“The flat tax is a time bomb for public finances”

The 30% flat-rate levy on capital income, the flagship measure of Emmanuel Macron’s presidential program, will cost Bercy much more money than the budgeted 1.5 billion euros, probably of the order of ten times more. This flaw fundamentally challenges the accounting balance of the draft budget law, and shifts an already unfair tax reform to total inequity. Here’s why.

Up until now, the French tax system has tried, somehow, to maintain a certain neutrality between the taxation of dividends and that of wages. Such neutrality is essential to the proper functioning of the tax. Because if the capital income is less taxed, then all those who are both employees and shareholders of their company – bosses, entrepreneurs, executives and independents – have an interest in perceiving the fruit of their labor in the form of dividends rather than wage income, thus siphoning the revenues of the Social Security and the State.

Let us take a concrete example, that of Marcel, boss of a big SME of which he owns 100% of the capital, and which faces the higher marginal rate of the income tax. It has the choice between paying a salary, subject to contributions, social security contributions and income tax, or to pay in the form of dividends, subject to corporation tax – 25% at the end of the year. quinquennate – and the flat tax Macron.

A similar loophole in the United States

The reforms desired by the new government will deepen the chasm between these two options. If Marcel chooses the “wages” path, his marginal tax rate will be, all inclusive, 65%; if he chooses the “dividends” option, he will be 50%. That is a difference of 15 points, a considerable and unprecedented gap in the history of French taxation.

Should we worry? Yes, because all the available evidence shows that high-income earners, well advised by their wealth managers and tax lawyers, are particularly sensitive to such tax differentials.