May 11 (Bloomberg) -- The French Cabinet agreed to cut a tax on the wealthy and scrap a tax ceiling for individuals, tackling a politically sensitive fiscal issue a year ahead of national elections.
“It is both fair and efficient to reduce a tax that remains an anomaly in Europe,” Budget Minister and government spokesman Francois Baroin said after today’s Cabinet meeting in Paris. “It was the most we could do, given the political calendar.”
President Nicolas Sarkozy last November called for an overhaul of taxes on assets, seeking to bring the French system more in line with those of other European countries. He was under pressure from members of his party, who wanted to abolish the wealth tax. At the same time, polls showed public backing for the levy and opposition to the tax ceiling approved under Sarkozy on total household tax liability. Sarkozy’s popularity is near record lows as he faces an election next year.
Most details of the change were announced last month. The first tranche of the wealth tax, for individuals with assets between 800,000 euros ($1.15 million) and 1.3 million euros, will be abolished this year. From next year, assets from 1.3 million euros to 3 million euros will be taxed at 0.25 percent, and assets of more than 3 million euros will be taxed at 0.5 percent, replacing four bands with a top rate of 1.8 percent.
Raises Tax Revenue
The complete package of measures, which include taxes on second homes of French citizens living abroad and tighter rules to govern the passing of cash and assets between generations, will increase tax receipts by 71 million euros this year, 14 million euros next year and 56 million euros in 2013, Finance Ministry officials said. The French budget deficit was about 140 billion euros in 2010.
The wealth tax, called ISF in French, was introduced by Socialist President Francois Mitterrand in 1981, a time when 10-year government bonds earned 10 percent a year, compared with 3.5 percent now. Other European countries have either abolished a similar levy or never had one. To temper its effect, Sarkozy introduced tax legislation that limits total tax payments to 50 percent of income.
That so-called tax shield will now be eliminated because 300,000 households out of the 562,000 which paid ISF in 2009, will no longer owe anything. Most of these households exiting the wealth tax ended up owing the money only because of rising property prices, Baroin said.
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