FRENCH ECONOMY
France's ultra-rich pay less tax, new study confirms
A report by four economists based on tax office data shows that the top 0.1% highest earners pay a decreasing rate tax rate as their income rises.
By Elsa Conesa
Published on June 6, 2023, at 7:00 pm (Paris)
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Time to4 min.
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It's hard to choose a more political title. "What taxes do billionaires pay?" asked four economists from the Institut des Politiques Publiques, an institute the Paris School of Economics, in a long-awaited report published on Tuesday, June 6. After months of contradictory debate, the conclusion is clear: For very wealthy French households, income tax is regressive. The effective tax rate paid by the wealthiest 0.1% decreases as they ascend the income ladder, from 46% at that threshold to 26% for the 75 households at the very top of the pyramid. This is a picture that promises to rekindle the never-ending debate on capital taxation of people with very high incomes, against a backdrop of strained public finances and at a time when the government is looking for resources to finance the fight against climate change.
This observation had already been made empirically. But now, for the first time, it is backed up by data from tax authorities. The authors of the study – Laurent Bach, Antoine Bozio, Arthur Guillouzouic and Clément Malgouyres – had access to a wealth of information from the Finance Ministry to perform their work. This data enabled them to reconcile the tax declarations made by companies with those of their shareholders, or at least the individuals who, in France, hold the capital. The economists were then able to construct an "economic income" of the wealthiest households, broader than just the tax income declared to the tax authorities, to which they add the paid tax.
The data to which the authors had access dated from 2016 and therefore predated Emmanuel Macron's reforms as president – the abolition of the wealth tax (ISF), the introduction of the "flat tax" on capital income, and the lowering of the corporate tax rate. Although they agree that it is "unlikely that these measures have increased the effective tax rate," the authors were unable to study their effects. The data was collected by a secure independent center, which was responsible for anonymizing it, then linking the companies' data to that of their shareholders – "a painstaking task," according to the authors, who nevertheless hope to repeat the exercise.
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Economic income 'taken into account'
"The tax forms of the richest people do not reflect all their income," Bach and Guillouzouic explained to Le Monde. "Our work consisted in adding to their declared income the undistributed profits of companies in which they hold more than 10%, and over which they have some form of control." This so-called "economic income" takes into account income that is not currently accounted for, such as undistributed profits from companies where individuals are shareholders. These may be profits placed in reserve, or housed in foreign entities – choices over which the shareholders who control the company can exert influence, say the authors.
Their work reveals significant discrepancies between tax income and this "economic income." The former amounted to €1 trillion in 2016, compared with an aggregate amount of "economic income" that was almost 30% higher, at €1.275 trillion. Similarly, the data reveal a high concentration of income: the 38,000 richest households declare an average reference tax income of €895,000, for an estimated average economic income of €3.3 million. And the effect is growing. The richest 3,800 households have a tax income of €3.4 million, for a recalculated economic income of €23.5 million. As for the 75 richest households, they declare an average tax income of €35.8 million, for an economic income of over €1 billion. The authors call them "the billionaires."
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Herein lies the explanation for the high tax regressivity of the ultra-rich. The nature of income changes as it increases. The richest tax households are more often shareholders in companies, or even control them. Income tax or the former wealth tax (ISF) are therefore of little consequence to them, compared to the corporate tax, which is paid by companies but which tax experts consider to be a tax on shareholders. The corporate rax, whose rate is lower than personal income tax, even becomes predominant for the richest 0.01% (less than 4,000 households), most of whose income is housed in the companies they control.
Above all, the authors point out, the wealthiest households have a greater propensity not to distribute the income generated by the companies they control. These retained earnings are therefore not taxed as dividends. They are, however, "real profits, since they are taxed at the corporate level," explain the authors. "They are not virtual wealth, like the value of companies listed on the stock exchange."
Question of new taxes
This approach reveals that the progressive nature of the tax system, in principle ensured by income tax, is confirmed for 99.9% of taxpayers, but has little impact on the wealthiest households. For them, personal taxes (income tax, wealth tax) remain progressive up to €600,000 in income, but decrease beyond that, to "no more than 2% of economic income among the 378 wealthiest households," notes the study. As for the 75 richest households, the effective tax rate on their economic income would rise from 26% to 59% if the personal tax scale were applied to them – what the authors call the "counterfactual" rate.
While it is difficult to make international comparisons, "the mechanism of regressivity at the very top of the income distribution is similar in most European countries," admit the authors, who nevertheless raise the question of the taxation of undistributed profits in France, particularly in holding companies – these are taxed in the USA, for example – or at the level of the shareholders themselves. The note concedes that these avenues could pose legal difficulties in terms of constitutionality or compatibility with European law.
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On Monday, June 5, the Finance Ministry reaffirmed its hostility to these ideas, on the grounds that the households targeted are "highly mobile" and that the regressivity highlighted "is not specific to France." A spokesperson for the Finance Ministry also considered it "dangerous" to equate personal income with corporate income, as the sums involved are not strictly speaking available to the former. "Retained earnings cannot be considered as dividends; they are sometimes reinvested in the company and create wealth," they added.
Above all, "the study shows that, if we want to tax billionaires, neither income tax nor a wealth tax are the right tools," insisted the ministry's spokesperson. "That's what we've been saying since 2017. These are global issues. At another time, the French authorities may have the opportunity to express their views on this. We need to think about it."
they tried the 75% on income over 1m back at the start of the 10's and then had to fall back a few years later.
future millionaires scared at the idea in this thread
