ISF reform, “flat tax”: the five lessons of the first assessment

The data remain insufficient to allow the Evaluation Committee of the reform of the taxation of capital to measure precisely the economic impact. Its report published on Tuesday nevertheless highlights “some positive indicators in terms of attractiveness”, such as the fall in the departures of ISF taxpayers and the rebound in dividends.

The capital tax reform assessment committee published its first report against a backdrop of strong political pressure.

Pointed at during the challenge of the “yellow vests”, the reform of the ISF has survived the great debate. At the end of this consultation, Emmanuel Macron however promised to review his parameters according to the assessment that would be made. It is therefore under strong political pressure that the evaluation committee bringing together economists, trade unionists, representatives of employers and the administration, published on Tuesday a first opinion on the two flagship measures at the start of the five-year term: the transformation of the ‘ISF in a tax on real estate (IFI) and the establishment of a flat rate (“flat tax”) on capital income, rather than taxation at the progressive scale of income tax.

Unsurprisingly, the data are still insufficient to accurately measure the economic impact. “It is not within the scope of the committee, for the moment, to conduct an“ ex-post ”evaluation. At the first meeting, we had no data. We tried to lay down the landscape and give the first quantified results ”, explains Fabrice Lenglart, chairman of this committee, placed under the leadership of the France Strategy “think tank”, hosted by Matignon.

This report is nevertheless rich in lessons on year I of this reform.

1 A lower cost than expected

The budget documents had already pointed this out, but the committee confirms that the cost of the reform should be slightly lower than forecast. It would be around 4.5 billion euros, instead of 5.1 billion anticipated before the reform. In detail, income from the real estate wealth tax (IFI) reached 1.3 billion euros in 2018, against 850 million recorded in the budget. A difference linked to the fact that the administration did not know the distribution of taxpayer assets between securities and real estate.

The cost of the “flat tax” is estimated between 1.4 billion and 1.7 billion euros, without taking into account the increase in dividends which was observed in 2018. There remains a question that the committee wishes to address in its next evaluation: have company directors favored the payment of dividends to the detriment of their salaries? This could imply a loss of revenue for Social Security. This effect cannot be assessed for 2018, which is atypical given the implementation of withholding tax. The leaders had every interest in paying themselves a high salary during the “white year”.

Despite this drop of 4.5 billion euros, the taxation of capital in France remains in the leading pack in Europe. In 2017, its weight in relation to GDP was 11%, i.e. 2.7 points higher than the European average. This order of magnitude should change little.

2 The increase in inequalities put into perspective

The report confirms that the reform has been very favorable to high incomes. But this effect is less pronounced than in previous studies on the subject, published by OFCE and IPP. INSEE was able to work on new data from the tax administration which shows that the 5% of households with the highest incomes receive 57% of the gains due to the reform of the ISF. For the “flat tax” on capital income, the gains are concentrated on the 15% of households with the highest incomes.

The committee puts the conceded tax cut – 4.5 billion euros – into perspective, given the total weight of compulsory deductions in France (more than 1,000 billion). “The Gini index, which measures the importance of income inequalities, of the order of 30 points in France, increases by 0.3 point”, underlines the opinion of the committee.

3 A reform favoring millionaires more than billionaires

It was the angle of attack of the right during the vote of the reform in the Parliament: the tightening of the ISF on the real estate will favor more the “big rich”, who have a greater part of their fortune invested in actions, that the “rich little ones”, owners of a family house. This argument is contradicted by this first assessment. Many “small rich” left the scale with the exclusion of financial assets, the number of taxpayers having gone from 360,000 to 130,000.

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Real estate wealth tax pays twice as much as expected

Another element to consider: the ISF weighed proportionally less on the “big rich” than on the “small rich”. Unprecedented work shows that the ISF tax rate was declining for very high incomes (the richest 0.01%) due to the 75% of income tax cap mechanism. The big fortunes played a big part in this mechanism, which in recent years of ISF collection cost the state more than $ 1 billion. “This explains why the big assets are not always the biggest beneficiaries of the reform”, according to Clément Dherbécourt, project manager at France Stratégie.

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4 An impact on tax exile difficult to measure

Are the rich coming back to France? According to a survey carried out by the committee among 90 wealth management professionals, “The reform would not have resulted, in 2018, by numerous returns from wealthy clients, but it would have made it possible to prevent certain departures”. In 2017, the number of departures from households subject to wealth tax fell by 40%, falling to its lowest level since 2003. A drop that can also be attributed to the consequences of Brexit. In addition, the asset managers interviewed expressed doubts about the sustainability of the reform, which contributes to slowing down returns.

5 How Big Fortunes Spent Their Tax Savings

The ambition of the reform was to create a tax bias between financial assets and real estate to encourage large estates to invest more in equities. Here again, there is a lack of economic data and reallocations of assets can just as much be linked to a market context as to changes in taxation. In their responses, wealth managers observe a lower investment in real estate and an upward trend in dividend payments. “Many have been reinvested in unit-linked life insurance type media”, which can be made up of stocks, bonds, or monetary media. “The additional net tax income induced by the reform would not have been spared more than usual”, indicates the report.

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