France: Taxes and Investment

October 9th, 2013
in Op Ed, syndication

Written by

What's good for Ireland, to the annoyance of the French, is certainly not something that the French want for themselves, even if it might perhaps be good for France.

Ireland has a corporate income tax rate of 12.5%, which has proved to be a useful instrument for attracting foreign business investment to the emerald isle. To the French, it is just another example of the unfair competition with which France has to put up.


Follow up:

The French prefer to show their muscle by sporting a 33.1% corporate income tax, beaten in Europe only by Belgium, 33.99% (source: Wikipedia), and just to show they have no complexes about this rate, France's socialist government is planning a new increase that will take the rate to between 37 and 38%, according to which expert you believe. But don't worry: it's only for two years, or so the government says.

The latest adjustment is an increase from 5% to 10.7% in a surtax, payable by the company, on distributed profits, such as dividends and "loans and advances" to shareholders. It will apply only to companies with a turnover of over €250m and is expected to raise about €2.5bn a year in extra revenue.

The surtax was introduced by the present government at a rate 3% in August 2012. The proposed increase replaces a measure announced in the 2014 budget for a tax on gross operating profits, to which employer organisations objected with particular vehemence.

It was argued at the time the surtax was introduced that by taxing distributed profits, the tax would encourage companies to invest profits instead of doing anything as anti-social as rewarding shareholders by paying a dividend.

I suppose one would have to do a case-by-case study of the accounts of all large companies to discover whether there is a grain of truth in this supposition. In the absence of such a study, one is left with the national income accounts, which indicate that investment by non-financial companies has fallen, but there are plenty of other factors that can explain this.

The broader question is why the government thinks that beating the corporate sector over the head with new taxes is a good idea when the business sector, through investment, employment and output, is the primary source of practically all national income.

What France needs in its present straits, with a large general government budget deficit and a government debt-to-GDP ratio expected to go to over 95% in 2014, is a larger and more profitable (non-financial) business sector, not a smaller and less profitable one.

But the present government has a peculiar difficulty in charting a course when it comes to business. First, when it arrived in office in May last year, it increased taxes on business, but in the spring of this year the government seemed to have concluded that it gone too far.

It introduced a tax credit on corporate income tax for the three years 2014 - 2016, lightening the tax burden by about €10bn in 2014, going to an estimated €20bn in 2016. Now, however, it has decided, in effect, to rescind a sizeable part of the tax credit, though not for small companies.

One would like to think that the goverment of President Francois Hollande knows what it is doing, but one sometimes wonders.

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