Macron’s tax reform, seen as favoring rich people, touches a raw nerve
French President Emmanuel Macron has announced wage hikes for poor workers and tax cuts for pensioners, offering concessions after two weeks of yellow vest protests, but refused to restore the solidarity tax on wealth (ISF). The reinstatement of ISF, transformed early in 2018 into real estate tax (IFI), is still among the demands of the protesters.
ISF had been a meaningful symbol for the French. It was first imposed temporarily after World War II in 1945 and re-imposed when the French Socialist Party first came to power in 1982. Afterwards, its imposition and abolition depended on regime changes.
Before Macron’s reform, ISF was applicable to households with total assets valued over 1.3 million euros ($1.48 million), and levied on what remains of the gross value after the imposition of other taxes. Calculation applied to all assets including real estate, financial assets and corporate shares, but some possessions such as artistic works, woods and money obtained as compensation for injury in accidents or due to illness were not taken into account. For households with property valued between 1.3 million euros and 3 million euros, 0.25 percents of the total assets must be paid; for those holding property worth over 3 million euros, the tax rate was 0.5 percent. ISF brought in about 5 billion euros every year with approximately 350,000 households as taxpayers and these numbers are still rising.
The ISF principle has its roots in socialism in France, that is, in accordance with the spirit of solidarity and mutual assistance, the rich ought to bear more social responsibility and obligations by paying more taxes, thus promoting equity in society. Since the company’s shareholding property is dealt with, ISF is also beneficial for the investment in enterprises, in that wealth would not be concentrated in fixed assets such as real estate, discouraging the formation of a rentier class. ISF thus became the benchmark for the French tax system by aiming to eliminate the gap between rich and poor.
There are other taxes like income tax and inheritance tax as well, but ISF has a symbolic significance since it is levied only on high-value asset owners.
Macron took office at a time France is facing a series of severe challenges: inadequately developed economy, high unemployment rate, industrial structure bottlenecks, scant improvement in quality of life and a polity in need of reforms. Moreover, populism and other trends affect society more than traditional political parties. Macron was elected president for his plan of large-scale structural reforms as well as a stance independent of traditional parties. The La Republique En Marche! founded by him gained a resounding victory, getting rid of interference from traditional left and right political groups.
Why did Macon axe ISF when he came to power?
He believes that economic development must be the priority, which requires increasing investment and autonomy to enterprises. This is the only way to fundamentally reduce unemployment, improve purchasing power and revive people’s confidence in France. Therefore, he chose the symbolic ISF, which is considered by the business and investment industry as the major wealth killer. Between 700 and 800 wealthy French families were driven away from the country every year, resulting in billions in financial loss. Moreover, some say that ISF actually increased the tax burden on millionaires and let billionaires flee because the really rich could manage to get around ISF.
According to a survey conducted by the French Senate, capital is discouraged from the consumption and corporate sectors due to ISF. As a result, losses caused by other taxes in the nature of value-added tax are more than the gains from ISF. In addition, because of the complicated declaration and calculation methods, there have been continuous disputes between taxpayers and tax authorities, greatly affecting the willingness of the wealthy to invest in France.
Even so, Macron reformed ISF instead of abolishing it. He divided property into various types of assets including finance, corporate investment, savings and real estate. He believes other assets except real estate are conducive to France’s economic development and should not be included in ISF. Therefore, he reformed by changing ISF to IFI. Although this will significantly reduce the number of taxpayers as well as the fiscal revenue, the impact will be remarkable because economic growth will offset the loss.
It is not fair to say that this reform path is wrong. However, the media and public opinion largely believe that Macron scrapped ISF. In their opinion, the fall in this symbol of France marked an unacceptable change for the broad-based low-income class and leftwing parties. They hold that too many benefits to the rich amount to injustice for low-income groups. Therefore, outrage boiled over in the form of yellow vest protests to blame this “crime” on Macron.
A lesson can be learnt from the ISF reform: It is impossible to simply deny and change something which is accepted by the people as a strong social symbol.