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Deductions as a way of promoting inequality

This post is based on the website “Pour une révolution fiscale” (“For a tax revolution”). I will show that, unlike one might think, the French tax system is not progressive for high income levels.

In France, the overall average tax rate is 49%. The 50% poorest French face an average tax rate of 45%, while the 50% to 10% higher income ones are taxed between 48% and 50%. Further up, the top 5% and mainly the top 0,1% have lower average tax rates which, for these last ones, does not exceed 35%. We can see that the French tax system is, after all, regressive!Image

Why does this happen?

First of all, we should note that consumption taxes, and above all, social contributions (“les cotisations sociales”), are highly regressive: as an example, the latter “collect” 25% of the poorest incomes and less than 5% of the richest ones. The fact that consumption taxes are regressive is explained by the fact that, while the poorest spend almost all their income, the richest save a considerable part of it. On the other hand, social contributions’ regressivity is explained by the reason that there are caps (“plafonnement”) which make them have a low weight on high wages and capital revenues.

To counterbalance these regressive taxes, taxes on capital and taxes on income should theoretically give progressivity to the system. While taxes on capital are indeed regressive, since the wealthiest have almost all the real estate and the financial capital, they are not that considerable for the total income: “The annual flow of capital income is 25 points of national income, these taxes are equivalent to an average tax rate of just under 20%”. But what really fails in this system are the taxes on income: while being weakly progressive for low and medium incomes, they are highly regressive for higher levels of income, reinforcing the regressivity of the system.

Let’s now take a deeper look at the taxes on income. These are divided into two: tax on the revenue of physical persons (“l’impôt sur le revenue des personnes physiques” – IRPP), which consists of a progressive tax, and social generalized contribution (“la contribution sociale generalisée”), which consists in a tax of 8% of all incomes intending to cover welfare spending. Besides being continuously reduced by the governments, the IRPP is undermined mostly by deductions that benefit high revenues and capital revenues, protecting the most fortunate ones: this makes the system regressive.

To overcome the ethical problems a regressive fiscal system (at least usually) creates, the authors of the study propose a tax revolution, which consists in the creation of a new tax on income that replaces all the existent ones which concern income. This tax would not allow deductions and thus progressivity would not be put at stake. The authors propose several combinations of taxes in order to held government revenues’ constant; the standard one defines a 2% tax on 1100 euros monthly income, and the taxes rise until the 60% for people with a monthly income that surpasses 100.000 euros.

The French tax case is surprising. But I think most of the problems found in France can be found in several other countries: the French Gini coefficient, after taxes and transfers, is relatively good when comparing with the other OECD countries, while the Gini coefficient before taxes and transfers is relatively bad when comparing with the same countries – it seems to give us some evidence that a large number of other countries have tax systems that are even more regressive than the French one.

The French case proves that a complex tax system which allows a lot of deductions is a source of regressivity in taxation. Simpler appears to be fairer. If we want to improve equity within society, why not simplify the tax system while simultaneously ending up with all/most of deductions? Fiscal illusion of progressivity seems to be a source of inaction of taxpayers that do not claim for the end of deductions because they do not perceive them as indirect taxes (since reducing tax payments through deductions raises the need of increasing other taxes). And while they do not perceive them as so, it seems hard to have tax progressivity.

 

Samuel Cardoso, 624

 

Source:

LANDAIS, Camille, PIKETTY, Thomas, SAEZ, Emmanuel; Pour une révolution fiscale: Un impôt sur le revenue pour le XXIIème siècle, Le Seuil/République des idées

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Author: studentnovasbe

Master student in Nova Sbe

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