Why income tax revenues rise while taxes fall

The examination of the finance bill begins this Monday in public session in the Assembly. During the debates in committee, the opposition pointed out a paradoxical increase in income tax receipts, while the government is communicating on a tax cut of 5 billion. Explanations.

The debates in the Assembly should focus on the reduction in income tax of 5 billion euros provided for in the budget bill.

This is the kickoff this Monday at the Palais Bourbon of discussions in session on the third Budget of the five-year Macron. The debates should focus on the main political object of this finance bill, namely a reduction in income tax of 5 billion euros which sounds like a response to the movement of “yellow vests”. Proof that even tax cuts can create controversy, the discussions in the finance committee highlighted a paradoxical phenomenon: income tax revenues should increase by almost 3 billion euros to 75.5 billion euros in 2020, despite this tax cut.

“The government announces to households a gift of 5 billion, but it takes back half of it”, pointed out the deputy Véronique Louwagie (LR), stressing that “An additional 2.5 billion euros will have been taken from the French between 2018 and 2020”. In other words, without the $ 5 billion tax cut, revenue should have increased by $ 8 billion between 2019 and 2020. “How is it possible to have such a spontaneous increase in income tax before the 5 billion cutback measure?” “, asked the deputy of Marne, Charles de Courson.

Natural dynamics

Faced with this challenge, the Budget rapporteur, Joël Giraud (LREM), justified this increase by an increase in the tax base linked to better performance of employment and wages: “There are more taxpayers, not only for demographic reasons, but also because there are fewer unemployed. “ It is true that income tax receipts have a natural dynamic, as the tax schedule is revalued each year by inflation, while the wage bill grows faster than prices.

This is not enough to explain the jump in revenue expected in 2020. The reason is to be found in the implementation of the withholding tax. In 2019, the tax will have been collected over eleven months instead of twelve, because the levy operated by the collectors in December 2019 will be paid to the State in January 2020. Hence a rebound in 2020.

In this case, revenues should have fallen in 2019, by at least 6 billion. However, it is not the case. Why ? In reality, the income tax scale has been revalued by one year of inflation (1.6%) in the 2019 finance law, while at the same time, the base has grown well. superior. Since we went directly from the taxation of 2017 income to that of 2019 income, the tax base increased by around 6% (on the basis of two years of increase in the private wage bill) during that the scale was increased by only 1%.

Political aim

The apparently technical levying of the tax over eleven months instead of twelve undoubtedly had a political aim. It mitigated any criticism, upstream of the switch to withholding tax, on the fact that the State would increase its tax revenues. The effect is now clearly visible in the 2020 budget, the first year in which the tax will be collected over twelve months. According to Charles de Courson, this “under-indexation” of the scale explains the increase in revenue observed in 2020 for 2 billion.

The withholding tax had another effect by increasing the collection rate. Initially planned at 97% for 2019, this rate will ultimately be 98.5%. Therefore, it has been revised upwards for 2020 and is expected to reach 99%, according to Bercy forecasts. This represents approximately $ 1.2 billion in revenue. “This does not explain the entire gap”, warns Charles de Courson, for whom there may be other phenomena at play, such as the standard 30% levy on capital income or a more significant distortion of the income curve. The government’s responses are awaited in the hemicycle.