Tax Analysts Blog

Et Tu, Sarkozy?

Posted on Feb 5, 2013

How would you feel about a former U.S. president leaving the country to run a highly profitable business on foreign soil? Let's say it's an actual change in long-term residence, not just a temporary sojourn. Would your response differ if the motivation for the departure was tax minimization?

The French public is pondering these very questions, as rumors have emerged that ex-president Nicolas Sarkozy and his ex-supermodel wife, Carla Bruni, may soon relocate to the United Kingdom. Supposedly the couple are checking out luxury dwellings in South Kensington. Sarkozy wants to launch a new private equity firm in London with co-investor Alain Minc. The two are trying to gather up the necessary seed capital, which is said to be in the neighborhood of €950 million. They figure London is a more logical venue for such commercial endeavors, despite the damp weather and questionable culinary offerings.

First Gérard Depardieu bolts to Belgium; now this.

In some ways the move makes perfect sense. The City of London — a distinct enclave within the British capital city — is a major financial center. While Paris hosts a EuroNext exchange, it's not such a big player in international finance. London tops the latest index of leading global financial centers, ranking ahead of both Wall Street and Hong Kong. Paris comes in at a disappointing 23rd on the list.

London is definitely where the market is, but taxes are a big part of the equation. While in office Sarkozy attempted to lower multiple categories of taxes, with varying degrees of success. His successor, Francois Hollande, is leader of the French Socialist party and wants to increase numerous taxes. In particular, Hollande advocates a top marginal income tax rate of 75% and a 60% capital gain rate on share sales.

The French Parliament already approved a law implementing the 75% income tax rate, but the French Constitutional Court has invalidated the statute on technical grounds. (It applied to individuals rather than households). Presumably the government will cure the defect during their next legislative session and the rate will finally become a reality. That would affect Sarkozy personally, who reportedly demands a speaker's fee of €180,000 per hour. That's some impressive coin. At that rate, Sarkozy need work only about 5 hours and 30 minutes during the course of 2013 to become subject to the 75% tax rate. By contrast the top individual rate in the U.K. is current 50%, and it's scheduled to drop to 45% in April 2013. His annual tax savings could be enormous.

More importantly for private equity firms, the U.K. capital gains rate tops off at 28% for upper-income investors. That's less than half of Hollande's target of a 60% rate. (Interestingly, Hollande describes the 60% capital gain rate as a 'tax preference' because he's comparing it to a 75% rate for ordinary income. I guess everything is relative.) Corporate taxes are also much lower in Britain than in France. The French corporate rate is 33.33%. The U.K. rate was a comparable 30% back in 2011, but then the Brits went on a rate-slashing binge in hopes of attracting foreign direct investment. Their corporate rate will fall to 23% this spring and to 21% in spring of 2014. Why all the rate cutting? The British feel they must compete against Ireland, which has a 12.5% corporate rate. The French government apparently has no such concern.

If the relocation happens, Sarkozy may need to mend some fences with his new neighbors. Back in 2011 he famously refused to shake hands with U.K. Prime Minister David Cameron when the latter voiced opposition to the EU financial transaction tax, which Sarkozy was championing. At the time, Cameron warned Sarkozy that the financial levy might render London financial markets uncompetitive. Ironically, that EU tax is yet another reason to set up shop in London rather than Paris. The Brits are opting out of the financial transaction tax; France is not.

In closing we note that Carla Bruni dated both Eric Clapton and Mick Jagger before marrying Sarkozy. Perhaps Mick and Eric will swing by the Sarkozys' new digs for a spot of tea and a chat about tax competition.

Read Comments (1)

lucas rachubaFeb 6, 2013

"Interestingly, Hollande describes the 60% capital gain rate as a 'tax
preference' because he's comparing it to a 75% rate for ordinary income. I
guess everything is relative.)"

Yes, anything less than 200% tax is a tax preference or tax expenditure. We
should not, as one wisea*s once famously put it, think of this as our money.
That fallacy is what creates false expectations and causes such dire

The better way to think about it is probably that we are all born with a debt
to the government(s) and that we simply have to work it off. It's kind of like
original sin (explaining perhaps why Catholic or post-Catholic countries, sans
Ireland, have such preposterously high tax rates).

This line of thinking has, of course, much historical precedent, particularly
in medieval Europe, so it is no surprise that it is once again, en vogue. If I
recall correctly, one economist even wrote a book about it back in the 40s.

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