Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom


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The Making of Tax Hell… And The Escape of Entrepreneurship

Why would you stay in a country where there are more than 200 types of taxes? And in which taxes are piled up and never removed. If French President François Hollande and his government want to fight against tax havens, French taxpayers and entrepreneurs are battling against the daily tax hell they are living in.

“Let us never forget that, in fact, the State has no resources of its own. It has nothing, it possesses nothing that it does not take from the workers”, warned French economist Frédéric Bastiat: here actually lies the very root of tax hell. The bigger the Government, the bigger its tax needs: a Government produces nothing therefore it must live on the country’s economy.

With 6 million civil servants, public spending reaching 56.6% of GDP, a national debt amounting to 1833,8 billion euros, i-e 90.2% of GDP, in which the Government alone weights for 79%, the social security for 11% and local governments for 9.4%, interests debt reaching 47 billion euros –the second Government budgetary spending-, the French Government needs a lot of money. The tax administration is essential to its survival. Under the pretense of social justice and protection of the French social model, tax rules become harder. In three steps, tax hell is reached.

First step: fiscal pressure . It is the usual state of taxation, should we say. With a 36.1% average corporate tax, a 52.1% income tax, a 45% employers contributions on wages, a 14% work tax and a 19.6% VAT, the French tax system usually looks like a bogeyman. High tax pressure let little benefits for companies. Yet, at this stage, entrepreneurs would not be leaving the country en masse.

Second step: tax pounding . Starting with François Hollande’s presidency, confiscatory-type taxes are or try to be implemented. The “special contribution on wealth” was hurriedly passed in Parliament during the summer 2012 and levied during last Fall. The famous 75% tax tried to be levied on wealthy people: it will finally tax companies where senior managers are earning more than one million euros. Besides, the Government schedules to levy on companies no less than 12.2 billion euros worth of new taxes in 2013, a tax pounding that is likely to decrease the economic growth by 0.5% and destroy 70.000 employments according to the Institute for Research on Economic and Fiscal Issues (IREF) most recent study on taxation and employment destruction. Because of this pounding, a bigger-than-the-usual-number of entrepreneurs are leaving the country: the estimates went from the usual 800 to the exceptional 5000 only for 2012.

Third step: tax repression . It has discreetly begun in February 2013 with the Ministry of Finance’s proposal of a new type of fiscal control. On a voluntary basis at first, companies are proposed to be audited by the tax administration before they submit officially their tax return. It would be as if the agents of the tax office would seat at the heart of a company’s accounting, dissecting all results and fill the company’s tax return themselves. It is a strange reminder of the People’s Commissar who would belong to all the society’s structures in order to check their faithfulness to the Party. The result is that the tax administration would control the overall company’s balance sheet. There are two dangers in that system: first the companies that will not voluntarily opt for this audit will become suspicious; second, the proposal may become an obligation. Free enterprise is threatened. Who would stay in such tax system?

Once these three steps have been reached, it can be said that France’s tax system has become a Tax Hell. Yet, President François Hollande and his government always talk about “national generosity”, “solidarity” and “social justice” to justify what is a blunt legal plunder. Unfortunately, this legal plunder is more necessary than ever since the French public sector did not stop growing since 1987 while the private sector was shrinking so that now it barely has room to make a decent business.

Corporate tax raises hamper corporate benefits and do not attract investors: direct foreign investments are forecasted to decrease. In such a context, unemployment growth will not stop: it reached a historical level on April 25th with 5.3 million unemployed people – all categories of jobless people being added – about 19% of the French working population.

In such economic context, it becomes quite difficult to retain junior and senior managers as entrepreneurs who are all looking for a “tax relief” – we do not dare saying “tax haven”. If French businessmen are leaving their country, it is not because the Thames is cleaner than the River Seine, or because the Guinness tastes better than Bordeaux Wine, or because they prefer German Chancellor Angela Merkel to French President François Hollande. If they are leaving, it is because they compared the countries’ tax policies. That is called tax competition between countries.

Thus, there are two types of countries: those that are “public sector friendly”, and those that are “business friendly”. The United Kingdom’s 24% corporate tax, or Ireland’s 12.5% corporate tax would attract more French entrepreneurs. Indeed according to Ernst&Young and KPMG, as pointed out by the IREF, the average corporate tax rate in France went from 34.43% to 36.15% between 2012 and 2013: a 1.72% increase in less than a year!

There is no shame to compare tax systems and choose the one that would let entrepreneurship flourish. After all, if one becomes an entrepreneur it is to make money, not to finance Big Government. That is why most businessmen are escaping from tax hells.

Sylvain Charat, Ph.D

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