Lagarde Confirms Changes To French Tax Shield

by Ulrika Lomas, Tax-News.com, Brussels

29 September 2010

Marking a significant about-turn, French Finance Minister Christine Lagarde has recently conceded that the country’s highly controversial tax shield mechanism (le bouclier fiscal) is “to change a bit” within the framework of the government’s 2011 austerity budget, due to be presented to the council of ministers on September 29, and will not serve to protect individuals against the proposed EUR10bn cut in tax breaks.

While fiercely defending the tax shield as a “good principle” which ensures that taxpayers in France pay no more than 50% of their earnings in tax, the minister nevertheless emphasized the need to consider what neighbouring country’s are doing “intelligently”. Alluding to French President Nicolas Sarkozy’s plans to work towards fiscal convergence with Germany, Lagarde acknowledged that in Germany there is neither a tax shield mechanism nor wealth tax (ISF). Germany could serve as a model to overhaul the existing French system of taxing its top earners, she added.

Indeed, several parliamentarians, including parliamentary budget rapporteur Gilles Carrez, have already evoked the idea of abolishing both wealth tax in France and the French tax shield, and have advocated the introduction of a new income tax bracket.

Up until now, however, President Sarkozy has flatly refused to consider the idea of amending the tax shield. This dogged stance appears to have weakened slightly now. Sarkozy recently asked the French Court of Auditors to conduct a study on the different tax systems in France and Germany.

Emblematic of Sarkozy’s era, the much trumpeted, yet increasingly controversial tax shield limits direct taxes in France (income tax, wealth tax, and local taxes such as dwelling and real estate tax) to 50% of income, including social contributions, honouring the President’s pre-election pledge that no-one will pay the tax authorities any more than half of what they earn. Once the total amount of these taxes and contributions exceeds 50%, the taxpayer may then recover the excess from the tax authorities. The mechanism cost the state almost EUR679m in 2009, up by 21% from the previous year.

In a recent survey of 1,000 individuals, a small majority (54%) declared that they were in favour of abolishing the tax shield, while 37% were opposed to such a move and 9% did not express an opinion. In stark contrast, 75% of those surveyed stated that they were opposed to the idea of abolishing wealth tax in France compared to a mere 19% who were in favour.

Regarding the 2011 budget, French Finance Minister Lagarde confirmed that the budget bill provides for a reduction of the country’s deficit from 7.8% of gross domestic product this year to 6% next year. In order to achieve this goal, the bill provides for a EUR10bn cut in tax breaks and for a tax on banks.

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