IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
France’s Draft 2010 Finance Bill provides for the abolition of the Business Tax, which is perceived by local communities and currently accounts for 10% of their revenues. Called by François Mitterrand “the idiot tax”, the Business Tax is the main local tax, paid every year by nearly 2,9 mln of companies. It is based on the investment in equipment done by local firms (the basis of the tax is the rental value of a company’s tangible fixed assets) plus 1.5% tax on the value added for companies with a turnover exceeding 7.5 mln €.
It was targeted for a long time from the left and the right side of the political spectrum as an asphyxiating for the economic activity tax, since it is penalizing those who are innovating and investing the most (the tax is due even when the investments are not profitable). The abolition of the Business Tax is therefore expected to reduce the incentives for outsourcing. Moreover, during the years the State became the main payer of the Business Tax, since it was compensating to the local communities the dozens of tax reductions and exemptions introduced by different governments. Nevertheless, the abolition of the Business Tax is highly controversial – according to local representatives, it will compromise their autonomy if not compensated by other revenues, especially in the current economic context. What the government proposes instead is the introduction of a Territorial Economic Contribution (TEC). The main difference between the Business Tax and the TEC is that the latter will be based only on the rental value of real estate assets of the company and machinery and equipment will no longer be taxed (they represented 80% of the former Business Tax base). An Additional Contribution is set for companies with turnover exceeding 500 000 € - they will have to pay a percentage on the value added, at a rate between 0.5 – 1.5%.