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Tax rise in France - not if but when

There is no guarantee that we will not see direct tax increases in France in the not too distant future

Do you remember the 1966 Beatles song Taxman written as a protest against the 95% super-tax imposed on top earners by Harold Wilson’s Labour government?

It includes the lyrics:

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold, I’ll tax the heat
If you take a walk, I’ll tax your feet
Taxman
‘cos I’m the Taxman
Yeah, I’m the Taxman…

We could write similar lyrics now but I fear the situation is only going to get worse.

Throughout Europe economies are buckling under the weight of swollen budget deficits.

Besides the costs of the financial stimulus measures introduced during the financial crisis, the economic downturn also drastically reduced tax revenue, exacerbating the situation.

Governments throughout Europe are therefore under pressure to cut spending and raise taxes to rein in their deficits.

The UK has already introduced various measures to increase tax revenue, and as we move through 2010 and into the following years we can expect to see tax increases of one form or another spreading across Europe.

Here in France the deficit is expected to hit 8.5% of gross domestic product (GDP) this year. This is better than the UK, but a headache for the French government nonetheless.

In theory the government is opposed to increasing taxes but as we saw from the 2010 Finance Bill proposals, it went for the option of reducing the “social” tax breaks available as a less direct way of increasing tax revenue.

There is no guarantee that we will not see direct tax increases in France in the not too distant future, particularly those aimed at higher earners.

Aside from the economic downturn, President Sarkozy also touched on another important issue in his New Year’s Eve address.

As reported on the Connexion website and worth repeating here, he said: “In 2010 we will need to consolidate our pensions system, whose future financing I have a duty to secure, and face the challenge of how to care for the elderly, which in the decades ahead will be one of the most painful problems faced by our families.”

This echoes a concern raised in a paper by the Centre for European Reform in 2008, which warned: “Europe stands on the cusp of a demographic revolution. Europe’s changing demographic profile poses political, economic and social challenges that are as important as climate change, security and globalisation.”

The post-war “baby boomer” generation is retiring. Birth rates have been dropping off so that the EU has one of the lowest fertility rates in the world.

Octogenarians currently represent 4.4% of the EU population, which is predicted to increase to 12.1% by 2060. This will result in an increasing dependency ratio - that is, the number of retired people as a proportion of those working and paying income tax.

Spending on pensions, healthcare and long-term care is estimated to hit 27.5% of GDP by 2035.

This is not an insignificant threat to the fiscal stability of EU countries.

As Sarkozy said, countries have a duty to fund care for their elderly, but it begs the question - where will this funding come from, particularly at a time of high public sector debt?

The UK is in an even worse situation than France. Last year the European Commission forecast that unless the UK government cuts state pension costs and healthcare bills, its public debt will jump from 60% of GDP to 160% by 2020 and 406% by 2040.

To add to these issues, a surge in inflation as a result of the fiscal stimulus packages could also force governments to review their taxation policies.

Over recent decades policymakers have mainly used monetarist policies of interest rate increases to curb inflation, but the current fragile state of their economies means that interest rate increases would have to be used sparingly, if at all, for fear of driving their economies back into recession.

Governments may have to resort to the earlier Keynesian practice of increasing taxes and reducing government spending to reduce money supply and cool inflation.

Here in the Eurozone, governments do not have the luxury of setting their own interest rates even if they would prefer to take that route.

Tax rates and government spending, on the other hand, are something they can control, even if their electorates will not thank them for it.

Nonetheless, the French tax system remains one where it is possible, particularly for higher earners and those with savings and investments, to reduce your tax liability to much lower levels than you might expect.

So while higher taxation is a threat, with suitable approved arrangements in France you may still be able to reduce your bill.

Besides looking at ways to lower tax on your savings and investments, you can also review any deferred UK private pension funds or pensions from which you are drawing down an income.

As an expatriate you may be able to transfer them into a QROPS (Qualifying Recognised Overseas Pension Scheme) and potentially enjoy improved tax efficiency on your income as well as avoiding the UK charges on death.

With the correct wealth management planning, British expatriates and those intending to move to France can use a number of established tax planning techniques to significantly reduce their tax burden in France compared to the UK, but do bear in mind that you may return there one day.

Alternatively, your wealth may end up being inherited by UK residents. The tax burden in the UK is certainly going to increase, but provided you take action while still resident in France you will be able to organise your wealth in a more tax efficient manner than UK residents are normally able to achieve.

The Beatles song quoted earlier also includes a line from the Taxman saying “be thankful that I don’t take it all.”

While some taxes are not escapable, others are, or at least they can be mitigated.

The old adage that “nothing in life is certain save death and taxes” is not entirely true if you plan effectively for the latter.

This column is written by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com) who has written for the Sunday Times on overseas finance for the last 10 years. He has broadcast regularly on BBC radio and is the co-author of the Blevins Franks Guide to Living in France. His column in exclusive to Connexion

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