France discovering the Laffer curve

Economy Oct 15, 2013

Although the latest figures published by the French Finance Ministry show a slight year-on-year increase in revenue levels compared to 2012, they also reveal that the record tax rises implemented this year are weighing heavily on overall revenue growth. This is in spite of surprisingly positive figures for August 2013.

Revenues derived from individual income tax amounted to EUR41bn (USD55bn) as at the end of August this year, compared to EUR34bn the same time the year before. Income from corporation tax stood at EUR23bn as at the end of August 2013, compared to EUR17bn in August 2012. However, close scrutiny of expected revenues for the entire year paints an altogether different picture. The Finance Ministry has revised downwards its forecast for 2013, currently anticipating total net revenues of EUR287.8bn, compared to the EUR298.6bn provided for in the initial finance law for 2013. The revision marks a shortfall of EUR10bn, added to which a further EUR5bn shortfall is expected due to lower income from social security contributions. This will push the total revenue shortfall figure to EUR15bn, despite the fact that the 2013 Budget provided for tax rises totaling EUR30bn.

Bercy attributed these disappointing figures to the economic climate and zero economic growth this year, pointing out that less growth means lower fiscal revenues. Additionally, revenue growth is simply not keeping pace with activity, or gross domestic product (GDP). President of the French National Assembly Finance Committee Gilles Carrez argues that the tax burden in France has become such that it is weighing too heavily on income from taxes. Too much tax kills taxation, Carrez stressed. Other experts have warned that when compulsory levies are already high, as is the case in France, a further rise in taxation merely results in a weak rise – or even dip – in revenue levels. At 46 percent of GDP, compulsory levies in France are at an all-time high.

The Finance Ministry remains confident, however, that revenue levels will once again keep pace with GDP in 2014, a prediction deemed "optimistic" by the High Council of Public Finances. France's 2013 Budget provided for EUR10bn in expenditure savings, for EUR10bn in additional taxes on large corporations in France, and for a EUR10bn contribution from households, notably the country's wealthiest. Hardly surprising then, that value-added tax (VAT) and corporate tax revenue levels have suffered as a result.


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.