Institut Economique Molinari // 23.11.2015

In its latest study (in English and French), the Institut économique Molinari shows that corporate taxation continues to slow down economic recovery in France despite the CICE, a tax credit meant to encourage competitiveness and employment. The first half of 2015 saw a 48% drop in corporate income tax revenue. The decline is much sharper than the anticipated effect of the rebates. This suggests that the broadening of the tax base expected under the rebate programme is not really occurring and that economic recovery is slow in coming.

A corporate tax burden still higher than 60%

At present, the corporate tax burden imposed on SMEs in France can amount to 62.7% of earnings before taxes. Concerning corporate taxation, what often comes to mind is the 33.3% corporate income tax rate. However, this is not the only tax paid by entrepreneurs. When we think of corporate taxation, there has been a tendency to focus only on corporate income tax without considering many other taxes that businesses have to pay. Taxation also includes employer-borne social security contributions paid on payroll, as well as real estate taxes and many other minor taxes.

Corporate taxation impacts all sorts of revenue in society: wages, benefits, dividends, and investments

According to a study, a 1% federal tax increase results in a 3% fall in output after two years. The IMF found that a 1% tax increase reduces GDP by 1.3% after two years.

Firms are the source of most income circulating in any economy. Although it is true that their income depends on their clients’ wealth, firms are the entities that conduct the actual redistribution of income in the economy. Profits are a sign that a firm generated more wealth than is used in production. This entails a potential increase in income for various agents. Shareholders obtain dividends, and employees may see pay rises in the form of profit-sharing. Any profit that is retained as corporate savings implies future investment that generates new income flows to current and future employees. Taxing corporate income is therefore equivalent to reducing all these income flows.

A negative impact on foreign direct investment

The greater the wedge between pre- and post-tax returns on foreign direct investment (FDI), the lower the incentive to undertake FDI in a given country. In France, foreign investment flows between 2010 and 2013 were 44.87% lower than in the 2000-2003 period. Flows are five times lower than in the previous decade.

In the International Tax Competitiveness Index prepared by the Tax Foundation, France ranks last among OECD countries.

Harmful taxation for productivity and employment

In France, double taxation (under the weight of corporate income tax and then again when distributed as dividends) can easily reach 60% of the gross realised gains from an investor’s holding in a company, the highest in the OECD.

Wages can be depressed by double taxation that penalises long-term investment in technology and capital goods. It makes labour less productive and therefore yields lower returns.

The complexity and lack of transparency of taxation means that its costs can be quite significant and detrimental to production and commercial activities. In a survey of the most recent academic studies on tax compliance costs, two economists find that the hidden costs of tax compliance vary between 1.3% and 6.1% of GDP, producing a tax gap of 2.8% of GDP for the U.S. federal government.

Tax avoidance is necessary but counterproductive

Tax avoidance, meaning all practices and schemes adopted by companies to reduce their tax burden legally, helps somewhat in avoiding the adverse effects of a heavy tax burden.

It makes investors more receptive to management, which is then better able to undertake longer-term projects that build up capital, increase productivity and generate new production outlets.

Tax avoidance makes a company more competitive. Labour remuneration and employment improve. This also means that shareholders will keep investing in the firm for a longer period, instead of selling their shares in a speculative move as soon as they make a capital gain. It allows for investment on new organizational methods and technology that can improve its cost structure vis-à-vis its competitors. Furthermore, the availability of greater capital reserves helps a company deal with hard times more effectively.

Fighting tax avoidance through regulation may prove counterproductive to the government. When it increases the rates and complexity of tax conformity, government gives firms the incentives to engage in tax avoidance or to invest in more friendly tax areas. Besides, it funnels funds to the tax avoidance lobby industry that would otherwise be used in production.

You can find out more about Institut Economique Molinari at www.institutmolinari.org.