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Tax Competition Alive and Well in France

4 min readBy: William McBride

This appears to be a race to the top:

With just a month and a half to go before the start of the elections, French presidential candidates Nicolas Sarkozy and his Socialist rival François Holland have once again crossed swords on the key battleground issue of taxation.

With both candidates focussing on the battle for social and fiscal justice as a means by which to gain much needed electoral votes, voters will have to decide between Hollande’s plans to increase the 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. burden on top executives in France, and incumbent President Sarkozy’s pledge if re-elected to tax large international groups.

Both candidates are now locked in a fierce combat involving attack and counter attack, each determined to outbid the other.

Socialist candidate Hollande launched the attack by initially unveiling election plans to levy a 45% rate of tax on annual income in excess of EUR150,000. Then, some time later, in a bid to regain the headlines, Hollande caused a fresh stir both at home and abroad by announcing plans to introduce a top rate of income tax in France of 75%, imposed on income in excess of EUR1m a year.

Eager to beat his rival at his own game, Hollande even put forward his own plans for a financial transactions tax at European level, to include derivative products. Mocking Sarkozy’s plans, Hollande insisted that the government’s proposals suffered from a “serious lack of ambition”, depriving the measure of any efficiency, both in terms of curbing speculation and generating significant revenues for the state.

Hollande revealed the Socialist Party’s aim to fix the tax at 0.05%, noting that this should serve as a basis for future discussions with France’s European partners.

Revenues from the “European tax” would be used to combat severe indebtedness among member states, to aid growth in Europe by financing large projects, and to finance international development and climate change projects, Hollande added.

In a counter attack, and a determined bid to shake off his image of “the president of the rich”, President Sarkozy denounced the “amateurism” of his rival’s plans for a 75% income tax rate, noting that even the Communists never advocated such a measure.

Sarkozy unveiled details of his own plans to introduce a minimum tax on the profits of large international companies in France listed in the CAC 40, the French stock index.

Underscoring that it is “not normal” that large international groups located in France are currently able to “maximize their tax breaks”, enabling some of them in so doing to not pay any tax at all, Sarkozy pledged to impose a minimum tax on profits if re-elected.

In accordance with current plans, the tax would apply to the same companies that would be subject to the government’s financial transactions tax from August 1, namely around a hundred companies headquartered in France with a capitalization in excess of EUR1bn.

The President announced that the proposed measure would be introduced within the framework of the country’s 2013 budget, and would yield in the region of between EUR2bn and EUR3bn for the state.

Lambasting Sarkozy’s latest proposal, Hollande remarked that although these are all “good ideas”, it was a pity that the outgoing president had them at the end of his mandate and not the start. Hollande’s spokesman Bernard Cazeneuve underscored the irony of the situation, that Sarkozy has taken “so long to understand that the taxation of companies is unjust”.

François Holland has already outlined his own plans for corporate tax reform designed to benefit in particular innovative small- and medium-sized (SMEs) companies in France. Hollande explained that he would introduce three tax rates, notably a rate of 35% for large companies, 30% for SMEs and 15% for TPEs (very small companies). This, he stressed, would re-establish a balance between the taxation of large and small companies.

The Socialist candidate has also pledged to toughen the system of transfer pricing and to limit tax deductions for loan interest to purely physical investments, such as the purchase of machinery.

It remains to be seen if there are further shock tax announcements in the weeks to come.

Meanwhile, France remains in the basement in terms of economic growth, going into a recession currently after having grown at less than half the rate of industrialized peers over the last decade.

Follow William McBride on Twitter @EconoWill