French President Emmanuel Macron is making good on his campaign promise to improve the business environment in France. As part of this effort, his government released a budget at the end of September with substantial taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reforms, which reduces or eliminates several business taxes. In addition, he has vowed to reform the unemployment insurance system by expanding it to the self-employed and farm workers as well as capping benefits and introducing training programs. These reforms have a hefty price tag, which Macron intends to pay for with cuts in spending to public programs. In addition, the new budget attempts to shrink the French deficit below 3 percent of GDP, which complies with EU deficit rules.
During the French presidential race, Macron, an economic centrist, had promised sweeping reforms to increase France’s economic competitiveness so that French businesses could compete in an increasingly global economy. With his decisive victory over Marine Le Pen in May and the overwhelming victory of his party in the Parliament in June, Macron has been given a mandate to fulfill these promises.
Overview of Tax Reforms
- Abolishes the wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.
- Introduces a 30 percent flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. on dividends, interest, and capital gains
- Reduces the corporate tax rate from 33 and 1/3 percent to 25 percent phased in over five years
- Removes the 3 percent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on the distribution of dividends
- Introduces a less generous competitiveness and employment tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CICE)
- Rolls back the expanded scope of the financial transactions tax (FTT) introduced this year
- Removes the 20 percent top bracket on the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.
- Phases out the taxe d’habitation, a tax on households
- Increases the General Social Contribution (CSG) tax by 1.7 percent
- Illness and unemployment contributions are no longer deductible from income taxes
- Taxes on diesel fuel increase by 2.6 percent
On September 27th, Macron’s government released the 2018 budget with major changes to both the rates and the structure of French taxes. The corporate tax would be reduced from the current 33 and a third percent to 25 percent over five years as well as other changes to business income. These reforms would leapfrog France from the 33rd most competitive corporate tax code to the 18th spot according to the Tax Foundation’s International Tax Competitiveness Index. Moreover, the reforms would bring the corporate rate in-line with the OECD average, which could attract businesses from the Brexit-embattled British Isles.
Macron’s government also proposed changes to the unemployment insurance system, which would expand coverage and cap benefits. The plan expands coverage to entrepreneurs, farmers, and merchants who declare bankruptcy to encourage business startups and, under strict conditions, covers employees who voluntarily quit to facilitate job transitions.
The plan does restrict the benefits received, both in duration and amount. The plan only gives the unemployed one opportunity to pass on a job for which they are qualified. If the individual passes on a second job, the new rules require them to attend a training program to continue receiving their benefits.
Macron’s proposed budget plans on paying for these reforms with a reduction in spending of almost €16 billion. The plan sheds 120,000 public sector workers over five years. Those who keep their jobs will see their wages frozen for 2018 with possible changes to the wage formula. Regional governments will see a €450 million-dollar reduction in payments from Paris as part of the plan. The less generous benefits from unemployment insurance will also help to reduce the overall spending.
In addition to the spending cuts, several tax increases have been introduced. The CSG, which is mostly paid by workers and pensioners, will increase by 1.7 percent. In addition, contributions to illness and unemployment insurance will no longer be deductible. The tax on diesel will increase by 2.6 percent, but incentives to switch to petrol or electric cars will be provided.
Although there has been considerable opposition to these changes, Macron’s government has stood firm in its resolve. Over the weekend labor unions organized mass protests and strikes began on Monday. Some 209,000 public-sector workers protested the new budget, but Macron seems unfazed.
Although there are still challenges to overcome before Macron can fulfill his campaign promise, he seems to have the leadership to keep his party on course for tax reform, even in the face of public disapproval. Macron has plotted a course for his country to achieve a competitive economy. It is up to his and his party’s resolve to implement their vision of a better France.
As France embarks on creating a more competitive economy, the United States needs to reflect on its position in the world if it cannot follow suit. A tax code rooted in the 1980s cannot compete with a world vying for businesses to operate within their borders. If U.S. politicians cannot provide the leadership and vision to push the U.S. tax code into the 21st century, the U.S. economy will cease to grow as businesses and entrepreneurs depart for more hospitable shores. The real question is not whether the United State can afford tax reform now, but whether the United States can afford a future without tax reform.
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