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 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.