Introduced at the start of Macron’s five-year term, in order to align the capital income tax system with that of other developed countries, the single flat-rate levy (PFU) has benefited a minority of very wealthy French people, without visible effect, to right now, on investing in the economy. Here is the new article in our series on the results of Macron’s reforms for the household budget.
It is often referred to as the flat tax, borrowed from the Anglo-Saxon world. Its official name is PFU, for single lump sum levy. This is one of the flagship measures of Macron’s five-year term in tax matters. Implemented in 2018, it established a global levy of 30% on capital income, which includes a flat tax rate of 12.80% and social security contributions of 17.20%.
What were the effects of this reform? How much does she cost? And who benefits? Here, four years later and a few weeks from the first round of the presidential election, our assessment of the PFU.
PFU, the single rate tax on savings
What has changed, and why
Emmanuel Macron is not the first President of the Republic to initiate, as soon as he comes to power, a reform of the taxation of capital. His predecessor, Franois Hollande, had the same reflex. From 2012, the socialist Head of State had opted for a barmisation of capital income, that is to say an alignment with the taxation applicable to earned income. The PFU, established on January 1, 2018, was therefore a way for Emmanuel Macron, former deputy secretary general of the Elyse then Minister of the Economy under Holland, to settle the tax legacy of his mentor.
The PFU marks, in fact, the return of a flat tax on capital income, the image of the flat-rate liberating levy (PFL) before 2012. It even pushes this logic further. Unlike PFL, the PFU is not optional: it is applied by default, except in the event of an exemption. On the other hand, it is not irrevocable: at the time of his tax declaration, the taxpayer can always choose progressive scale taxation.
When presenting the PFU, Emmanuel Macron had notably put forward two arguments. Simplicity first: the PFU tends unify the tax regime for investments, since it applies to interest (passbooks, term accounts, shares, etc.), dividends, capital gains on the sale of securities, as well as, depending on the date of subscription, income from life insurance and PEAs. Then attractiveness: the PFU was presented as a way of bring French taxation closer to European standards in matter.
Taxation of bank investment income
In the background, we find another bias of the Macronist power, which also led him to abolish the wealth tax (ISF) in favor of a tax on real estate wealth (IFI). Its logic is as follows: a reduction in taxation will encourage some households to return to place their money in France or redirect it to more productive investments, recalls Pierre Madec, economist at the French Observatory of Economic Conditions (OFCE). This is also why the government did not include the rents collected in the PFU or why it created the IFI: it wanted to create a tax shift favorable to movable rather than real estate investments.
A choice that also resonates with a controversial economic theory, the so-called runoff theorywho believes that a policy favoring the incomes of the richest will, in the last resort, benefit everyone.
Who benefits from the reform?
Logically, the introduction of a flat tax on capital income has especially beneficial to the most taxed households, those whose marginal tax rate (TMI) exceeds this flat rate. In this case, therefore, households whose income per bracket currently exceeds 26,070 euros, and whose IMR is therefore 30%, 41% or 45%. Taxpayers in the first two brackets, 0% and 11%, generally have an interest in opting for taxation at the income tax scale.
However, a detailed analysis of the effects of the tax reforms of the Macron five-year term, and in particular the PFU, shows that the big winners of the reform were very few.
The main observable effect of the implementation of the PFU has, in fact, a sharp rise in dividends paid by companies to their shareholders. the 3rd gear of the capital tax reform evaluation committee, published in October 2021 by France Strategies, an organization that reports to the Prime Minister, assessed this increase 9 billion euros, from 14 billion to 23 billion euros, between 2017 and 2018, the first year of implementation of the PFU. A call for air which was confirmed in 2019 (+1 billion euros) and in 2020 (stable compared to 2019).
How to explain the extent of this increase? Everything indicates that the installation of the PFU gave the signal for a massive release of dividends from companies owned by natural persons, who had chosen to hoard since 2013 and the implementation by François Hollande of the barmisation of capital income. A much less favorable tax regime than the PFU, as shown by the CRED (1) in its evaluation report on the implementation of the PFU, dated September 2021: Taxpayers whose overall marginal tax rate was 45% in 2017 saw their marginal rate on dividends drop from 40.2 % to 30% and their marginal interest rate from 58.2% to 30%.
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This windfall effect, ultimately, will only benefit a small number of taxpayers. In 2019, as in 2018, dividends were even more concentrated than in 2017: in 2019, 62% were received by 39,000 households (0.1% of households), of which 31% by 3,900 households (0.01% of households), notes the committee for the evaluation of capital tax reforms. (…) The 5,000 households that increased their dividends by more than 100,000 euros in 2018 and 2019 compared to 2017 alone account for 45% of the additional volume of dividends. Among them, 310 households recorded an increase of more than 1 million euros in their dividends in 2018 and 2019 compared to 2017, and alone represent an increase of 1.2 billion euros.
The PFU is not a tax justice measure, summarizes Pierre Madec. It has largely broken the progressiveness of the tax, which was the philosophy of the previous five-year term.
A gift estimated at 1.8 billion euros
In the Economic, Social and Financial Report (RESF), published as an appendix to the draft budget law for 2022, the budgetary cost of setting up the PFU was estimated 1.8 billion euros over the 2018-2022 period.
However, the real budgetary cost was probably nil, estimates the public finance information site Fipeco, if we take into account the tax revenues linked to the sharp increase in dividends paid from 2018. A point of view that Pierre Madec puts into perspective : This hoarded money would have ended up being released and taxed in one way or another. We can therefore hypothesize a loss of earnings.
Have the objectives been achieved?
Remember: strengthening tax justice was not one of the stated objectives of the government when it created the PFU. Did he, on the other hand, achieve the goals set for him?
Regarding the alignment of the tax system with the average of OECD countries, the answer is yes. (…) The 2018 reforms led to a reduction in France’s tax rates on movable assets levels close to the average observed in the main developed countries, this movement being mechanically more notable for the wealthiest taxpayers, notes the committee for the evaluation of capital tax reforms. With the implementation of the PFU and the abolition of the ISF, France is in fact joining the majority situation of countries with regard to movable capital, where income is taxed at a single rate (flat tax) and where there is no annual tax on assets.
On the reorientation of investments towards the real French economy, in favor of economic growth, the results are on the other hand more vague. Like in 2013 [date de la mise en place de la barmisation des revenus du capital], no significant effect on business investment was observed, believes Franois Ecalle, president of Fipco. This is confirmed by the various reports designed to assess the effects of the tax reform.
The objective of stimulating investment in the French economy has been widely publicized, but in reality, no compensation was requested taxpayers who have benefited from the reform, observes Pierre Madec. Nor has there been any massive reinvestment in real estate, continues the OFCE economist. One can imagine that the dividends paid will end up going towards investment, but for the moment this is not yet visible. Clearly, the runoff is still pending.
(1) Center for Research in the Economics of Law (CRED) at the University of Paris II Panthon-Assas.