The French government’s proposed top 75% income tax rate, applicable to individuals annually earning more than 1 million euros, was struck down by the country’s Constitutional Council last weekend after it ruled that it breached a fundamental principle of equality for taxpayers. The super-tax for the super-rich had made headlines the world over, notably with the cases of high-profile individuals, latterly the actor Gérard Depardieu, who announced they were fleeing France for more fiscally clement climes. While President François Hollande has promised to redraft the terms of the tax, there is every indication that, if it is revived, it will return severely watered-down. Mediapart business and finance specialist Martine Orange analyses a fiasco that begs the question of whether the tax was scuppered from the inside.
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How could the French budget and finance ministries have made such a mistake? Ever since the announcement that the country’s Constitutional Council struck down the government’s planned 75% tax rate on incomes of more than 1 million euros, the question, sometimes mixed with suspicion, is being asked everywhere.
The blunder concerning what was one of President François Hollande’s key and symbolic election campaign pledges is quite simply monumental. The Constitutional Council gave no ruling concerning the admissibility of the proposed rate of the income tax for the super rich, but rather centred on the simple point that the new tax violated a principle of equality.
This was because the tax was applicable to individuals as opposed to households. “The legislator having thus misunderstood the requirement for taking into account contributive rights, the Constitutional Council has, without pronouncing on the other complaints levelled at this Article, censored Article 12 for a misunderstanding of [the principle of] equality before public charges,” read the Council’s official statement following its judgment.
So the government ignored the basic rule for income tax payment in France, which is that the contribution is calculated on the income a household declares. This meant that, for example, in the case of a household where the total income was 1.5 million euros, but where the couple making up that household earned – individually - less than 1 million euros, they would not be taxed at 75%. Whereas another household, made up of just one income earner who brings home 1.2 million euros per year, would be subject to the tax. This is the illegal inequality that the Constitutional Council cites.
Furious at the outcome, Socialist Party MP Christian Eckert, the rapporteur of the finance commission of parliament’s lower house, the National Assembly, posted this on his blog: “Many people are now talking of the amateurism of the government and its parliamentary majority, who could have seen this coming! There, too, the truth must be told. Following the expert advice of my administrative team at the National Assembly, I had prepared an amendment to avoid this distortion between [the fiscal status of] households. As always, this was raised with the cabinet of the Minister of the Budget ahead of parliamentary sittings in order to avoid the situation whereby the budget rapporteur submits an amendment that does not have the approval of the government that he supports. I was dissuaded from submitting the amendment. I gave up on it because experience shows that in general the [parliamentary] majority only exceptionally votes against the opinion of the government […] I regret not having been able to convince [the ministry] on this point.”
Christian Eckert’s blog statement raises a number of important questions. Why did the budget ministry not listen to his warning? Why was the Council of State, which is normally so painstaking in its appreciation of legal matters, not concerned by the issue? This further begs the question as to whether the budget ministry deliberately scuppered a tax it did not agree with. “I have heard these suspicions, but I don’t agree with them,” Eckert told Mediapart. “[Budget minister] Jérôme Cahuzac places importance on the presentation of things. He can make his contrary opinion known. In fact, in private, he didn’t hold back. But he would never tolerate that a situation would degenerate and damage the government.”
Hostility
Jérôme Cahuzac was François Hollande’s presidential election campaign spokesman on economic and social affairs, and made known his incomprehension and hostility towards Hollande’s plan for the super-income tax when he was made aware of it – in a television studio (click on video below – in French only). Clearly, he had been kept apart from its preparations.
While Cahuzac was unable to convince Hollande to drop the plan, it was soon the object of modifications, and even before the election campaign was over it became described as “an exceptional” tax that would last no more than two years.
Almost immediately after Hollande’s election, the issue of the super-income tax was at the centre of a series of discussions within the finance ministry. It had already become a major obstacle to the fledgling relationship between the new socialist government and the Association Française des Entreprises Privées, the French business association that represents every company quoted on the Paris stock exchange, the Cac 40. A number of senior finance ministry civil servants opposed the tax, warning that the measure, which some compared to a revival of class war, would lead to an exodus of high income earners, and notably CEOs.
During the summer, while preparing the 2013 finance bill due to be put before parliament in the autumn, the government attempted to sweeten the pill, first with a plan to partially exclude sportsmen and women and artists and performers from the tax. At one point, the finance ministry floated the idea of raising the threshold for the 75% rate to apply to couples earning above 2 million euros per year, which is an indication that the question of calculating the applicability of the tax by household, rather than by individual, had been considered.
In the end, the government settled upon the super tax’s original criterion of incomes of more than 1 million euros per year, ignoring the household tax rule. However, the danger of the tax being struck down by the Constitutional Council was present from the beginning, after the conservative opposition announced early on that it planned to demand that the Council rule on whether ort not it was of a confiscatory nature.
Fiasco
“When I raised this issue with members of the budget ministry cabinet, with whom we are in regular contact, they brushed aside my objections,” recalled Christian Eckert. “In any case, they never take anything into account. They told me that the dossier had been overseen, and that it was not a problem. The CSG [supplementary tax to help fund the social security budget] is an individual one, like the [government’s low-salary top-up] employment bonus. Therefore tax on high incomes could be also. For it wasn’t about creating a new tax band but rather to create a tax that dissuaded [the practice of] exorbitant salaries.”
Budget minister Cahuzac’s staff repeat today the same message, explaining that the Constitutional Council’s decision “was not a given thing”. They cite as an example the taxation scheme applied to what are known as retraites-chapeau. These are retirement payments for company bosses, entirely paid for by their firms and free of social security contributions, upon which tax is calculated per individual, and not as part of household income.
But these explanations tinged with embarassment cannot hide what is a political defeat. Guy Carcassonne, a specialist in constitutional law and a professor of law at Nanterre University, and also a close friend of Jérôme Cahuzac, writing in the French version of the Huffington Post, described the striking down of the tax by the Constitutional Council as “the demolition of a symbol”. While the Right rubs its hands at the government’s setback, the latter retreats back behind the lines. During his televised New Year’s Eve address to the nation, President Hollande pledged the super tax would be revived, with consideration of the Constitutional Council’s observations. But Prime Minsiter Jean-Marc Ayrault’s staff, like those at the finance ministry, already envisage an unhurried timetable for the new draft, suggesting it could be ready for June, or even September.
The government will have to grapple with the bounds set by Constitutional Council. What will be the level of income, calculated per household, at which the tax is applicable? Will it kick in from anything more than 1 million euros? If so, it will affect many more income earners than the original proposal. Or will they accordingly raise the starting sum to more than 2 million euros? In that case, the numbers of those eligible for 75% taxation will thin like a snowball in the desert.
Last but not least is the question of whether it is dangerous for the government to maintain a top 75% income tax rate. While the Constitutional Council has not taken up a clear position on the conservative opposition’s complaint that this is a confiscatory measure, it nevertheless left a warning on the issue regarding other aspects of new taxation rules. It found that the new scheme concerning stock-options, now subject to income tax, and which raised the tax rate to 72% and even 77%, amounted to “an excessive charge” which was “contrary to equality before public charges”. It reduced the marginal tax rate here to 64.5%, as it did also for the proposed new tax on retraites-chapeau company-paid pensions, ordering it down from 75% to 68.34%. Reading between the lines, the Council appears to suggest that a tax rate of more than 65%-70% is confiscatory.
The 75% super-rich income tax was launched amid improvisation, and continues in a direction of complete confusion. It has become a total political fiasco.
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English version: Graham Tearse