French National Assembly Examines High Risk 2010 Budget

by Ulrika Lomas, Tax-News.com, Brussels

23 October 2009

As the French government prepares to defend its 2010 budget bill in the National Assembly, it will inevitably face fierce opposition, given the increasing unpopularity of the tax shield, mounting hostility to the reform of local business tax, and with the country’s record deficit lurking ominously in the background.

The 2010 finance bill contains two major reforms to the country’s taxation, namely the introduction of a new carbon tax, and the abolition of the highly controversial local business tax. By virtue of their complexity, both reforms could have merited separate examination. Yet it is the country’s tax shield, or “bouclier fiscal,” which will be very much under the spotlight.

Despite a record deficit of around EUR141bn expected this year, compared with EUR56.3bn in 2008, President Nicolas Sarkozy has insisted that taxes in France will not rise. Faced with the reality of the public deficit, however, discontent has spread, even amongst members of the President’s own parliamentary party, the Union for a Popular Movement (l’Union pour un Mouvement Populaire).

France’s highly controversial tax shield

At such a tense time, however, the President’s much trumpeted tax shield, which limits direct taxes in France to 50% of income, has now come in the firing line. Emblematic of the Sarkozy era, the shield is becoming increasingly harder to justify, given that the country’s major beneficiaries are protected from any future rise in taxation.

For the Left, the tax shield represents a symbol of fiscal injustice. Indeed, the government is under increasing pressure to either amend or abolish the shield. Although parliament voted last year to impose a general ceiling on tax breaks, limiting the maximum amount of cumulative reductions in income tax to EUR25,000 plus 10% of taxable income, this initiative merely served to save the government around EUR22m this year (instead of an anticipated EUR200m). Given that the existing tax breaks are set to cost the State in the region of EUR74.7bn in 2010, there will undoubtedly be calls to lower this ceiling.

Determined to reduce the country’s social debt, UMP members Jean-Luc Warsmann and Marie-Anne Montchamp will propose an amendment, seeking to remove the social debt repayment contribution (CRDS) from the tax shield. Although a similar amendment, recently put forward by the New Center Party (le Nouveau Centre), was finally, albeit narrowly, rejected, a further debate in the National Assembly may yet tip the balance. The amendment proposed by the New Center Party aimed to remove the general social charge (CSG), the CRDS, and local taxes from the shield.

Carbon tax

President Sarkozy recently unveiled details of a new carbon tax, to be introduced in France from January 1, 2010, designed to encourage consumers to opt for more environmentally friendly products and lifestyles, and to reduce both their energy consumption and carbon dioxide emissions. Although agreed in principle, the government is nevertheless likely to face a backlash regarding the proposed means of compensation for households, and for certain sectors of activity, such as the agricultural industry.

Reform of local business tax

Although the announcement of the abolition of France’s highly controversial local business tax has been unanimously welcomed, concerns nevertheless remain over how future finances for local authorities will be assured. The opposition has also expressed fear that the reform will merely result in a transfer of taxation from companies to individuals.

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