French Statistics Office Lowers Growth Estimates

by Arvind Ashta, Groupe ESC Dijon-Bourgogne, for Tax-News.com

18 November 2002

The French finance bill (budget) for 2003, published in October, predicts growth of 1.2% this year and 2.5% next, leading to a budget deficit of 2.6% of GDP. Fiscal changes include a 6% lowering of Personal Income Tax (PIT) rates, some minor reforms and continuation of schemes to stimulate employment, and a scrapping of some sector-specific corporate taxes. But the government statistical office, INSEE, has since estimated that growth this year will do well to top 1%, putting the deficit perilously close to the 3% maximum under the EU's Stability and Growth Pact. Indeed, last week the Commission formally warned France and Germany to control their public sector deficits.

This report on the French government's budget for 2003 has been provided to Tax-News.com by Arvind Ashta, Professor of Finance, Groupe ESC Dijon-Bourgogne.

The French tax bill proposes a deficit of € 44 billion. This represents about 2.6% of French GDP, dangerously close to the 3% limit allowed by the EU to member States. Moreover, the EU now wants to phase out entirely deficits of Member States by 2006, in a bid to consolidate economic policy at the European level. France, along with other major members, including Germany, is going to find this difficult.

Net receipts are evaluated at €281 billion, about €7 billion higher than the revised budget for 2002, mainly due to higher tax receipts at €249 billion, assuming normal growth of the economy. This trend growth compensates for some proposed tax cuts. After accounting for payments to EU (€16 billion) and to local governments (€36 billion), this leaves €29 billion at the national level. With expenditure levels at €273 billion, the bill proposes a net deficit of about €44 billion.

These public finance figures do not include various quasi-taxes such as the CSG (Contribution sociale généralisée: €65 billion), CRDS (Contribution au remboursement de la dette sociale: €5 billion) and the duties on tobacco consumption (€10 billion) which are attributed to different social security and public organizations. These "taxes" would total another €101 billion or €111 billion, depending on whether we include local government tax receipts or not. These figures are, however, necessary to appreciate the total tax burden.

Personal Income Iax cuts

The reduction of French taxes, 5% earlier this year and another 1% proposed in the budget for 2003, making a total of 6% have to be viewed in the framework of Prime Minister Raffarin's commitment to reduce PIT by about 30% by the end of his term. This would mean that the top rate of 52.75% (budget 2002) had to be lowered to about 37%. The measure should increase consumption and thus aggregate demand, and at the same time reduce the disincentive to work. This should also be viewed in the overall international tax competition perspective as a manifestation of global opening of economies generally and a widened EU more specifically, where neighboring States have reduced their maximum marginal rates significantly during the last few years (Germany, Netherlands, Italy). It should also be the quid pro quo necessary to the sharing of tax information and attempts to abolish tax evasion and tax havens. After all, if domestic taxes were reasonable, there would be less reason for people to look for havens abroad.

The different reductions to Personal Income Taxes give a rather complicated look to French tax rates. There are now six tax brackets (ignoring the zero-tax range), three times as many as in Ireland (2 brackets) but only a third of that found in Luxembourg (17 brackets).

The French PIT is based on the number of persons in the households. For single persons, the new budget proposes:

It's a pity the new government didn't simplify the system to, say 5 tax brackets of 10%, 20%, 30%, 40% and 50% as a step towards a three or four tax-bracket system.

Ongoing measures to stimulate employment

Most of the tax measures fine tune employment related taxes and benefits. These relate to labour intensive sectors such as repairs to houses, domestic help, etc. While most measures are geared to improve the domestic and corporate demand for labour, the work bonus is aimed at stimulating supply of labour.

On the demand side:

* The eligibility ceiling for tax credit of 50% for domestic help for dependent children or for old-people is now raised from €6900 to €10000, which conforms roughly to the total cost of a half-time worker at France's minimum wage. The measure affects about 1.5 million households and 556,000 direct employees.

* The VAT reduction on certain labour-incentive industries (household repair services, window-cleaning, care of dependents) being experimented for three years is being continued for another year, as per the recent EU extension. This will give the EU time to evaluate the benefits of the experiment, and perhaps to generalize it.

* In a similar vein, the 15% personal income tax credit, for certain expenditure, within a limit of 4000 € for single people and 8000 € for couples, made to one's principal place of residence is being continued for another three years.

* The good news for business is that the infamous professional tax no longer includes salaries in the tax base. This is the continuation of the gradual phasing out of this component of the tax base over the last few years to reduce the tendency to substitute capital for labour.

On the labour supply side, the Work Bonus, similar to the Earned Income Tax Credit in the US and the Working Families' Tax Credit in the UK, was introduced last year, in a bid to get the unemployed to work. The scheme is being modified in favour of part-time workers. The window-dressing advantage of this measure (as opposed to social security payments) is that these payments are netted off from tax receipts, thus reducing the perceived fiscal pressure of taxes and social payments as a ratio of GDP.

The eligibility income thresholds and ceilings have been raised by 1.7% in keeping with the general inflation rate (excluding tobacco) during 2003. Within these limits, the base for calculating the Work Bonus has been increased by 2.44%, which conforms, perhaps exceptionally this year, to the increase in the French minimum wage (SMIC).

The Work Bonus for part-time workers, working at least 30% of the year (an amendment in the National Assembly has reduced this to 29%), has been given a bigger boost, bringing it more in line with the American and British schemes which favour part-time work. For those working between 30% and 50% of the year, the work-bonus is prorata for the time worked, but the budget proposal allows a 45% increase in the work bonus. For those part-time workers working beyond half-time (but less than full-time of 1820 hours per year), the work-bonus will no longer be prorata but standardized at 79.75% of the full work bonus (145% of .55).

Corporate taxes

The major adverse change, from an international business perspective, concerns the imputation system for giving relief from double taxation on dividends. France has continued the phased suppression of the tax credit for dividends given to inter-corporate investments. The dividend tax credit (avoir fiscal) for inter-corporate investments (other than parent-subsidiaries) is now reduced from 15% to 10%. This will reduce tax expenditure and increase tax receipts. The primary reason for this reduction is the huge cost of dividend tax-credits being given to foreign companies, mutual funds and pension funds belonging to countries with which France has an agreement. These companies and organizations then pay taxes to their home country and not to France. Thus, France gets no tax benefit at all from the activity of the distributing company. This is why UK and Ireland stopped giving tax-credits to foreigners, a few years ago. Germany scrapped the tax-credit system altogether in 2001.

On the positive side, a minor tax on financial institutions is being phased out over the next two years, since no other EU country was applying it. Similarly, license fees for cafés are being abolished.

A research-oriented measure is to exclude R & D investments from the asset base for calculating the professional tax.

Reminder!

The new features of French taxation operative from 2003 include provisions introduced in the Finance Bill for 2002 last year, but operative from 2003, such as provisions in favour of investments in risk funds and innovation related mutual funds, the opening up of Investment Savings Plans to European securities, tax reduction for non-quoted companies, or investing in French overseas departments.

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