Includes the introduction and conclusion of an article written by Éric Pichet entitled La doctrine budgétaire et fiscale actuelle: contraintes, mise en oeuvre et conséquences, was published in the 15 November 2012 issues of La Revue de Droit Fiscal (N°46). In which we demonstrate that the 2013 Provisional Budget’s expectation of a deficit equivalent to 3% of GDP is clearly an underestimation, with 4% being the likelier outcome.

Introduction

The study’s first section introduces the economic and legal constraints complicating the budgetary mathematics that all European countries are facing today, while demonstrating the challenges of applying current budgetary and fiscal doctrine in the draft bills that are currently making their way through the French Parliament. The second section analyses the main tax measures in France’s 2013 Provisional Budget affecting private persons, instruments that are founded on two main principles: the alignment of taxation on income from capital with taxation on work; and the growing fiscal burden on the upper social classes. The third and final section compares France’s leading tax rates with what is found in other countries. It formulates predictable economic consequences from the growing discrepancies between French taxation of capital and high value-added work and its main competitors. The conclusion shows how tax policy will be a new experience for France over the next few years, making the country a particular useful laboratory for research on tax economics. This will probably clarify some very important theoretical debates about whether lower spending or higher taxes are a better way of cutting the public deficit. It is also likely to provide proof of the existence of an optimal tax threshold (affecting income but also capital) beyond which tax revenues diminish due to new social phenomena such as tax expatriation and the way countries can become less attractive to highly qualified work and capital investment, both key factors in the 21st century for the competitiveness of leading nations.

Conclusion

“Once upon a time, in an old country that was tired but had an effective tax system, ten friends from Montesquieu high school used to meet every Friday night after a hard week at work to drink a few beers in their local pub. Invariably, the total bill was always exactly €100 and the buddies (who had been idealist soixante-huitards in their youth) devised a “fair”system for sharing the cost. Copying the French income tax system (strange idea, isn’t it?), this would involve the five poorest friends not paying anything, the sixth poorest only paying €1, the seventh paying €3, the eighth €6, the ninth and €16 and the wealthiest (a brilliant tax specialist) €74.(1)
To the foreigners’great surprise, the group lived happily with this arrangement until the day when the bar owner, having heard the rumour that the country’s 2013 Provisional Budget would double the tax on beer – an exaggeration, since the ultimate rise was only €0.10 a pint - explained that he would also have to increase the group’s drinking bill by 10%. He then asked what kind of system they would want to adopt in the future. All of the friends were already suffering from the recession so they democratically decided amongst themselves, that the wealthiest friend should pay the extra €10, while recognising secretly that he was already paying too much for everyone else. In reality, for quite some time he was getting bored with his old friends and started to regret not having time to accept the invitation of another group of brilliant fellow tax specialists who met at the same time in another, much posher bar. He therefore found an excuse for politely disappearing from the old buddy group and joining the other club, where he calculated that for the same amount of money he used to spend he could now drink a whole bottle of Bollinger champagne. All of the old buddies missed him the following week and drank a toast in his name. But when the time came to pay the bill, they found that they barely had one-quarter of the cash they needed. This anecdote is a perfect analogy for France’s income tax system.”

Fiscalité au Bollinger,
a French tale of Champagne and taxes in the early 21st century.

At the end of this study, two types of conclusions can be drawn. The first involves a diagnosis. The second a prognosis.

The absolute necessity today, after 30 years of ruin in France’s public accounts, is to control the country’s public debt and deficits. This is widely accepted. All that remains is the question of the speed at which the deficit should be reduced to avoid suffocating growth. Despite the adoption of the TSCG, which has supposedly resolved all questions in this respect, the decision to have the current legislature cut public spending has not in fact been implemented, seeing as official public spending is supposed to increase in 2013 by more than €30 billion in value (up 2.6%), irrespective of the decision made that tax increases should account for two-thirds of the 2013 deficit reduction effort. A detailed analysis of the 2013 Provisional Budget also shows the problem of claiming that the public deficit will be limited to 3%. Based on the hypotheses selected, the real number should be around 3.5% and, in case of a sudden slowdown in growth, probably above 4%. Under these conditions, announcing an economic tax rate of 75% on top activity-related earnings – even if the measure only concerns 1,500 taxpayers and is very popular in France – will yield a pitiful €200 million and send a highly inhospitable signal worldwide, including to companies considering where to locate their European headquarters. This means that the rate will probably lead to a loss of at least €2 billion annually in tax revenues, or 10 times its expected yield. Alongside of this but distinctly from it, tax rates on income from capital have become economically prohibitive (albeit constitutional) and are hitting a production factor that is crucial to France in the global economic race, namely, access to capital. These measures, which have no equivalent in the OECD, accentuate two major faults in the French tax system: its complexity; and its instability.

The consequences of the new tax situation seem fairly easy to predict, namely, a continuation of the undeniable tax expatriation trend that began in early 2012. This will amplify in the near term to shrink the base of residents susceptible to paying income and wealth taxes. Over the medium term, it will cause domestic and foreign investment to plummet. On top of expatriation, there is the reluctance of foreign investors and large French companies to invest in a country that has the developed world’s highest taxes on capital and highly qualified work. At that point, there is no other budgetary choice than to implement an austerity policy combining, for the first time in 30 years, lower public spending and new tax rises (moderate, given the already high current level of compulsory levies). The probable result is that France will follow the “German path” initiated in 2002 by Chancellor Schroeder with his 2010 agenda, involving a drastic reform in Social Security, unemployment benefits and pensions.

On the other hand, the current experience - which is painful for taxpayers in the short run and for the economy in the medium and long run – should be very positive for social science researchers. We expect that it will confirm the Laffer curve and the preference for reduced spending over tax increases as a means for resolving budgetary dilemmas. In the meantime, there is every possibility that France, the world’s leading tourist destination, will itself become a kind of museum: in terms of its tax system; but even worse, in terms of the economy as a whole.

(1) According to Conseil des prélèvements obligatoires, Prélèvements obligatoires sur les ménages: progressivité et effets redistributifs, op cit, p. 220: “In 2009, 30% of the top earning households paid 87% of gross total income tax and, above all. 95% of net tax proceeds, with the 10% at the top of the declared income distribution paying 74% of net tax proceeds (versus 62% in 1975). The 1% top households, by themselves, paid 33% of net tax proceeds.”

Expertises of Éric PICHET

Researcher, Professor of Economics and Finance, Postgraduate Programme Director, Author, Independent Board Member. Discover Éric PICHET’s world.

Expertises