Explaining #geonpi to non-French entrepreneurs

There’s been a recent flurry of activity on twitter around the #geonpi hashtag. What is going on?

The short version is that French entrepreneurs are all up in arms against the French budget law for 2013. On the surface, one aspect of the law is intended to align the taxation of capital on the taxation of work, to use the words of the French government. But the reasons that entrepreneurs react is that, in practice, the new taxation may well make the creation of startups in France completely untenable.

Etymology of #geonpi

A first question you may have is: What the hell does “geonpi” mean? Well, it’s simply Verlan for pigeon. And in French, pigeon is a slang word for a dupe, a scapegoat, or someone who is being easily been taken advantage of. In short, a sucker. But there are many other expressions and word associations around pigeons, like “tir au pigeons” or “roucouler”. Les Pigeons movement is clearly about the “easily abused” meaning.

Entrepreneurs in France feel that they are the “pigeons” of the whole social system.

What caused the wrath?

Like in any other country, entrepreneurs in France take risks. They create new wealth. They create jobs. They usually reach the legal 35 hours per week on Tuesdays. They often put a good fraction of their own savings into the enterprise (I talk from experience here). They don’t sleep well at night.

Yet, in France, entrepreneurs get very little recognition. This may be hard to comprehend for someone who is more accustomed to Silicon Valley, where being an entrepreneur is a Good Thing™. But in France, “entrepreneur” is almost a dirty word. In the mind of the general public, entrepreneurs and greedy corporate executives earning millions per year are one and the same thing.

In reality, entrepreneurs in France earn very little if anything, just like in any other country. No minimum wage here. No job protection. Entrepreneurs, unlike other workers in France, have practically no retirement benefit, and certainly no “golden parachute”. More to the point, they don’t get anything from the state if they fail.

The new regime

So what changed? What bothers French entrepreneurs is how they would get treated under the new budget law in the unlikely case they succeed. In France like in any other country, nine out of ten entrepreneurs fail. They are prepared for that. But what happens if they succeed is the problem here.

The new law is supposed to double the the taxation of the benefits you might derive from a successful investment in a small startup. from an already meaty 30% or so to about 60%. Yep, you read that right, six oh. I guess you have the reaction reading that number that I had reading the gas mileage of a Humvee. [Update: ddabdul commented that I should talk about capital gain tax, but it's actually a combination of various taxes, one of them being capital gain tax. To muddy things further, the French government actually moves that to the income tax. So I decided to stick to my previous wording with this clarification.]

If, after 5 to 10 years of an extraordinarily uncomfortable life, one lucky entrepreneur happens to have any kind of success, which by the way means he created a sustainable company and presumably quite a few jobs, then under the new regime, he immediately loses a little over 60% to the Benevolent State in taxes.

But don’t worry for the Poor State of France, there’s more. The State gets to collect a few extra percents here and there in value added tax and other taxes on goods (e.g. on gas). Then 1% to 2% per year on the “tax on fortune”, another beautiful French invention. And finally 45% of whatever is left would again go to the State when the exhausted entrepreneur dies.

Le Gendre was right

Sorry to put it that way, but so much stupidity really hurts.

The debate in France about why the State needs to be so greedy is not exactly new. Colbert once asked to a merchant named Le Gendre what the State could do to help. Le Gendre reportedly answered “Laissez nous faire“. Centuries later, that wisdom remains ignored by the French government.

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36 thoughts on “Explaining #geonpi to non-French entrepreneurs

  1. It’s all matter of stand point : I have never seen as much Q7 and X7, PANAMERA in the hands of plumbers, electricians, small entrepeneurs and yet I never seen any average worker (“salarié”) drive these cars.
    Also there has never been as much public teachers, yet our children come back home reporting teachers’ repeated absenteeism….
    It all drills down to individualism and long term visions: how can society pull advantages of individualism occidental natural driver to build a long term sustainable society.
    Some say : let us do, “Laissez nous faire”. 2007 Financial Institution failures boldly demonstrated how Le Gendre attitude could drive to greed with major destructive impact –
    Worst conclusion ever, or maybe the best to leverage NEW responses.

    1. I’m afraid that by citing what happened in 2007 with financial institutions, or by explaining that entrepreneurs typically drive expensive cars, you are precisely falling into that confusion I talked about You are looking only at the successful entrepreneurs, and you are implying that they are driven by greed like financial institutions.

