The Six Keys to Sound Tax Reform

Published in Les Echos, January 29, 2014
by Vincent Champain and Raphaël Coin

Tax revolutions end in disaster when they try to alter tax policy using
appealing or popular ideas that are out of
touch with economic realities. In the end, tax policy cannot consistently
disregard six basic principles.
  • Cover all forms of taxation. In France, the most burdensome expenses
    for businesses are employer social security contributions. Unable to reduce
    social security spending, we have eased the burden where it was the most
    harmful: the exemption for low wages and the tax credit for competitiveness and
    job creation (CICE) sustain low-skilled jobs, while the research tax credit
    (CIR) safeguards jobs for researchers by bringing expenses in line with the
    rest of the world. A purely tax-based reform would observe a withdrawal of the
    CICE and CIR from corporate income tax rather than seeing that these
    initiatives aim to reduce excessive burdens.
  • Avoid isolation. When France acts alone, it has no hope of achieving
    its goals, and simply reinforces its reputation as a country where taxes alone
    thrive. On the other hand, when France takes action at the OECD level, helping
    identify potential developments for digital taxation and how such initiatives
    could be implemented simultaneously
    with other
    , it has a real chance to move tax policy forward.
  • Avoid dogmas. There are those who criticize the CIR without
    understanding how the worldwide distribution of R&D projects is decided.
    Others denounce exemptions from social security contributions – as if cost was
    not an issue for businesses. Some say that companies will always choose France
    for its strengths; they forget that neighboring countries offer comparable
    strengths, sometimes with more attractive conditions.
  • Differentiate between good and bad taxes. The best taxes offer a
    “double dividend.” For example, the social cost of a ton of CO2 is estimated at
    around €30. A tax in this amount would provide the government with revenue
    while at the same time helping the environment. These are the only taxes for
    which an increase can, in itself, enhance well-being. Other taxes are
    indispensable in that they provide governments with the lion’s share of their
    income – the domestic consumption tax on petroleum products (TIPP), the
    value-added tax (VAT), personal and corporate income tax, etc. The existence of
    these taxes is not called into question, but it makes sense to wonder about
    their simplicity and coherence on an international scale. Finally, there are
    destructive taxes. The tax on financial transactions is an example, as it will
    serve merely to move jobs out of the countries that implement it. Furthermore,
    this tax will destroy political goodwill among our partners; we will no longer
    be able to count on them to support causes such as the price of CO2.
  • Avoid “virtual taxes”. Uncertainty works like a tax: businesses tack
    on a “safety margin” in addition to applicable taxes when a situation announced
    at the beginning of the year is liable to change. Likewise, studies show that
    business leaders estimate their tax expense several points above the actual
    level. As such, tax reform’s primary objective should be to reduce these
    “virtual taxes” that hurt the economy while providing no income for the
  • Be realistic. Tax policy is also based on shared principles and practices.
    Does it make sense for interest
    s payments to be tax deductible while dividends are not? The issue
    can be a subject of academic debate, but in practice the entire world applies
    this distinction, and a single country cannot go against the current without
    leading its capital-intensive industries to ruin.
An ambitious reform should take the time to analyze the facts, motivate
our partners (OECD or Europe) and consult with businesses to ensure that
investment incentives are maintained. Finally, it is essential not to create
artificial divisions: facts are neither liberal nor conservative; they are
simply there. And disregarding them will become ever more costly for France. 
À propos

Dédié à l'analyse des questions économiques, sociales et environnementales de long terme, L'Observatoire du Long Terme se fixe pour objectif de donner davantage de visibilité à ces enjeux dans le débat public. Dans ce contexte, il donne la parole à des contributeurs variés, avec pour seul critère le caractère étayé des arguments présentés.

L'Observatoire est indépendant, ne reçoit aucune aide financière et repose sur le volontariat de ses contributeurs, de son bureau, présidé par Vincent Champain et Bruno Fuchs.

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