Dump anti-business taxes to unleash French potential
“Let’s dismantle our anti-economic taxation before it finishes our economy”
By Nicolas Marques, courtesy of Institut économique Molinari
The future is particularly worrying for French society. Companies, suffocated by extraordinary taxation and finicky regulations, have structural competitiveness problems. The previous crises have left their mark, with abnormally high unemployment. The coronavirus strikes a weak economy. In the first quarter, GDP fell by -5.8% in France. This is more than in Spain (-5.2%), than in Italy (-4.7%), than in the European Union (-3.3%), than in Germany (-2, 2%) or in the United Kingdom (2%). To reverse this spiral, it is urgent to reduce the tax burden on companies whether their results are good or bad.
If the general public feels that a lot has been done to favor businesses in recent years, with a drop in the corporate tax rate to 25%, the reality is quite different. On the one hand, this reduction in corporate tax, announced in 2017, will not be operational for all companies until “horizon” 2022. Second, the French rate, even if it is reduced to 25%, will remain significant. In 2018, half of the OECD countries already had a lower rate. But above all, this reduction would benefit from being extended beyond the taxation of profits, to provide a response to the lack of competitiveness and French unemployment.
In France, most corporate taxation is not based on profits. We have the distinction of having a multitude of taxes on land (CFE, taxes on offices or commercial areas, and so on), payroll (apprenticeship tax, tax on wages, transport payment), the benefits offered to employees (social package, taxes on company vehicles, etc.), turnover (C3S), added value (CVAE) or dividends. These so-called “production” taxes represented more than 75 billion euros in 2018, far more than the corporate tax that brought in 27 billion that year. They are problematic for two reasons for French society.
On the one hand, they are much more harmful than conventional taxation. They do not relate to corporate profits, but to bases upstream of the result and disconnected from it. These bases are not linked to the performance and contributory capacity of economic actors. This makes production taxation insensitive to the financial situation of companies and particularly counterproductive. This tax system, which is akin to an import subsidy, reduces the competitiveness of our players positioned on productions with low added value. It encourages offshoring, whether it be basic products (such as protective masks which we lack…) or products with high added value.
On the other hand, we abuse this taxation. In 2018, with 75 billion production taxes, we had a third of production taxes on businesses in the EU-28, while we represented only 15% of the wealth created. Production taxes on businesses represented 3.2% of GDP, compared to 1.6% in the EU and 0.4% in Germany. Assessment: French companies suffer from a lack of profitability compared to their European competitors. Their gross operating surplus represented 7.1% of turnover in 2017, compared to 10.1% on average in the EU with 27 countries. This differential of 30% and 3 points is not trivial. It has major social consequences. In accordance with the theory of tax incidence, this tax falls on individuals, the unemployed, employees, consumers or shareholders.
The first to suffer from this taxation are the unemployed. The production taxes encourage to favor investments abroad and to abandon France. It is no coincidence that the CAC 40 companies or our mid-caps are very internationalized. Beyond the challenges of diversification and establishment on foreign markets, they have a vital need to reduce their exposure to French over-taxation. A number of SMEs – and a fortiori VSEs – do not have as many opportunities to get out of the Franco-French framework, which explains the importance of failures or their difficulties in growing. Even before the coronavirus crisis in February, the French unemployment rate was still 8.1%, compared to 6.5% in the European Union and 3.2% in Germany.
Employees, like shareholders, also pay production taxes. When companies are not able to pass on French extra-taxation to their customers, it is the employees who bear the cost of this taxation, with salary increases or capital remuneration lower than what is observed abroad. .
So far, the government has not given this issue the priority it deserves. They have set up working groups and ordered notes, but as the Minister of the Economy recently pointed out, this work remains to be done. However, the coronavirus pandemic can no longer wait. For a whole series of factors, the French economy is particularly affected.
Production taxation, sitting on plates disconnected from results, combined with the pandemic, is a weapon of mass destruction for our weakened economy. It risks causing a multitude of bankruptcies, but also increasing the competitiveness differential with our neighbors.
The difference will be particularly significant with Germany. It normally has 8 times less production taxes and did not need to drastically slow down its economy, an intensive screening policy having made it possible to practice more selective confinement.
The key to dealing with this subject is to offer a credible alternative to local authorities, which benefit from most of the production taxes. The dismantling of these tax systems, deadly for local economies and their citizens, represents a financial challenge for communities. However, good foreign practice shows that this shortfall could be offset by a reallocation of other tax systems. They could, for example, benefit from a portion of corporate tax revenue, like what is done in Germany or Italy. They could also benefit from a greater proportion of VAT revenue, like what is done in Germany or Spain. The regions have already benefited from part of the VAT since 2018 and it is planned to do the same for the departments, to compensate for the shortfall resulting from the abolition of the housing tax. Solutions exist. It is high time to move forward on this subject, which is even more crucial today than yesterday.
Nicolas Marques is Managing Director of the Institut économique Molinari (IEM). Holding a doctorate in economics (Université d’Aix-Marseille) and a diploma in management (EM Lyon), he began his career teaching economics before taking on marketing and commercial responsibilities at large French asset management groups. An Associate Researcher since the IEM was established in 2004, he became its Managing Director in 2019. He is the author of several works on tax issues, public finance, social security and the contribution of business. His writings appear frequently in La Tribune and Capital.