Zooming In On French Taxation

Since 2017, Emmanuel Macron has implemented several tax reform measures. These include the reduction in corporate tax, the transformation of the CICE (The Competitiveness and Employment Tax Credit), a reduction in employer contributions, the replacement of the ISF (the solidarity tax on wealth) by a real estate wealth tax, and the introduction of a "carbon tax", to name but a few. Although relevant, these measures have a high budgetary cost. Efforts to reduce these costs have frequently been ineffective. For example, budgetary savings, which were meant to accompany the reduction in compulsory levies, did not occur. In 2020, in response to the crisis, France was highest in Europe in terms of the level of its public expenditure (61.8 points of GDP), a trend that is not expected to reverse any time soon. 

With less than three months to go until the French election, this article is part of a series that looks into the achievements and drawbacks of Emmanuel Macron’s presidential term. The extended analysis in French can be found here. 

Key Notions:

• CICE - The Competitiveness and Employment Tax Credit, introduced in 2013, was a corporate tax credit that applied to all sectors, calculated on the basis of the salaries that fall below the 2.5 times the minimum wage limit, thus reducing the cost of labor for companies. It was abolished as such in 2019, and transformed into a reduction of social charges for employers.
   
• The Company Added Value Tax (CVAE) - A tax-based value and the second component of the Economic Territory Contribution (La contribution économique territoriale - CET) paid by companies and self-employed workers who generate a certain amount of turnover. This tax is introduced for the benefit of local authorities. The rate is nil for a turnover of less than €0.5 million and 1.5% for turnover over €50 million.
   
• The Companies’ Social Contribution (C3S) - It contributes to the financing of old-age insurance. It concerns all commercial enterprises, public enterprises, the cooperative sector, and organizations. The C3S rate is 0.16% of turnover. 
   
• ISF - IFI - The solidarity tax on wealth (ISF) was an annual direct wealth tax on those in France having assets over €1,3 million (since 2011). It was one of the Socialist Party's 1981 electoral platform's measures. In 2017, Emanuel Macron turned it into the real estate wealth tax (IFI), only including real estate assets and exempting the rest, with the aim of boosting investment. 
   
• CSF (crédit social des fonctionnaires) - Social credit for civil servants: created in 1955, the CSF grants loans to public officials. It has been replaced by social contributions on assets. 
   
• The housing tax - Applied to both landlords and tenants. This tax is conditional on property, location and revenue of the individual. It is slowly being lifted and will be entirely eliminated by 2023. 
   
• CSG - The so-called generalized social contribution, this is a tax that finances the social security system and unemployment benefits. It is most often directly deducted from the citizens salary, and it is currently capped at 9,2% of the wage. 

Key Figures: 

• France, which has the fourth highest corporate tax rate in Europe, has reduced its corporate tax from 33% to 25% between 2017 and 2022, at a cost of €11 billion. 
   
• The replacement of the IFI by the ISF cost approximately €3.8 billion. 
   
• France has the largest government expenditures among OECD countries. Public expenditures were 55.6% of France’s GDP in 2019, the highest in the OECD. The main driver is social protection expenditures of 23.9% of GDP, almost double the OECD average of 13.3%
   
• France’s production tax represents 10% of national revenue, in comparison to 2% in Germany, for example. 
   
• The gradual removal of the housing tax on primary residences has resulted in a revenue loss of €10bn per year as of 2020.
   
• Production taxes have been decreased: €10 billion over two years (2020 et 2021), i.e. €20 billion in total. 
   
• The carbon tax increase in 2018 brought in €3.7 billion, but was canceled from 2019 onwards, following the Yellow Vests crisis.

Evaluation French taxation policy: 

• Important tax measures have indeed been implemented since 2017, but they have come at a high fiscal cost. Sufficient budget savings need to accompany the reduction of compulsory levies in order to reduce public deficit, but that has not been carried out.
   
• Overall, the rate of tax contributions have not declined significantly (44.5% in 2020 and 43.8% in 2019, after 44.7% in 2018), nor has public spending: France maintained the highest levels of public spending in Europe in 2020 (61.8 points of GDP). Public spending in European countries averaged 54.1% of GDP in the Eurozone in 2020 and 53.4% of GDP in the EU-27. 2020 is certainly exceptional, but the ranking of countries according to their public spending was not very different in 2019. 
   
• From 56% of GDP in 2022 public spending in France should reach 53.1% by 2027 according to the 2021-2027 stability program.
   
• In an effort to reduce production tax, the finance law for 2021 abolishes part of the Added-Value Tax (CVAE). The finance law also lowers the "common ceiling" for the CVAE and the CFE from 3 to 2% of the added value, and reduces taxes by half for industrial establishments (property taxes and CFE). Losses of revenue from local authorities are compensated by affecting a fraction of the VAT by the State, which bears the cost of this measure: €10 billion per year, including €7 billion for the regional part of the CVAE.
   
• Since 2014, the domestic tax on the consumption of energy products (TICPE) includes a "carbon component" (or "carbon tax") expressed in euros per tonne of CO₂ emitted, to address the combustion of fossil fuels. This amounted to €30.50 in 2017 and was expected to increase its power to reach €100 per ton of CO₂ in 2030. The finance law for 2018 has programmed a gradual increase of this carbon component, year by year, up to a level of €86.20 per tonne of CO₂ in 2022, which would have taken the TICPE to 78.23 cents per liter of diesel and 77.80 cents per liter of gasoline. The budgetary return of this measure was to be €3.7 billion in 2018 and €14 billion in steady state from 2022.
   
• The increase planned for 2018 has taken place, but following the social crisis i.e. the Yellow Vest Movement of autumn 2018, the finance law for 2019 was canceled along with the planned increases for the years 2019 to 2022. The abandonment of the planned increase of the carbon tax makes it more difficult to effectively implement the fight against climate change in France.
   
• Financing the tax cuts that were approved in 2017 is a major issue. Today, however, France ranks among the countries with one of the highest production, corporate, and compulsory contribution tax rates in the world. Covid-19 will most likely not reverse this trend in the short term.
   
• The overall consensus among experts is that there should be a reduction in production taxes (CVAE and C3S as priorities), in order to realign the level of French taxation with that of its neighbors.