      There is nothing farther from the truth. The cars some entrepreneurs drive are never paid for by their current venture. They may be the result of the previous successful venture, but then it’s the reward for a few years of misery. Or they may result from a past life as well paid individual in some large company, who gave up this comfort for a life of misery. In which case it just serves as a daily reminder for what they gave up. As for me, I drive an old 307SW with over 190000km. And I have no idea if/when I’ll be able to afford another car anytime soon.

      Your other point, comparing entrepreneurs to the bankers in financial institutions, is completely bogus. On one hand, the plumber, driven by his customers, who built a network and a reputable company over twenty years and finally became able to afford a nice car. On the other hand, a greedy corporate executive who drives by numbers, has little accountability, owns a few cars and travels in private jets. What do you see in common between the two?

      My conclusion stands. Let the entrepreneurs do their job. They are the little guys. And if you think they are driven by greed, then you have never been bored to death talking to one of them. Laissez les faire.

    2. Eric, you are totally missing the point here. France is entering into a vicious circle.

      If this proposed taxation becomes law nobody in the right mind will invest seed capital into a French startup.
      We all know how risk adverse French banks are. So once you take away the Business Angels and Venture Capitalists, there will be very few new startups in France. The result is less creation of valuable intellectual property and jobs. Once you create less jobs, two things happen:
      1 – Young graduates move abroad to find these jobs; and remember that they are probably tomorrow’s entrepreneurs. So you lose a job today and many more down the road.
      2 – There are less employed people to pay taxes and therefore fund benefits for the unemployed and retired

      As a result of #2 above the State needs money and looks for new ways to tax the people. Basically a perfect vicious circle.

      So you can argue about how much regulation is good all you want. The vicious circle above has nothing to do with regulation and Wall Street alleged “greed”. It has all to do with French public servants being all trained in the same universities where business administration is not taught. Having never worked at a company by the time they get into office these technocrats perpetuate over-taxation, continue to inflate Government and don’t really care about discouraging the young.

  2. Two comments from my part.

    One purely semantic, but there is no such thing as taxation on benefit. The correct word is capital gain tax.

    Second: If you pay taxes, it means that you earned money (ie you have recouped your full investment plus some capital gain). It is the state privilege to fix taxation, and 60% is as good as any other number. The main point that other entrepreneurs are making is that by increasing the capital gain tax for french companies, a number of funds that invest in the start up environment would choose not to invest in France, as they can benefit from a better capital gain tax rate somewhere else. That is fundamentaly different from what you are saying (you are just looking at you personnal situation).

    While most of the venture capital should be in a position to structure around the capital gain taxe rate in France (for instance holding the shares in a company located in Belgium), the point of tax competivness to attract capital might be a good one.

    Your point is de facto simply driven by your own interest (you want to keep more from the capital gain you realize). You expect to grow your company, to be able to sell it and make significant profit out of it. In order to reach this profit you are willing to take risks that a normal employee would not take. You expect a payoff that is high enough to compensate for all the risk you have taken. There is no certainty in this happening, and taxes was just another risk you took without really knowing about it. The venture capital guy, knew about it, hedged, and today couldn’t care less.

    If you want to fight this correcty you should not complain about the rate, but how the rate applies. Some countries have a tax rate that reduces with time. The longer you stick to an investment the lesser you pay taxes (as you are not looking for short term profit, but long term development). It would make sense for French entrepreneurs to lobby for a lower capital gain if you stick for your investment for 5 or 10 years.

    1. @ddabdul: Semantic point taken, but since we are really talking about IRPP + CSG and not capital gain tax, I think for now it’s a bit confusing to placate that on english terms.

      Yes, it’s a state privilege to fix taxation, but no, 60% is not as good as any other number. To quote La Tribune (hoping that you can read French, which seems reasonable given your email address):

      Je voudrais plutôt parler ici de l’alignement de l’imposition des revenus du capital avec ceux du travail qui conduira, par exemple, un entrepreneur cédant son entreprise après 10 ans de labeur, d’incertitudes, de hauts et de bas, de semaines de 70 heures… à payer 45% (taux marginal de l’IRPP) +15,5% (CSD/CRDS) soit plus de 60% sur la plus-value de cession. Nous sommes ici dans le dogme anti-capitaliste, l’anti-économique, le «brisage de rêve», la démotivation quasi-sadique, le “je-ne-sais-quoi-qui-donne-la nausée”…

      et

      Taxer le capital investi dans une PME de croissance plus que l’immobilier, l’art ou des placements de père de famille, c’est totalement nier cette contribution à la croissance que nous recherchons. Taxer ce capital comme le travail c’est nier à la fois le risque pris (on peut tout perdre si l’entreprise connait des difficultés) et l’illiquidité associée (les business angels ou investisseurs en capital restent souvent 7-10 ans au capital des entreprises).
      Passer brutalement d’une taxation de 19+13,5=32,5% à 45+15,5=60,5% (voire plus si la CSG augmente encore et si on y ajoute des contributions exceptionnelles), c’est léthal et cela signifie condamner à mort l’économie et la croissance de notre pays!

