Tax shield is a tax measure introduced in some countries to cap the overall tax rate for taxpayers. To its proponents, it has the capacity to safeguard the tax system where the superposition of different taxes can, in some cases, generate tax burden.
To its critics, the tax shield is a costly measure for public finances, and is a device which benefits the richest taxpayers.
A number of countries have adopted measures to reduce marginal tax brackets in a logic influenced by the supply-side economics.
The Laffer curve develops the idea that “too many taxes kill taxes” by supporting the theory that beyond a certain level of taxation, income tax for the state decreases. Under supply-side economics, these measures may allow renewed growth and increased tax revenue for the state.
The tax shield is a measure which stipulates that a taxpayer may have to pay more than sixty percent of its revenue from direct taxes. In some jurisdictions direct taxes paid by a taxpayer may not exceed sixty percent of its revenues.
This percentage relates to the income tax, the solidarity tax on wealth, property taxes and residence tax on principal residence but does not include social contributions.
The system then works by repayment of tax administration, the authorities refund the surplus to taxpayers in the event that the taxes remitted exceed the threshold set by the shield.
In some jurisdictions authorities once considered introducing a minimum tax, the tax shield mirror on account of tax equity. However, this project was regarded as too complex and was abandoned for a cap on tax loopholes.
The taxpayer has the option to self-liquidate the tax shield itself by committing tax money that goes beyond the global threshold (achievable on solidarity tax on wealth, land and housing taxes as well as the CSG).
The mechanism of the tax shield is based on an application for refund by the taxpayer to the tax authorities as regards the over-payment. All information provided is therefore likely to be controlled. The different taxes should normally be declared on an annual basis.
This procedure has, however, reverse some risk: the claim is actually a contentious process, as influenced by tax administration rules. The reverse, where the calculation of the taxpayer would be challenged, may give rise to payment of penalties by the taxpayer.
Critics of the tax shield contend that it would be too generous or too complex to operate and have a postive effect. Thus, this system of tax shield is severely criticized by some who see the resultant shortfall in public finances as being unfair to taxpayers.
A large portion of revenues are considered, and these include wages, capital gains (including those exempted), property income, interest on savings plans and those generated by life insurance contracts. Certain income, however, is not included in the calculation, and these include the real estate gains, securities gains and social benefits.