On September 9, France lost its second government in a year. The story behind the fall of François Bayrou’s government is largely the same as that behind the fall of Michel Barnier’s last December.
The French government ran a budget deficit of 5.8 percent of Gross Domestic Product (GDP) in 2024, the largest since World War II and well above the three-percent limit required from members of the eurozone. The budget Bayrou proposed to deal with this included a number of fiscal measures, such as a freeze on increases in welfare benefits and government spending, €10 billion ($12 billion) of cuts to local authority and healthcare spending, and a “solidarity contribution” for individuals with the “highest incomes.” This package was a non-starter with both the hard left and big government right – Marine Le Pen’s National Rally – which dominate parliament. Bayrou called a confidence vote, lost it, and resigned the next day.
The incoming prime minister, Sébastien Lecornu, inherits the same conundrum that stumped Barnier and Bayrou: How to balance France’s budget deficit in a way that both the hard left and big government right will support.
It is a tough one. Neither faction supports spending cuts and factions are divided over tax hikes.
Zucman’s Wealth Tax
Bayrou’s “solidarity contribution,” opposed by National Rally, is likely to be an absolute requirement for hard left support. The 2 percent tax on the roughly 1,800 households whose wealth exceeds €100 million ($118 million) is the brainchild of economist Gabriel Zucman.
“Billionaires, taking into account all mandatory levies, pay half as much in taxes as the average French citizen,” Zucman argues. “This is because their income, housed in holding companies, escapes the income tax.”
Significant doubt exists over Zucman’s findings. In 2019, Zucman claimed that the previous year, the overall effective tax rate paid by the ultra-rich in the United States had dipped below that paid by the bottom 50 percent of earners for the first time, a claim identical to that which lies behind the proposed “solidarity contribution.”
But, as economist Phil Magness notes: “Through a series of highly opaque and empirically suspect adjustments, Zucman had artificially inflated the tax rate paid by the poorest earners while simultaneously suppressing the tax rate paid by the rich.”
Indeed, the controversy surrounding Zucman’s method may have cost him a prestigious gig at Harvard.
Even if we accept the estimates that underlay Zucman’s proposed “solidarity contribution,” the measure has been attacked on other grounds. Of claims that the tax could reduce investment, slow economic growth even further, and worsen the budgetary problem, Zucman told Le Monde that such an argument “does not hold up in a country like France, which has abundant savings.”
Of a pattern of people leaving countries that impose such taxes, Zucman argues that “tax exile is not non-existent, but it is very limited.” His colleague, economist Thomas Piketty, suggests that, for those who do leave, “Your assets are frozen, you could be arrested at the airport.” Zucman estimates that the “solidarity contribution” will generate between €15 billion and €25 billion annually.
But these arguments cannot be so easily waved away. In an op-ed for Le Monde, seven prominent economists question the “constitutionality of a wealth tax above 0.5 percent in France.” More directly, they argue that Zucman’s revenue estimate “vastly overestimates the actual revenue that such a measure could actually generate.”
First, the estimate doesn’t account for “behavioral responses.” “Taxpayers adjust their behavior in response to new taxes, either through tax evasion or optimization (intensive margin), or by relocating abroad to avoid taxes (extensive margin),” the economists note. Empirical studies examining the effects of hikes in taxes on capital which “affected a much broader base of taxpayers than those targeted by the Zucman tax and at much lower rates,” they continue, find “that for every €1 collected on paper, only €0.25 translates into actual long-term revenue due to taxpayer behavioral adjustments.” In this case, “the Zucman tax could reduce the structural deficit by €5 billion, not €20 billion.”
In addition, the economists note, “Taxing business assets directly would create liquidity problems for owners and shareholders of non-listed companies, potentially discouraging investment and entrepreneurial risk-taking by imposing double taxation on income that has not yet been received.” This would harm economic growth, but “excluding professional assets would reduce the taxable base by nearly 90 percent, bringing tax revenue below €1 billion,” or 0.6 percent of the budget deficit of €170 billion.
Zucman’s response to this objection is startling: “Such cases are rare, but they do exist,” he concedes. “Solutions can be found. The simplest is to allow those concerned to pay the tax in kind, by transferring shares of their company. The state would then be responsible for keeping or selling these shares, for example to the company’s employees, while prohibiting resale to non-residents.”
This would be a disaster for innovation and economic growth in France.
Les Misérables
“You have the power to bring down the government, but you do not have the power to erase reality,” Bayrou stormed on his way out of office. “Reality will remain relentless: expenses will continue to rise, and the burden of debt, already unbearable, will grow heavier and more costly.”
He is right. France’s budgetary problems are, quite simply, the result of a level of social spending its economy cannot support. The explosion of debt incurred to finance the fight against COVID-19, the money printing to finance that, and the resulting inflation, have exposed this, as in other countries, by ending the period where the French government could borrow at a rate of effectively zero. Its bond yields are now above those of Europe’s perennial economic sick man, Italy.
Sooner or later, the laws of economics will be enforced with the doggedness of Inspector Javert, and the merciless brutality of Marc Ferrot.
France’s budget problems are shared across the developed world, including in the United States. Federal debt is spiraling and borrowing costs are rising: The Treasury is now spending more money on debt interest than on defense for the first time in history. Proposals like the “solidarity contribution” are offered as a solution to our deficit, but they face the same problems: They do not generate enough money and what revenues they do generate come at a disproportionate cost in lost output. Those who want “the rich” to pay their “fair share” usually mean that they want them to pay for everything. They won’t.