      I think this article and a few others address your points quite well.

    2. Your reply shows a complete lack of understanding of the difference between capital gain and income tax. The reason people are complaining about the rate is that its a tax on money that tax has already been paid on and that has been risked.
      This is unlike, say the average civil servant pension plan ( http://en.wikipedia.org/wiki/French_special_retirement_plan) where you pay a tenth of the tax (7%) for an average guaranteed payout of more than a million dollars.
      The point is that its the civil servants that are the greedy millionaires here, not the entrepreneurs, and that should be the angle to attack this.

      1. @david g: Unless I misunderstood our comment, you missed the key point of the proposed reform. The French government has decided to replace the “special case” that was capital gain tax, and to integrate capital gains with income tax. Numerically, whereas capital gain tax was around 30%, the rate under the new scheme is more typically 60% or so. It is no longer a proportional scheme but a “progressive” scheme (i.e. higher incomes have higher tax rates).

        So that’s why I think that calling it a “capital gain tax” is misleading, since it’s no longer one (methinks).

  3. The missing point in this post just as in many others on the same subject is that the said revenue will be exceptional, and there is a specific rule statting that exceptional revenues shall be divided and postponed in the next 5 or 10 years (missing the figure here, sorry).
    So an entrepreneur making a solid 1,5M€ one-off will be considered making 150k€ that year and each and every year there after, and will pay taxes on this revenue. Which, depending on his personal situation (married or not, number of children, etc) may result in far less than those 60%.
    I’d like to read someone confirming this or not, and especially confirming the number of years.

    1. So an entrepreneur making a solid 1,5M€ one-off will be considered making 150k€ that year and each and every year there after, and will pay taxes on this revenue. Which, depending on his personal situation (married or not, number of children, etc) may result in far less than those 60%.

      This is also my reading. There are also other ideas, like for instance further reductions if you invest the resulting capital gain, or if you retire, or if you kept the investment long enough. This is just making the whole scheme more bloated and more complicated, it doesn’t make it smart at all.

      The core issue is not just that founders will stop working. They won’t, because what drives them is rarely money. The core issue is that business angels and venture capitalist will make the money they lend to founders more expensive, because they wouldn’t be good investors if they did not.

      Imagine a founder that was ready to leave 40% of the company in exchange for 250K. Now the investor replaces “35%” with, say, “55%” in the discounted cash flow calculation, and for the same 40%, he only offers 100K. Can the founder achieve his objectives with 100K? Maybe not. Can he leave 100% of the company in exchange for 250K? Don’t think so either. So the project dies by lack of funding.

      The problem is not greedy founders who hope to cash out, it’s needy founders who need investors.

  4. “It is the state privilege to fix taxation, and 60% is as good as any other number.”

    It is amazing at this time there is still opinions like this…
    Any increase in taxation is limiting freedom.
    Any increase in taxation is increasing Government power.
    It is changing power from free economy to political economy.

    1. Your freedom is in your vote. Whatever come next is the governement privilege. You are also probably un-happy that you do not have to pay for schools, roads, doctors, universities, police, firefighters,….

      In a democraty, government power is people power. Government do not limit freedom, it secure freedom. It is the difference between a Citizen life, and I just care about myself life.

      You have all the right to disagree with that, but then do not complain when your kids will be refused at a hospital because you cannot aford the bill.

      1. Government privilege does not by any mean indicate that we have to agree with stupid government decisions. It is our privilege to fight them. French are known for being strike-happy, but I see this as an expression of democracy that is much truer than some guys I’ve never met in an congress somewhere.

      2. This is not about complaining about taxes which pay for things like roads, the French toll road system is far more privatized than the America’s.

