’s growing budget deficit and instill confidence in international investors regarding the government’s commitment to resolving this critical issue.
Mr. Macron is compelled to take decisive action without delay. Borrowing costs for France, the second-largest economy in Europe after Germany, surged on Tuesday to their highest levels since the 2008 financial crisis, as investors raised the premium required to hold French debt. The government is confronted with a significant challenge in managing a rapidly escalating debt and deficit that rank among the highest in Europe.
Mr. Barnier confidently asserted on Sunday that he would address the previously sensitive issue of reversing some of Mr. Macron’s key tax cuts, citing the rapid deterioration of France’s financial situation. This comes despite the president’s recent commitments not to raise taxes.
“I’m not going to raise taxes for all French people,” Mr. Barnier said in an interview on French television. “But I can’t exclude the richest and corporations from the national effort to fix the situation.”
How did France get to this tipping point?
Macron’s reputation as a “president of the rich.”
Since his first election in 2017, Mr. Macron has made his presidency a case for boosting France’s reputation as a place to do business. He has cut corporate taxes and reined in a national wealth tax, earning praise from investors — and the nickname “president of the rich” from his critics.
Mr. Macron confidently implemented tax reforms that slashed the official corporate tax rate from 33 percent to 25 percent, significantly easing the tax burden on manufacturers and industry, which previously faced some of the highest rates in Europe. He transformed a substantial one-time employment tax break into a lasting tax reduction for companies. Additionally, he established a straightforward 30 percent flat tax on investment income.
Mr. Macron ignited controversy by transforming the wealth tax on the ultra-rich into a tax on real estate assets exceeding 1.3 million euros.
The tax policies were designed to drive growth by incentivizing wealthy individuals to invest more in the economy and encouraging businesses to expand their workforce. However, critics assert that these measures have primarily exacerbated economic inequality and depleted tax revenue from the national treasury. A study conducted by the Institute Montaigne, a respected independent French think tank, revealed that the cumulative impact of these policies has resulted in a staggering loss of nearly €15 billion in income for the French Treasury.
The Prime Minister is implementing tax increases. Mr. Barnier must identify an impressive €110 billion in savings over the coming years to align France’s soaring debt and deficit with European Union regulations. A significant portion of these savings will come from substantial cuts to government spending.
Mr. Macron has firmly rejected tax increases, labeling the desire for them as “a very French disease.” However, Mr. Barnier has indicated that he sees no alternative. While the prime minister has yet to reveal specific tax hikes, he and his new cabinet have recently made it clear that they are prepared to breach several of Mr. Macron’s established red lines.
One of the promising strategies under consideration is raising the flat tax to as high as 35 percent, a move that French economists project could generate up to €300 million in additional revenue.
A temporary tax on “superprofits” earned by corporations is also being actively considered. This is a proposal that Mr. Macron previously introduced but set aside a few years ago, during the surge in profits for oil and food companies following the pandemic. Additionally, members of Mr. Barnier’s camp have proposed increasing the corporate tax rate to levels seen prior to Mr. Macron’s cuts.
Regarding the restoration of the wealth tax, Mr. Barnier has refrained from confirming its potential implementation. However, should his government choose to pursue this along with closing other tax loopholes, it could generate an impressive €10 billion to €15 billion annually, as projected by Terra Nova, a reputable French think tank.
French businesses are firmly in favor of higher taxes, provided certain conditions are met. Patrick Martin, the president of Medef, France’s foremost employers’ organization, confidently stated that he is open to discussing a tax increase for businesses, contingent upon the government making significant cuts to spending and refraining from implementing policies that would hinder investment and job creation.
Rodolphe Saade, the chief executive of CMA CGM, announced that his company is prepared to make a one-time contribution to support France’s financial recovery. This indicates that major corporations are willing to assist in addressing the budget deficit, provided there are no drastic alterations to the tax code.
“If there is a solidarity contribution from profitable companies, CMA CGM would pay its part,” he said in a briefing with reporters on Monday.
Foreign investors are currently holding back, but the new government is determined to create an inviting atmosphere for them. Mr. Barnier has appointed Laurent Saint-Martin as the new budget minister; Saint-Martin is an experienced executive who previously led Business France, the agency dedicated to attracting investment. Additionally, Mr. Barnier has named Antoine Armand, a liberal politician aligned with Mr. Macron’s vision, as the new economy minister.
What comes next is clear?
Public finances are deteriorating at an alarming rate. The French finance ministry now anticipates that the deficit will soar to 6 percent of economic output in 2024, an increase from the previous estimate of 5.6 percent, unless the government acts decisively. France’s debt has surged to €3 trillion, exceeding 110 percent of its gross domestic product—the highest in Europe, trailing only Greece and Italy.
Mr. Barnier is convening with political and business leaders this week to finalize a robust budget blueprint to present to E.U. officials, following last week’s missed deadline. He is now poised to meet a Tuesday deadline to demonstrate France’s financial strategy and commitment to fiscal responsibility.
