The French Government Nails Its Flag To Tax Reduction Mast

by Ulrika Lomas, Tax-News.com, Brussels

05 September 2003

Astonishingly, France seems to have finally consigned Colbertian economics to the guilllotine, as the high-priest of European fiscal dirigisme followed its shock to the Stability and Growth Pact by confirming a solid 3% reduction in income tax rates for next year.

M Jean-Pierre Raffarin has a good sense of humour, it's clear. Having begun the week by protesting on bended knee to European President Prodi that the French government is "entirely committed" to the stability pact (famously described by Mr Prodi in an unfortunate moment of candour as 'stupid'), M Raffarin then told Brussels that it expects the nation's deficit to hit 4% of GDP this year. Now he has decreed a further 3% cut in income taxes after cuts of 5% in 2001 and 1% in 2002.

French president Jacques Chirac, in his last term and presumably thinking more about statues than re-election, promised to slash income tax by 30 per cent over five years in his 2002 election campaign, and M Raffarin, willingly or otherwise, is evidently going along.

Ronald Reagan and Margaret Thatcher both got statues after presiding over tax cuts that reinvigorated their economies. M Raffarin must be sweating on a similar result in France, although it hasn't been evident just yet.

"Solving problems by raising taxes is an archaic attitude," he said in an interview with Le Figaro. "What we need to do in this country is to encourage work. To share in the fruits of growth, we must first create wealth. That means preferring work rather than taxes."

Optimists may point to the French Government's recent support for entrepreneurial activity, shown in an August law that recognized some of the barriers - bureaucratic and fiscal - that stand in the way of entrepreneurial activity in France, and its recent stout defence of pension reforms in the teeth of Union resistance.

The August law is impressive: administrative formalities are being eased, the personal fortune of the entrepreneur is being protected, funding is being sought and tax and social security advantages offered. With all this, the government hopes to bring the creation of enterprises back to their level in the 1980's. Statistics published by INSEE show that only 175,000 new enterprises are created every year. This is lower than 200,000 per year created in the 1980s. Even Spain today creates twice as many enterprises each year, and it has overtaken France in the total number of enterprises. Enterprises per person are much lower in France than in the UK, USA or Italy.

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