French Assembly Agrees Tax On Investment Revenue

by Ulrika Lomas, Tax-News.com, Brussels

10 October 2008

Ratified during a first reading before the French National Assembly of a new welfare reform bill, le revenue de solidarité or RSA, effectively a negative income tax, is to be financed by a controversial increase in tax on investment revenue.

Presented by Martin Hirsch, the High Commissioner responsible for the reform, the bill announces an anti-poverty back-to-work programme designed to mark an end to the welfare trap by ensuring that it is no longer unprofitable for the unemployed to return to work and guaranteeing a minimum level of income.

Although the principle of the welfare measure found immediate approval with the vast majority of MPs, the arrival of the new investment tax to pay for it has proven highly controversial. The 1.1% tax, which comes into force on January 1, 2009, ahead of the welfare reform, will be wide-ranging, levied on share, property rental and other investment income and is seen to fly in the face of the President’s drive to encourage wealth creation and reduce taxes.

Estimates are that the investment tax will generate EUR1.5bn per year. In principle, a tax shield will impose an upper direct tax limit at 50% of income. This ceiling should shelter between EUR150mn and EUR200mn.

The Opposition relentlessly demanded that the beneficiaries of the tax shield should also pay the tax. The government and the majority, however, refused to renege on the 50% shield.

The aim of the RSA is to simplify and improve existing welfare measures by replacing the minimum income benefit (le revenue minimum d’insertion or RMI) and the single parents allowance (l’Allocation parents isolés or API).

The RSA bill, which enters into widespread effect from June next year, was adopted on Wednesday by 306 votes to 20. With unemployment the key concern of the French public – currently estimated at two million - according to an opinion poll TNS Sofres, it is hoped that the new measure will provide the necessary incentive to return to work and raise the quality of life for poorer workers. According to Hirsch, the key idea of the RSA is that those who go back to work immediately earn more than by remaining on the RMI. The RSA allowance will be granted to RMI beneficiaries who find a job. This allowance reduces progressively as income received from the work increases.

Although passed in the Assembly, only deputies from the UMP majority voted for the bill, with 40 UMP and NC deputies failing to support the text. The opposition PS unanimously decided to abstain despite approving of the welfare measure in principle. The four Green Party MPs also opted to abstain whilst the Communist Party, PCF, voted against.

The senate will examine this bill from October 20.

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