The French President Nicolas Sarkozy favors the tax shield

Tax shield is a tax system some countries apply to put an upper limit on the maximum tax liability. The goal of this measure is to be a "parapet" for a sophisticated tax system in application of which the addition of various taxes can, in some specific cases, reach an amount the lawmaker judges excessive.

In France, the tax shield system exists since 2006. The effective ceiling of the tax shield was set at 71% when it was created, but Nicolas Sarkozy announced, during the 2007 presidential campaign, that he wanted this rate to be reduced and reach a 50% ceiling. Although the left-wing parties were opposed to this idea, this measure has been implemented and, since 1st January 2008, the tax liability of a French taxpayer cannot go over 50% of his/her income.

The tax shield system is based on a claim by the taxpayer to be reimbursed the excessive payment by the tax Authorities. All the evidence provided may therefore be inspected. Generally speaking, the various taxes are reported on the basis of the income of the previous year and paid during the following year; a claim for reimbursment of the excessive payment can only be filed the year after that by sending a form to the Authorities. For instance, the tax on the 2007 income is paid in 2008 (therefore, including the 2007 income tax) and the reimbursment claim is filed in 2009.

As a consequence, unlike the exemptions applicable to wealth tax, the taxpayer cannot deduct his/her excessive wealth tax on his return but must claim for a refund.

The beneficiaries of this system are mostly: modest households who have mainly real-estate assets or very rich households with little income.

In 2007, only 23 179 refund claims based on the tax shield have been filed with the Tax Authorities. The tax reimbursment has amounted to 222 million euros, i.e. 16 623 euros per tax household. Approximately 20% of the claims have been rejected.

In 2008, the Tax Authorities foresee the number of possible beneficiaries of the tax shield system to be 93 000 and the reimbursment amount for a full year to 400 million euros.

The advocates of the tax shield say this is a sensible and equitable system, since a taxpayer should not be despoiled of income because of the addition of all the existing taxes. Moreover, from an supply-side economics point of view, these measures make possible a development revival and a raise of the tax resources of a give State. Indeed, in the United States, the tax reductions on the highest brackets in 2004 and 2005 have led to an 8% and 9% increase of the tax income, as well as a 3.9% yearly growth.

Moreover, the tax shield also settles the case of some taxpayers who have low income and who end-up, in some specific cases, with a tax liability higher than the income they have received. However, these taxpayers must advance every year a payment exceeding 50% of their income.