One Sector That’s Not Cheering French Tax Cuts

(Bloomberg Opinion) -- The French state has, at times, been as close to a nanny state as it gets. But that doesn't mean France lacks a thriving charity and non-governmental sector. On the contrary, France’s charity sector is massive, with some 1.3 million estimated non-profit groups. They spend close to 3.4 percent of French GDP, and employ close to 2 million people, with 14 million volunteers, donating time equivalent to almost 1 million full-time workers, according to one study.

The non-profit sector has been growing faster than the overall economy since the 2008 recession, in part thanks to increased public spending and in part thanks to donation tax incentives. Now that sector is under threat because of changes French President Emmanuel Macron has made to the tax code.

Macron's drive to shift the tax burden away from capital and work is, in principle, good, since onerous taxes on wages and capital are a major brake on the French economy. But there have been unintended consequences for France's non-profit sector from two of Macron's tax reforms.

One unintended consequence has come from the abolition of France's wealth tax, a direct tax on capital which is unique to France and has been much decried by many economists and international observers. Macron replaced this with a tax called IFI, a tax on real estate wealth, which is much lighter and, as the name indicates, only applies to real estate ownership. So far so good. But the old wealth tax also included significant deductions for charitable donations; tax-deductible donations had become a major source of income for French private charities. The new tax contains no such deduction.

The second tax change concerns income. Macron has sought to lower France's punitively high payroll taxes without breaking the EU's budget rules. So he balanced mild payroll tax cuts with an increase in an obscure tax called CSG, a flat tax on all income. The CSG was cobbled together in the late 1980s to plug the fiscal hole caused by the erosion of the income tax base due to an ever-growing list of special interest deductions. Unheeded calls to simply merge the CSG with the "regular" income tax have been a regular feature of French political life since its implementation.

The CSG disproportionately hits pensioners, since much of the benefits pensioners get are deductible from the regular income tax but not the CSG. Macron has made clear that shifting the tax burden away from workers and towards pensioners, who enjoy lots of protections, is a feature and not a bug. What he didn't apparently consider is that the majority of small-scale charity donations come from the elderly. According to figures provided by a trade association for non-profits, over half of donors to non-profits are aged 60 and over. The CSG increase hits middle-class pensioners the hardest (low-income pensioners are exempt and high-income pensioners can eat the increase), which means that their end-of-year budget for charitable giving is likely to be taxed away. One charity reported receiving mail from regular donors that contained an apology note instead of a check, saying they could no longer donate because of the CSG increase.

The full impact of the changes probably won't be clear until charities balance their books in 2019. But Jean-Marie Destree, CEO of Fondation Caritas France, has released some preliminary mid-year figures in a blog post on LinkedIn, and they are grim. Caritas, the Catholic Church's relief and aid organization, is not only one of France's biggest charities on its own, but also provides back-office fundraising and compliance services to some 820 independent Catholic non-profit organizations working on every imaginable issue.

The numbers speak for themselves: Relative to the same point last year, Caritas France's own fundraising is down 64 percent in terms of absolute numbers, and down 54 percent in terms of number of donors; the average donation amount is down 23 percent. For the five biggest foundations sheltered by Caritas, fundraising is down 64 percent. The precipitous fall-off is due to the wealth tax repeal, he says. As a result, he writes, Caritas France has planned to cut its grant-making budget by an astonishing two-thirds.

It remains to be seen whether Macron intends to do anything about this. Creating incentives for charitable giving should be easy. A common thread of the Macron presidency has been a tendency to centralize power in government hands, at the expense of non-government bodies. A technocrat who has filled his administration with people with similar profile, Macron has shown almost no interest in solutions to social problems that empower non-bureaucrats, whether they be unions, politicians (his parliamentary majority is defanged and he clearly likes it that way), or non-profits.

Macron may not have intended to destroy France's philanthropic sector, but he apparently believes that so long as it is intelligently managed, the government can take care of most social problems, a view shared by the majority of his compatriots. If so, that would be a tragic mistake.

©2018 Bloomberg L.P.