        It is about the nauseating culture of corporatism under the guise of left wing politics. Proposed taxes are stopping little companies and innovation in favor of giant corporations from Carrefour to the French government where our children will have to pay for massive pensions of the self-entitled and lazy while people like yourself make them feel guilty if they disagree by talking about cuts to healthcare.

        The elephant in the room is that there is nothing more corporate than French socialism.

  5. Christophe de Dinechin :

    The core issue is that business angels and venture capitalist will make the money they lend to founders more expensive, because they wouldn’t be good investors if they did not.
    <

    You are spot on what might be percieved as a problem. However in reality i do not believe this will actually be a problem. That is because most of the venture capital firm now how to deal with such issues.

    Either you are talking to a pure individual french business angel (who is an individual French tax payer) and then, the fiscal treatment of his investment in France, Germany, or Singapore will be exactly the same (he will pay a lot of taxes when selling), or you will deal with more sophisticated venture capital who will not be affected by the rule, as he will most probably not be based in France in the first place. All in all, i doubt that this will have a major impact on the venture capital coming into the start up scene

    1. In reality it is a massive problem and here’s why:

      VCs like to invest locally, which is why the Boston firms also have offices in Sand Hill Rd. Venture investment is high risk and hands on.

      The tax proposals mean that a French VC or private equity firm will face up to 75% tax on carried interest if their managing partners operate live in France, even if the holding company is structured in, say, Luxembourg. Their tax bill would be 0-15% elsewhere, and these people are mobile.

      Now you could argue that the government will create funds (they probably will), but these will be a disaster for the same reason that tier 3 corporate VC funds from industry often are – the partners will be on salaries, with no carried interest and the better ones will leave. Tier 3 firms tend to not be able to get in early into big opportunities.

      The government funds will be worse for 3 reasons: 2nd rate VCs; people who have come from govt. and therefore have little shared experience with founders and imposition of capital structures in firms invested that means they cannot be funded by traditional VCs (currently Silicon Valley VC’s try and wash out govt. enterprise money because it messes things up).

      The result will be a lot of trumpeting by the govt. investing in completely stupid failures like the politically motivated Qaero rather than the next Google (startups more like Eurovision song contest entrants than the Rolling Stones). The overall eco-system of innovation in France will shrivel and die as people in suits and ties, with houses in Cannes and that look like bankers pontificate about how ‘normal’ they are.

  6. Christophe de Dinechin :
    Government privilege does not by any mean indicate that we have to agree with stupid government decisions. It is our privilege to fight them. French are known for being strike-happy, but I see this as an expression of democracy that is much truer than some guys I’ve never met in an congress somewhere.

    You do not have to agree, but you have to live with them. That is the basic concept of Citizenship. If everyone who disagrees would have a say, we would live in anarchy

    Wikipedia Quote: “Anarchism is generally defined as the political philosophy which holds the state to be immoral, or alternatively as opposing authority in the conduct of human relations. Proponents of anarchism (known as “anarchists”) advocate stateless societies based on non-hierarchical voluntary associations.”

    1. “You do not have to agree, but you have to live with them…Anarchism is generally defined as the political philosophy which holds the state to be immoral”

      The French republic is founded on holding the state to have been immoral and deciding not to live with it.

  7. ddabdul :

    You do not have to agree, but you have to live with them. That is the basic concept of Citizenship. If everyone who disagrees would have a say, we would live in anarchy

    You do not have to live with what is only, at this stage, a project. It is not law.

  8. smashingtelly :

    The result will be a lot of trumpeting by the govt. investing in completely stupid failures like the politically motivated Qaero rather than the next Google.

    Wow, in all this time, I had never even heard of Qaero. Apparently, all that’s left now is a Wikipedia page.

  9. ddabdul :
    Your freedom is in your vote. Whatever come next is the governement privilege. You are also probably un-happy that you do not have to pay for schools, roads, doctors, universities, police, firefighters,….
    In a democraty, government power is people power. Government do not limit freedom, it secure freedom. It is the difference between a Citizen life, and I just care about myself life.
    You have all the right to disagree with that, but then do not complain when your kids will be refused at a hospital because you cannot aford the bill.

    I guess you all know one of the risks of a democracy is oppression by the majority, and to demonstrate it, often the following quote is used:

    “Democracy is two coyotes and a lamb voting on what to have for lunch.”

    To demonstrate the French situation however one should rephrase this quote as follows:

    “French Democracy is two unemployed and an entrepreneur deciding how much income tax has to be paid to pay the raising unemployment benefits.”

    I hope this better visualizes the French situation…

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