To resolve the public deficit slippage, Michel Barnier’s government could reform the single flat-rate levy, known as the “flat tax”.
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A real headache. This is what the future Minister of Economy and Finance is expecting when Michel Barnier, the Prime Minister appointed by Emmanuel Macron after more than 50 days of waiting, has formed his government. And for good reason, the first emergency at Bercy will be to find the most effective solutions to resolve the slippage of the public deficit in France. To remedy this, the executive could seek to boost the State’s tax revenues by going back on the past promise not to increase taxes. One of the avenues would be to reform the single flat-rate levy (PFU), known as “flat tax”.
Implemented under Emmanuel Macron in 2018, the “flat tax” applies to income from savings and capital (stock dividends, interest on bank accounts or life insurance in particular) excluding real estate at the overall rate of 30%, including 12.8% income tax and 17.2% social security contributions. This year, it should bring in 6.8 billion euros, according to the Budget for 2024. If the new government were to touch it, the first hypothesis would simply be to increase the rate, for example to 32% or even 35%. “Increasing by one percentage point would generate around 600 million euros in revenuecalculates economist François Ecalle, founder of the Fipeco website. But this purely theoretical amount does not take into account changes in behavior.
The highly uncertain effects of the return of income tax
On paper, therefore, 3 billion euros of additional tax revenue. But only on paper, because raising the overall rate of the PFU could in fact lead to a reduction in dividend payments, whereas the latter have generally increased since the introduction of the “flat tax”, this tax being more advantageous than the progressive scale of income tax in force previously. “Increasing the flat-rate withholding tax could discourage family businesses from paying dividends”warns François Ecalle.
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Another option is to eliminate the flat tax and return to the progressive scale of income tax, as promised by the New Popular Front during the legislative elections. At that time, the Montaigne Institute calculated “between 3.2 and 3.6 billion euros” the impact of such a measure. But “in a maximalist hypothesis”, according to the think tank, which noted last July that “the application of the income tax scale could lead companies to reduce the dividends paid, and thus the tax base.” And even put forward the hypothesis, if capital income returned to its 2017 level, of a negative yield (-0.7 billion euros) if income tax replaced the “flat tax”. “In theory, it would bring in a lot of money… But experience tells us that it is not so obvious. It could lead to losses.”confirms François Ecalle. Another option: maintain the PFU as it is by applying a ceiling beyond a certain threshold to only hit the most well-off. “It would be more of a symbolic and political measure by making the richest pay. But it would not bring in much money.”concludes François Ecalle.
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