Taxation in France: a brake on growth?

Businessman in paper recycling concept in office

After a presidential five-year term whose economic results seem very mixed, leaving France with an unemployment rate of around 10% and a low growth rate of 1.2% in 2015, we are entitled to ask ourselves what the causes could be. Indeed, if we compare the growth and employment figures with those of neighbouring economies, such as Germany (1.7% growth; 3.9% unemployment) or the United Kingdom (2.3% growth; 4.8% unemployment) which have reached the stage of full employment and a good economic recovery, one of the factors that we could identify as explaining some of these differences would be the tax differences between these three countries.

In fact, François Hollande’s five-year term began with a major tax shock via compulsory taxes (IRPP, CSG, ISF, social contributions, etc.) on companies (+16 billion) and households (+32 billion) between 2012 and 2013. To mitigate this effect on companies, 2014 will be marked by the implementation of a countermeasure, the CICE, aimed at reducing labour costs. However, household taxes continued to increase to 20% VAT and the intermediate rate to 10%, resulting in the collection of €15 billion. This fiscal shock would have caused France to lose about 0.8% of growth per year according to the OECD. Germany’s growth was lower (0.3%) in 2013 than that of France (0.6%) but the following year in 2014, Germany stood at 1.6% compared to 0.3% for France, demonstrating the counter-productive aspect of the policies pursued.

From a macroeconomic point of view, France’s growth depends mainly on household consumption and business investment, and we can see that, as a result of these tax policies, household purchasing power fell by 1330 euros per year between 2011 and 2014, resulting in stagnant consumption.

For companies, studies conducted by the IMF have highlighted the negative role of corporate taxes since a 1% tax increase reduces GDP by 1.3% after two years. France is in an unenviable situation regarding the tax burden on companies since between 2011 and 2015, they had to bear an exceptional contribution which went from 5% to 10.7%, which could raise the tax rate from 33% to 37%. Margin rates have fallen, directly impacting their investment capacities which, despite the implementation of the CICE, remain sluggish. Investment is a prerequisite for an economic recovery, with a theoretical reduction in the unemployment rate, which has followed a negative trend (-1.9% in 2012 and -1.8% in 2013), partly explaining the explosion and the fact that the unemployment rate remained at 10%. France therefore remains far behind its European neighbours, who apply a corporate tax rate of 22.8% on average, negatively impacting the productivity of French companies and consequently reducing France’s attractiveness.

Despite these significant increases, France is unable to achieve a balanced budget since public spending has not decreased but increased at the same time. According to the OECD “It is likely that the same result could have been achieved with a more gradual evolution of taxation”. In 2017, the debt will reach 96.5% of GDP, which remains a level in the average of European countries. But these tax efforts by households and companies have had a disastrous effect on public opinion with a “ras le bol fiscal” punishing the Socialist Party in the 2017 presidential elections with a historically low score of 6.3% in the first round and that we are at the same time witnessing an increase in extremist political movements.



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