A Capitalist Revolt in Socialist France

The French government is trying to rein in its deficit by jacking up taxes, including the capital gains tax, which it wants to bring to the same level as the tax on income earned by the sweat of your brow—an old philosophical pillar of the French left. But an explosive essay published last Friday hit a nerve with entrepreneurs, venture capital investors, artisans, and mom-and-pop business owners. And their anger, which spread across the social media, the papers, and finally TV news, turned into an open revolt.

The trigger was an editorial in La Tribune by John-David Chamboredon, Executive President of ISAI, an internet startup fund. After the Finance Law 2013 was proposed during the presidential elections, he wrote, “la France du business stopped breathing.” Investments and hiring were put on hold.

The cause: the capital-gains tax provisions. An entrepreneur, for example, who risked his savings, spent 10 years growing his business, created perhaps hundreds of jobs, survived all the challenges, and then wanted to cash out, would have to pay two layers of taxes on the capital gains, totaling, according to his calculations, 60.5%. And so would investors.

It would kill entrepreneurship. Funding for startups would dry up. And growth in the private sector would wither. “If the fiscal maelstrom is confirmed, the sequence of events is quite clear,” he wrote. “Instead of hiring people and developing the business, owners threatened by this confiscation would spend the rest of 2012 imagining ways to escape it.”

There are legal ways, he said, for example by creating a holding company in Luxembourg that would retain the shares of the startup, or by relocating top management to London (which is rolling out the red carpet). Startups funded by large funds could do this. Small operations would be stuck in France. For them, it’s going to be tough. And it would put a damper on job creation in France, he said.

Articles in La Tribune are normally tweeted a few times and liked on Facebook a few more times. But this one was tweeted 1,576 times and liked 5,601 times. Over the weekend, it gave rise to the movement of the Pigeons—which in French also means “sucker.” The revolt of the bosses was born.

“We are the result of the anti-economic policy of the government that has decided to take the thousands of entrepreneurs in this country for suckers (pigeons) and annihilate entrepreneurship,” their manifesto explains. And a demonstration of the bosses in front of the National Assembly was organized on Facebook for October 7.

Anger against the “fiscal overkill” continues to grow. Entrepreneurs and those who invest in them see this law “as an act of vengeance by those who run the government or who live off it!” said Philippe Villin, an investment banker close to the entrepreneurs. “The France that is taking risks and is investing their own money in the jobs of tomorrow, and might lose everything, has the feeling of being rejected by the France that is more protected,” added Agnes Verdier-Molini, Director of iFRAP, a public policy think tank.

Money is already drying up. “We had three deals going. Since Friday, everything is suspended, because with taxes this confiscatory, it doesn’t work anymore for the business leaders,” said Bertrand Rambaud, President of Siparex, an investment fund.

La France du business stopped breathing,” as Chamboredon wrote, has already occurred. The Services Activity Index dropped to an 11-month low. Orders plunged, and companies responded by cutting their work force at the fastest rate since December 2009. The Draghi-Bernanke effect kicked them in the teeth with higher input costs that they couldn’t pass on. And the Composite Index, which combines the service and manufacturing indices, plunged to 43.2, the lowest since March 2009—the depth of the financial crisis.

It couldn’t have come at a worse time for President François Hollande. Since his election in May, according to the latest poll, voter confidence in his ability to handle the crisis dropped from 55% to 41%. And those who were “not confident” shot up to 56%. He has become unpopular in less than six month—which in France has never happened before.

He can’t afford an open revolt by small business owners—or the label “anti-startup,” when unemployment is at a 13-year high, and when every job counts. So the government decided to do some fence-mending. It has offered to listen to the “Pigeons” and apparently is studying “solutions” to the capital-gains tax debacle to “return to the situation as it was before.” And unnamed members of the government might perhaps negotiate with the Pigeons—who in return cancelled the demonstration.

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