What is a tax shelter? In short, a tax reduction created to favor a sector of the economy, help certain households or encourage taxpayers to invest. What are the tax loopholes that cost the state the most? Who are the main beneficiaries? The top 8, focusing on income tax alone.
Exemptions, allowances, deductions, credits and other income tax reductions: among the many tax loopholes, which is the most costly for the state? The answer is, each year, in the annexes to the finance law. Since the government has the obligation to submit to Parliament the list of the eight costliest tax expenditures among those relating to income taxby quantifying the shortfall that these niches represent for public finances.
Verdict: In this top 8, there are niches benefiting a very large part of the population, or others benefiting from a handful of real estate investors..
| Costliest Tax Expenses | Cost 2021 | Number of beneficiaries * | |
|---|---|---|---|
| 1 | Home employment tax credit | 4.85 billion | 4229258 |
| 2 | 10% allowance on pensions | 4.2 billion | 14627700 |
| 3 | Exemption from wage savings | 2.35 billion | Not determined |
| 4 | Exemption from family allowances and AAH | 2.04 billion | Not determined |
| 5 | Overtime exemption | 1.67 billion | Not determined |
| 6 | Property deficit and deductible rental charges | 1.7 billion * | 1600000 |
| 7 | Tax reduction for charitable donations | 1.6 billion | 4993058 |
| 8 | Rental investments in Duflot and Pinel | 1.2 billion | 257000 |
* In 2019
Source: Volume II of the Ways and Means appendix to the 2022 finance law
N1 Tax credit for the employment of a home-based employee
4.2 million tax households declare expenses for personal services at home, either directly via systems such as Cesu or via a service provider company or association. This is a tax credit. Therefore, unlike the second niche of this classification, it entails an expense for the state for each of the beneficiaries, even the non-taxable ones. The highest cost for public expenditure nevertheless concerns households whose reference tax income (RFR) exceeds 108,510 euros per year (more than 9,000 euros per month): the tax credit to these wealthier households (10% of beneficiaries) exceeds one billion euros, despite the ceilings per household.
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N2 10% allowance on pensions
Reduction of 10% on the amount of pensions (including alimony) and pensions, details the government in the annex to the 2022 budget. The 14.6 million beneficiaries of this tax niche, the second most expensive by focusing on income tax, are therefore both withdrawals and taxpayers receiving alimony. Estimated cost of this tax expenditure intended to help withdrawals: 4.2 billion euros in 2022.
First important clarification: it is not a tax credit. The 3 million most modest beneficiaries of this niche are non-taxable: the expenditure for the public treasury is nil in their case. Second clarification: this tax benefit is capped for each tax household (3912 euros in 2021).
The flat-rate allowance of 10% for professional expenses which benefits all assets, including employees, is not considered by Bercy as a tax expense, rather as a simplification measure to prevent each taxpayer from declaring his actual expenses. The application of the family quotient is not, either, considered a tax expense from the point of view of Bercy.
N3 Employee savings exemption
When your employer pays you a participation or profit-sharing bonus, you have the choice between 1. taking the cash, which adds this bonus to your income subject to income tax, or 2. placing the bonus on a retirement plan. ‘salary savings plan (PEE, PER, Perco…), which exempts you from taxes. This exemption (1) costs more than 2 billion euros each year to public finances. However, it is impossible to determine precisely the number of beneficiaries of this niche.
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N4 Exemption from family allowances
Here is the title for this 4th niche: Exoneration of family benefits and allowance for disabled adults. This lack of revenue for the tax authorities is slightly more than 2 billion euros, but the government does not detail the number of beneficiaries.
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N5 Exemption from overtime
It is a measure taken by the government of Emmanuel Macron in the crowd of the Yellow Vests movement: the return of tax-free overtime. Since January 2019, overtime is exempt from income tax, however up to 5,000 euros of overtime in the year. The cost for the state was limited to 1 billion euros in 2019 but has now reached 1.6 billion euros.
The unpleasant surprise of certain taxpayers on the exemption from overtime
N6 Land deficit and deductible rental charges
The deduction from property income of repair and improvement expenses. In other words: on the one hand the deductible rental charges and on the other hand the land deficit. These systems allow landlords to take into account their rental management costs, property tax, co-ownership charges and other insurance premiums to reduce their property income (rent collected): these are referred to as deductible charges.
This mechanism also makes it possible to pass on the cost of maintenance work to land income: if it is higher than the land income to be declared, then the lessor generates a land deficit. The latter then makes it possible to occasionally reduce other types of income (salaries, pensions, etc.). Cost of these two schemes dedicated to owners renting accommodation: 1.7 billion euros in 2022, for 1.6 million beneficiary taxpayers.
N7 Tax reduction for charitable donations
Nearly 5 million taxpayers each year declare donations to charities or other organizations of general interest and assistance to the most disadvantaged. At stake: a tax reduction of 66% or 75% of the amount donated. Annual cost for public finances: 1.6 billion euros. Important clarification: non-taxable households that donate do not derive any tax advantage, since it is a reduction and not a tax credit. According to the annual Research & Solidarities study, around a quarter of donors are non-taxable and therefore appear to be disinterested donors.
What tax reduction for your donations to associations?
N8 Rental investments in Duflot and Pinel
A shortfall of more than one billion euros per year for a tax advantage which this time concerns only 257,000 tax households. That is an approximate expenditure of 4600 euros for the State for each household benefiting from the main rental investment incentive niches! These statistics only concern the Pinel device and its predecessor, the Duflot. An extremely targeted expenditure (half of the beneficiary households have an RFR greater than 70,000 euros) but which is explained by the state’s desire to increase the supply of rental housing.
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The top 10, all taxes combined
The more than 400 tax loopholes do not all focus on income tax alone. They also benefit businesses through cuts in corporate tax or VAT. The following 15 expenditures, classified according to their cost, alone represent more than 50% of the total cost of tax expenditures for the government in the 2021 budget.
- Research tax credit (7.43 billion euros estimated for 2022)
- Tax credit in favor of competitiveness and employment
- Tax credit for the employment of a home-based employee
- 10% allowance on pensions
- VAT reduced to 10% or 5.5% for certain works
- Reduced VAT 10% for catering
- Exemption from wage savings
- VAT 8.5% and (reduced rate) 2.1% in Guadeloupe, Martinique and La Runion
- Exemption from overtime
- Exemption from family benefits and AAH
And to have a truly global view of government expenditure, it would also be necessary to list the social niches: exemptions from social contributions benefiting, for example, self-employed entrepreneurs, rural revitalization zones, those applied to holiday vouchers, etc. But they concern another budget (that of Social Security) and are therefore not listed here.
(1) More specifically the exemption of sums paid in respect of profit-sharing, profit-sharing, matching contributions or sharing of capital gains, to employee savings plans and retirement savings plans undertaking collective or compulsory.