June 30, 2022

Towards a new inheritance tax system? The shock tracks of the economic analysis council

The pandemic has brought to the fore the burning issue of inequalities in France. While the overall income of the French has been preserved, many people have lost their jobs in just a few days with no real safety nets. A few months before the presidential election, the debates on inheritance and taxation, for the moment little present in the battle of ideas, could revive the proposals of the candidates for the Elysee. In a very documented note unveiled this Tuesday, December 21 after a long work of more than two and a half years, the economists of the Economic Analysis Council (CAE) explain that the inheritance again plays a major role in the rise of inequalities.

“In France, the share of inherited wealth in total wealth now represents 60% against 35% at the start of the 1970s” underline the experts. “Inheritance is making a comeback. Inherited heritage has greatly increased in total heritage. Inheritance is much more unequally distributed than many other resources. It becomes essential to inherit to reach the top of the social pyramid of the level This observation is shared in the OECD countries. This has aroused renewed interest in redistribution policies. There is a real danger to equal opportunities with this return of the inheritance “, said the economist and teacher at the London School of Economics (LSE), Camille Landais, during a press briefing.

Added to this is the high concentration of heritage among the better-off, supported by the recent report on global inequalities co-edited by subject specialist Thomas Piketty. “There is a huge concentration on inherited heritage”, added Camille Landais. Faced with this resurgence of heritage disparities, the council attached to the Prime Minister is exploring several explosive avenues.

Thomas Piketty: “It is because we have reduced inequalities in health and education that we have experienced more prosperity”

Eliminate or reform the main tax loopholes

Among the avenues that risk igniting the debates, are the planing or even the elimination of certain tax loopholes “whose economic justification is limited”. In fact, the inheritance tax is “mitigated by exemptions and exemptions” consider the authors of the note Clément Dherbécourt, Gabrielle Fack, Camille Landais and Stefanie Stantcheva. Inheritance tax niches would have the peculiarity of being “numerous, generous compared to the tax norm” and they mainly focus on the top of the pyramid.“At the top of the distribution, the top 0.1% of each cohort, which will have received around 13 million euros in gross transmissions over their lifetime, pays barely 10% in inheritance tax on the ‘all of this inherited heritage, far from the marginal rate of 45% displayed by the scale above 1.8 million euros transmitted directly online “, indicate the authors.

France is a country where the taxation of capital is apparently rather high compared to the average for OECD countries. On the other hand, there is much less data on the progressivity of this taxation of capital and transmissions. Inheritance tax revenues are high. This taxation is a little blind. There is a targeting problem. This system has resulted in a low taxation of high estates “, said Clément Dherbécourt.

In the maquis of French tax loopholes, economists have selected four devices with an estimate of the total shortfall for public finances between 8 and 11 billion:

  • The Dutreil pacts (between 2 and 3 billion euros);
  • life insurance (between 4 and 5 billion euros);
  • donations in bare ownership with reserve of usufruct (between 2 and 3 billion);
  • the non-taxation of unrealized capital gains in the event of inheritance (0.05% of GDP).

On the Dutreil pacts implemented in the 1990s and 2000s, the members of the economic analysis council recommend in particular at least strengthening tax controls. These devices are primarily intended to facilitate the transfer of professional family assets. According to the theory, the taxation of such goods would be detrimental to investment, employment, governance and the survival of companies. “This argument is theoretically valid and the negative effects can be considerable in the presence of credit constraints, likely to affect small and medium-sized enterprises. However, empirical work suggests that these negative effects are very limited or even zero in practice”, say the researchers. They suggest a drop, “or even the elimination in favor of payment facilities directly adapted to the problems of liquidity constraints potentially caused by the payments of rights on business transfers”.

In addition, the empirical economic literature has not shown “a clear indication that encouraging family heirs to enter governance was favorable to business development.”

Taxation on inheritance flows throughout life

Finally, among the other avenues to be explored, economists propose to set up a tax on inheritance flows throughout life. The implementation of such a tax system would require access to more reliable information on donations and inheritances. “If we want to have a more fruitful debate, we must have access to this data” specifies Camille Landais. “These data show us that the problem is more important than what we thought before. Beyond the estimates, there is a problem of progressivity of the system”, said Clément Dherbécourt.

Moreover, this reform would have relatively little impact on the risk of tax expatriation. “One of the big issues is that when States tax in an environment of tax competition, the fear is to leave rich assets. Clearly, there are migratory movements but the magnitude is much lower than what we hear. in the public debate. The migratory flow is quite low. It has little impact on the rich population “ informs Camille Landais.

Guarantee capital for all

The other proposal that risks provoking lively debate is the establishment of a capital for all paid by the majority. This capital would make it possible to reduce the most extreme disparities “but also to remove credit or liquidity constraints which can negatively affect access to education, investment, housing for the very large part of each cohort who receives nothing, or almost nothing at birth “.

“A lot of people leave with nothing at all in life. Credit constraints can block some people in their choice of business.” adds Camille Landais. This track was mentioned in particular by economists Olivier Blanchard and Jean Tirole, authors of a river report submitted last June to the Head of State. This guaranteed capital could be financed by the reform of the current tax loopholes. The modalities of this redistribution could be the subject of an abundant debate a few months before the presidential election.

Climate, pensions, successions: the shocking proposals of the Blanchard-Tirole report