French taxes. Wealth of the nation

Why plans to cut France's wealth tax are unlikely to succeed

IT HAS become a well-worn ritual. A politician suggests reforming France's wealth tax; the government dismisses the idea out of hand. So it was to some surprise that the proposal was made this week not by a maverick backbencher but by the finance minister, Thierry Breton.

In an interview with Le Figaro, Mr Breton declared that the tax had become “no longer a wealth tax, but simply yet another tax on the savings and housing of our fellow citizens, who are by no means all wealthy”. Moreover, it was a “costly” tax, which “can be economically dangerous”. The prime minister, Dominique de Villepin, duly denied that reform was on the table; but he confirmed that a review of fiscal policy - including the wealth tax - would be conducted by the end of the year.

The impot sur les grandes fortunes (tax on great wealth) was introduced by Francois Mitterrand in 1981 and - after a brief and controversial abolition - reintroduced in 1988 under the label impot de solidarite sur la fortune (ISF). It kicks in when combined assets - property, securities, cash, furniture - reach €720,000 ($850,000), and it applies yearly on assets held both outside and inside France. The tax rate rises from 0.55% to 1.8% for assets over €15m. France is not the only European country with a wealth tax - Spain, Finland, Luxembourg and Sweden have them too - but it is alone in having raised it. Denmark, Germany and the Netherlands have all scrapped wealth taxes in recent years.

Were the ISF confined to genuinely large fortunes, there might be little case for change. But thanks to the property boom, over 335,000 households now pay it, a rise of 87% in eight years. Most new payers fall into the least-rich brackets, and they include property-owners in newly fashionable places where house prices have soared - not to mention, presumably, left-wing Paris-based politicians who would be mortified if it emerged that they paid the ISF. Newspapers often report the plight of fishermen, farmers and pensioners living on the Ile de Re, a vogueish resort for Parisians, caught by the ISF.

The economic case for change is strong. A Senate report showed that the tax prompts a steady flow of exiles to lower-tax Belgium and Switzerland. It deplored a “loss of dynamism for the French economy” and said that, in the long run, “the situation is not sustainable...if we want to preserve the attractiveness of the country and hence French jobs.”

All the same, in a land where Trotskyites are credible political voices and the revolutionary myth of equality runs deep, there is fierce resistance to easing a squeeze on the rich. Wealth, particularly of the speculative financial sort, occupies an ambiguous position in France (paintings and works of art are, naturally, exempt). After Mr Breton's call, the opposition Socialists instantly dismissed the whole notion of reform, calling on the government to choose between “mending the social divide and protecting the rich”.

A recent effort by backbenchers of the ruling UMP party to reduce the burden of the ISF failed to muster support in parliament. As for President Jacques Chirac, he was the prime minister who controversially scrapped the wealth tax in 1986 - but went on to lose the presidential election two years later.

Why plans to cut France's wealth tax are unlikely to succeed.

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