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.
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
countries, 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
government. - Be realistic. Tax policy is also based on shared principles and practices.
Does it make sense for interests 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.
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.