The cap on wealth tax

Characteristics of households subject to the wealth tax threshold

• By definition, households subject to the wealth tax ceiling have high net worth and low incomes compared with the rest of the population of households paying the wealth tax; nevertheless, their characteristics are otherwise very similar, except that households subject to the wealth tax ceiling have higher net worth than the
  average wealth of ISF taxpayers.
• Whilst the cap mechanism was intended to provide relief to taxpayers with illiquid assets, it appears that the assets of those subject to the cap are slightly more liquid than those of those not subject to the cap, even when considering a given level of assets. In particular, households subject to the cap hold very large amounts of life insurance. Furthermore, entrepreneurs are neither over- nor under-represented among households subject to the cap.
• One consequence is that the level of coverage by liquid assets
  of the wealth tax (ISF) payable before the cap is applied is very high and similar
  between those subject to the cap and those not subject to it.

The consequences for households of the removal of the cap for the year 2012

• In 2012, following President Hollande’s election, an exceptional wealth levy (CEF) was introduced for which no cap mechanism was provided. The absence of a cap led to a doubling of the wealth tax payable for those who would otherwise have been subject to the cap.
• The authors compare households that would have been subject to the cap in 2012 based on their income in previous years (the ‘treatment’ group) with households that would not have been subject to the cap in any case (the ‘control’ group).
• The authors do not observe that households which faced a very high tax burden, regardless of their reported income in the years prior to 2012, sought to generate more disposable income in 2012 to pay the wealth tax. This is confirmed even amongst households whose wealth tax liability amounted to more than twice their income in previous years.

The consequences for households previously subject to the cap following the conversion of the ISF into the IFI

• In 2017, the ISF was converted into the IFI and, for the vast majority of households previously subject to the cap, the reduction in the ISF tax base meant that the cap became less significant for these households.
• The authors compare households that would have been subject to the cap after 2017 in the absence of the IFI, given their income and wealth in previous years (the ‘treatment’ group), with households that would probably not have been subject to the cap (the ‘control’ group group).
• The authors estimate that the removal of the cap resulted in the deferred RFR for the treated households more than doubling after 2017. This increase is particularly evident for income categories that are easy to reallocate, such as withdrawals from savings vehicles (notably life insurance), dividends, and capital gains on securities.
• This very strong causal effect of the cap on RFR, as estimated by the authors, suggests that the budgetary cost of this measure is in fact twice as high as the static cost of 1.1 billion euros previously highlighted. It also implies that the removal of the cap for the vast majority of taxpayers has, in itself, generated additional revenue from the flat-rate tax (PFU) and the high-income tax (CEHR) amounting to several hundred million euros.