In January this year the French Government of Francoise Holland quietly shelved its 75% tax on the rich. Now new figures show three thousand affluent French people each pocketed a 240,000 euros tax rebate in 2014, in further embarrassing evidence that the Socialist
administration has backtracked on promises to soak the 1%.
This tax relief is as much as under the Presidency of right-wing Nicholas Sarkozy and his controvertisal ‘tax shield’ for the ruling classes, between 2007 and 2011, according to communist newspaper L’Humanite.
It’s an ‘illustration of the unfairness of the tax system’ the paper says, arguing that this gift to the extremely well-heeled outweighs promised cuts to tax on the income of low-income households.
The government has loudly announced a cut in income tax affecting 9 million households, amounting to around 3.2 billion euros.
Yet other figures released earlier this week by Les Echos newspaper throw a different light on the French tax policy.
While the announced reduction in income tax mainly benefits the households with the lowest incomes, at the other end of the social
scale, the better off were granted, from last year, significant reductions in their tax .
According to the business daily, which had access to the latest data from the Ministry of Finance for the year 2014, a small
number of people liable for the solidarity tax on wealth (ISF) enjoyed a very generous rebate.
Exactly 3,290 taxpayers, each with a personal wealth exceeding 10 million, received a rebate of 246,674 euros per household, on
average, over the amount they would normally have had to pay to the Treasury public.
The total cost for the state – and thus for all taxpayers – about 800 million euros. A sum amounting to nearly 1 billion (926 million
euros exactly, + 27% on 2013), if one adds the reductions granted to the “bottom rung” of the ISF, whose assets are between 1.3 and
10 million euros, who each saved on average between 10 000 and 30 000 euros tax.
A state of affairs that recalls the glory days of the little infamous “tax shield” … and worse! The sum of “gifts” handed out last year
exceed in absolute value those granted by Dominique de Villepin, then Prime Minister Jacques Chirac in 2006 and continued and
amplified shamelessly by his successor Sarkozy, between 2007 and 2011.
At the time, this welfare system for the wealthy had led to Sarko being characterised the “president of the rich”, so much so that he
dumped the tex policy for fear of jeopardizing his re-election bid in 2012.
Sarko’s tax allowed the richest to evade taxes to the tune of 600 and 700 million a year. This symbol of injustice dead and buried,
how come this similar wealthy elite set are pocketing in 2014 a sum that beats it by 200 to 300 million Euros?
The answer has a less “bling-bling” name than the tax shield: its called the ISF cap. A procedure that limits the total of direct
taxation of a taxpayer at a 75% maximum of their annual revenue, including ISF. In principle, the mechanism is the same as the
shield of the Chirac-Sarkozy era: it was also the case then that taxation of the rich taxpayer could not exceed a predetermined
fraction of its income, initially set at 60% and then lowered to 50% (39% if one deducts other taxes – the social charges CSG and the
CRDS that finance the health service and its historic deficit – included in the calculation of this tax).
However, it must be fair: if a ceiling was restored to the ISF, this is not the initiative of the current government nor the previous
directed by Jean-Marc Ayrault, but of the Constitutional Council, which required in its decision of August 9, 2012. This was based
on the principle of “equality before public burdens” to regularly censor tax rates deemed excessive, usually above 75%.
But the government has the ability to limit the advantage this gives to the wealthiest. Prior to 2006 and the establishment of the tax
shield, the tax cap was higher (equal to 85% of revenues), and tax rebates could not exceed a certain limit set at half the normal ISF
rate. The Socialist government did nothing.
Since Srko axed the tax shield, the ceiling was raised, but deleterious effects of the debate were the same, indeed even worse is if you can consider that there were half the number of beneficiaries than under the tax shield ( 8872 for all tranches in 2014 ISF) share a larger cake, each slice equivalent to an average of 104,000 euros. Why the decline in the the number of beneficiaries? No mystery: raising the ceiling to 75% automatically reduces the number of taxpayers whose tax liability exceeds this limit. However, one would expect that the cost would decrease proportionally: in face the opposite has occurred.
The key to the puzzle: the “revenue buoyancy of the ISF,” says Les Echos. “Already up sharply in 2014, the ISF should generate
this year a new record yield, estimated at 5.6 billion euros”, driven by the euphoria of the stock and real estate markets, but also by
the regularization of “repentant” tax evaders. “If taxpayers pay more ISF, they have logically (sic) a larger refund under the
cap,’ the paper says. In short: the richer you are the less tax you pay, in proportion to your assets.
In this context, even if it is a welcome move to provide relief to nine million households that are struggling to make ends, reducing the lowest brackets of income tax is a tax reform, fails to address a radical overhaul of the whole architecture of the tax system.
The only fair tax – because it is progressive, where each contributes in proportion to income – has been under sustained attack for decades. Income tax bands were reduced from 14 to seven in 1982, and then down to five in 2007, while highest band was lowered from 65 to 41%.
Since the arrival of François Hollande to the Elysee Palace in 2012, income tax now has a new top bracket, of 45% as of 2013, and a low band was axed this year (5.5%, partly aligned with that of 0% below 9,690 euros, against 6,011 euros before): good for the purchasing power of low-income households, but bad point for progressive taxation, since a taxpayer will see his rate rise from 0 to 14% at 9,691 euros and above (against 11,992 euros previously).
The result, thanks to the reforms, is that the take of income tax continues to weaken, while indirect taxes such as VAT strengthens. Income tax will only represent 28.6% (69.1 billion) of state tax revenues in 2015, against 13.7% (33.1 billion) for corporate tax (IS ), and 58.3% (140.9 billion) for VAT. The latter is however particularly unfair, since it is all paid by all at the same rate: for any purchase, the weight of the tax weighs proportionally more heavily on the budget of a modest household.
Now there’s talk in the ranks of the Socialist party of a possible merger of the income tax and social contributions (CSG).This does not bode well for greater tax justice: behind the idea of making CSG “progressive”, which is today paid by all at the same rate, lurks the possibility of making employees and pensioners alone fund social protection. A new royal gift to capital, risking the future sustainability of the health system and pensions.