An exceptional contribution for the wealthiest French citizens

A special tax will be imposed on the wealthiest French citizens. During an interview on France 2, Budget Minister Laurent Saint-Martin specified that 0.3% of households paying income tax would be affected.
 

Who will actually be affected by this measure?
When asked, the minister gave the example of “a childless household with an annual income of around 500,000 euros.” When contacted, the French Ministry of Finance (Bercy) told Les Echos that the number of children would not be taken into account for the implementation of this new surtax.
 

A Likely Adjustment to the Special Tax on High Incomes (CEHR)
It seems increasingly likely that this additional tax will result in an adjustment to the Special Tax on High Incomes (CEHR). Introduced under President François Hollande in 2012, the CEHR—which remains in effect—distinguishes between single individuals and couples (married or in a civil partnership) for tax purposes, without taking the number of children into account, unlike the standard income tax, which is based on the family quotient principle.
 

Currently, the CEHR applies to households whose taxable income exceeds 250,000 euros for a single person and 500,000 euros for a couple. The tax is progressive, with a 3% rate and a 4% rate for incomes exceeding 500,000 euros for a single person and 1,000,000 euros per year for a couple. For example, a single person with an income of 400,000 euros will be liable for a special contribution of (400,000 euros – 250,000 euros) × 3%, or 4,500 euros.
 

Fewer than 40,000 households affected in 2021
According to the latest statement by the Minister of the Budget, the one-time tax on high incomes would affect approximately 65,000 households in France. However, a report by the Court of Auditors dated June 5, 2023, on “the consideration of the family in taxation” cites different figures. The report highlights that “revenue from the CEHR totaled 925 million euros in 2021, paid by 39,300 tax households.” According to Le Parisien, 3 billion euros are expected from a “tripling of the exceptional contribution on high incomes.”
 

The most likely scenario would be a broadening of the tax base, since raising the tax rate would result in a tax burden close to 66 percent—a level deemed confiscatory by the Constitutional Council. For example, the new income thresholds for the CEHR could be lowered from 500,000 to 400,000 euros for a couple.
 

According to statistics from the tax administration, 66,850 tax households had a reference taxable income exceeding 400,000 euros in 2022 (for the 2023 tax filing season), a number of households close to the threshold indicated by the minister.
 

An Already Highly Concentrated Income Tax
The progressive income tax already falls primarily on the wealthiest households. The DGFIP notes that in France, 75% of income tax is paid by the wealthiest 10% of households. At the same time, less than half of all households are liable for income tax.
 

While affluent households already pay the majority of income taxes, the wealthiest largely avoid paying them. Admittedly, the progressive tax system applies fully to the wealthiest 95% of households. But tax mechanisms allow the wealthiest 0.01% to reduce their average tax rate, thereby creating a ceiling effect, according to a report by the Institute for Public Policy (IPP).
 

"Above a certain income level, 'the overall tax rate becomes regressive, ranging from 46% for the wealthiest 0.1% to 26% for the wealthiest 0.0002% (the billionaires),'" the study explains.
 

In fact, most of the income earned by this category of households is not subject to income tax, unlike that of the vast majority of the population. Why? Because these individuals’ resources are not necessarily classified as income.
 

Tax Avoidance Strategies of the Ultra-Wealthy
Among the strategies that can be implemented, capitalization is a classic example. A household’s investment income is subject to a flat tax at a rate of just 12.8% plus 17.2% in social security contributions, for a total rate of 30%.
 

Taxpayers can also take advantage of tax-efficient investment vehicles such as life insurance, the PEA, or the PER. However, these strategies—which have become widely adopted and are used by most savers—are nowhere near as effective as the arrangements set up through corporations.
 

The IPP study reveals that most of the ultra-rich’s income is held in wealth management holding companies. “The wealthiest tax households are more likely to control companies and are significantly more inclined not to distribute the income generated by their companies.” The institute notes: “This shift from a tax base subject to income tax (IR) to one subject only to corporate income tax (IS) is not, however, neutral in terms of the overall tax burden borne by the wealthiest households.”
 

Through this approach, the tax rate on personal income and wealth (including social security contributions), which peaks at around 59 percent, is replaced by the much lower corporate income tax rate of 33.33 percent in 2016, according to the IPP (25 percent in 2024). The study goes on to emphasize that if billionaires were indeed taxed under the individual income tax system, the overall effective tax rate on economic income would rise from 26% to 59%.
 

According to this study, the majority of the income earned by the wealthiest 0.01% remains within corporations. The institute also notes that the former wealth tax (ISF), whose tax base was based on income, “was unable to correct the regressive nature” mentioned here. Its reinstatement would therefore have little effect on these avoidance strategies, according to the IPP.
 

These parent companies can use other methods to reduce their tax burden. For example, if they have their subsidiaries remit management fees (fees paid by a subsidiary to the parent company for services it has received), these fees can be used to repay debts incurred by the holding company. Through this purely accounting-based strategy, which allows for significant deductions, the profits of both the holding company and its subsidiaries can be reduced to a minimum. This is one way to minimize corporate income tax, in addition to income tax.