Hollande Prepares Plethora Of Tax Rises

by Ulrika Lomas, Tax-News.com, Brussels

13 June 2012

With the French left looking set to gain an absolute majority in the National Assembly after the first round of legislative elections, the government is currently preparing an ‘enormous’ raft of tax measures to redress the public finances, primarily targeting savings, wealth and top income earners.

With scant regard for much-needed expenditure cuts, despite the recent publication of a report from the General Inspectorate of Finances indicating that around EUR3.9bn (USD4.9bn) in savings is necessary each year to achieve a budgetary balance, President François Hollande is busily preparing behind the scenes a package of additional tax rises under the guise of tax reform designed to ensure greater fiscal justice.

Commenting on the government’s plans, Socialist Party (PS) leader Martine Aubry insisted that there are other means of restoring the public finances rather than simply reducing spending. There is “enormous” scope to realize this goal by introducing additional taxes, Aubry stressed.

French lawmakers are due to vote on a supplementary finance bill in July, providing for the most emblematic measures contained in President Hollande’s election campaign, including the introduction of a 75% rate of income tax, and plans to reform the country’s solidarity tax imposed on wealth (ISF). Other remaining tax initiatives provided for in the campaign programme are to be inscribed in the country’s 2013 finance bill, due to be examined in the autumn.

The President’s last minute plans to tax at 75% income in excess of EUR1m to secure election votes could, however, prove disastrous for the economy, as it brings with it a real risk of increasing the number of fiscal exiles relocating abroad.

The excessive tax burden would affect not only top executives of large companies in France, but also the heads of small- and medium-sized companies (SMEs). The combination of a tax levied at 75% coupled with plans to align the taxation of capital with the taxation of work, and critics of the proposals warn that they could prove catastrophic. Gains realized from the sale of a company, if in excess of EUR1m, could for example be taxed at 75%.

Hollande’s aim of reforming ISF, includes plans to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

Despite the legal and technical problems associated with the reform, the government plans to increase ISF from 2012, to be achieved possibly by means of imposing an exceptional wealth tax contribution on taxpayers, akin to the exceptional contribution imposed on top income earners in France at the end of 2011.

To guard against claims that the 75% tax rate is “confiscatory” and therefore unconstitutional, the new President plans to reinstate the so-called “Rocard cap” (plafonnement Rocard), stipulating that the sum of income tax, wealth tax and social contributions (general social contribution and contribution for the repayment of the social security debt) must not exceed 85% of household income.

The new government is also busily preparing for an assault on existing and highly costly tax breaks (niches fiscales) in France to reduce the deficit. In accordance with the President’s campaign programme, the government plans to cap tax breaks at EUR10,000 a year, compared to EUR18,000 plus 4% of income currently.

Despite a lacklustre turnout, the Socialist Party and its allies are currently ahead following the first round of elections, winning 46.77% of the votes compared with 34.07% for the right-wing parties (Union for a Popular Movement and its allies), and 13.6% for the National Front.