The examination by the National Assembly during the 1st reading of the articles related to fiscal receipts in the 2018 Finance bill generated an intense political debate. The bill includes measures which express the new philosophy inspiring the president of the Republic regarding taxes, with, as a first point, the reform of the Wealth Tax and the scheduled suppression of the residential tax. It is recognized to taxes a triple role. They cover public expenditures. They contribute to the reduction of inequalities and to strengthen social cohesion. It is at the end an economic policy tool used to support economic activity when it is needed or to slow it in case of an excessive internal demand. The fiscal tool is also used to achieve “structural reforms” improving, for instance, enterprises margins they might have lost. It is the well-known “supply side policy”.
Critics have been focused on the transformation of the Wealth Tax into a Property Wealth Tax. The Wealth Tax was created by the Left and put in application in 1982. Its reason was ideological. It was utilized to strengthen the alliance between the different components of the Left, which permitted to François Mitterrand to protect his freedom of action on international issues. So was the subtle equilibrium found at that time. This tax was abolished by Jacques Chirac government in 1986, which contributed to his electoral defeat in 1988. His successor, Michel Rocard reestablished it through a slightly different name in introducing the concept of solidarity. No other government dared to call it into question until Emmanuel Macron election. According to his electoral engagements, he gave the instruction to reduce its basis to the most important real estate assets. But the debate is still purely politician and no real reflection has been engaged about the economic role of household wealth taxation and on its consequences, except the issues related to fiscal evasion and to the exiles coming back. But we know, since a long time, through economic figures provided by the Ministry of Finance that these consequences on fiscal receipts and on economic activity are marginal and that the number of those choosing the exile for tax purpose during a year was never superior to one thousand. The main issue is not there, the real issue is the adaptation of the French tax system to the 21st century.
Who is a rich person today? Is he a person who makes a lot of money or a person who has a lot of money? Obviously, it is somebody who owns a lot of money. But our tax system ignores that clearness since it is based, regarding households, on revenues. The legal basis of taxes is the article 13 of the Declaration of Human Rights. It is inscribed that everyone contribution to public charges is based “according to his capacities”. To restrict the contributive capacity to revenues made sense when wealth was not large enough and concentrated in a tiny minority as before the Revolution of just after a war. The situation is quite different today. Public expenditures are used, for a significant share of them (defense, security, justice) to protect both people and goods. It wouldn’t be unfair that those who own assets contribute to their protection according to their value. French people wealth in 2017 will overpass 11 000 billion euro. If debts are removed, their net wealth will be around 9 500 billion. A 1% tax, as an average with several brackets, would represent much more than the income tax. We get indignant by a tax which amounts until now 5 billion euros. But when a brilliant manager receives a substantial bonus rewarding a success which permitted, for instance, to win an order and to guarantee the future of hundreds of employees, nobody is worry about the fact that that reward can support a tax which may reach 45% on a portion of its amount. It is illogical and it is why a real fiscal transformation resulting, regarding household taxation, in taking into account both their revenues and their wealth and in rebalancing their respective shares would be much more adapted to the reality of today French society. The proposed reform is a first step in that direction, against all appearances and would permit to break with an ideological vision of the wealth taxes. It is justified especially since now indebted house owners thanks to the re-negotiation of their debts are the most important benefactors of the massive reduction of interest rates for the last two years. And it is also quite logical that financial assets are only taxed through the revenues they generate or capital gains they produce as the current reform is proposing. These savings are used to finance corporate investments and carry a risk.
The suppression, on the midterm, of the residential tax is inscribed is that perspective because it is unthinkable that is stays on the long term for only 20% of households. The reform of its basis which is still based on 1970 figures is losing purpose because it would apply only to such a small share of the population. The abolition of this obsolete tax could be accompanied by a progressive extension of the real estate Wealth Tax, the last step before the creation of a Global Wealth Tax based on all non financial assets. The instauration of a tax collected by all insurance companies, like the one covering natural disasters, based on household insured goods would permit to address most of the critics developed regarding the former Wealth Tax. But that transformation would make sense only if it goes along with a reduction of the income tax for the same amount. For the five previous years, its receipts increased by almost 50% but the number of household paying it fell by one million. In 2016, only 42.8% were paying it. So that tax is withholding every year an increased amount on a more and more reduced share of the population. This trend must be reversed in order to avoid that effort and success are more taxed than the existing wealth, whatever it comes from, heritage or accumulated saving.
We are not anymore in 1981 and moreover in 1945. French people, even if there is too much poverty and families in a precarious situation, got considerably richer and that wealth is much more shared among the population that it is usually said because 60% of households owns a main residence or a second home or a real estate investment. Their wealth is among the highest in Europe, even without taking into account their future pension rights. The level of public and private debt is certainly high but unrivalled, against what is frequently said, with private assets. The country solvability, frequently put forward to frighten and to facilitate the acceptance of unpopular measures is not threatened. France is also an open country, to the opposite of the situation which predominated in 1981. That point is irreversible, despite the affirmations of an acting minority which is largely invited by the media to bring contradiction to mainstream politicians. Tomorrow tax policy must take into account these changes, notably in prioritizing levies on assets a few or not able to be de-localized. In order to succeed, that transformation must be progressive and resolute. It must also be the purpose of an intense pedagogical effort to explain to the French people why these evolutions are indispensable. Such is the challenge French political leaders will be confronted with.