France: Selected Issues

Abstract

A REVIEW OF CAPITAL TAXATION IN FRANCE 1 The government's planned tax reforms are an important opportunity to make capital taxation in France more efficient and growth friendly. The current system is characterized by a range of distortions and inefficiencies. The corporate income tax (CIT) regime features a high statutory rate but low revenue productivity, as well as a bias toward debt financing, ineffective size-dependent regimes, and inefficient tax incentives. Profit-insensitive taxes are comparatively high. Anti-tax-avoidance rules are strong, but risks to outbound profit shifting remain. Tax uncertainty is another concern. At the individual level, the system of taxing wealth and capital income is complex, with distortions from differential taxation across savings instruments. To address some of these issues and make the tax system more supportive of growth and job creation, the government plans to reduce the CIT rate, further cut the labor tax wedge, unify taxes on capital income, and narrow the wealth tax. Staff's analysis suggests that complementing these reforms with measures to remove inefficient tax incentives, further reduce the debt bias, address disincentives to company growth, and streamline the taxation of long-term savings could enhance their impact on competitiveness, revenues, and growth. RightsLink Copyright Clearance Center ® FRANCE 4 INTERNATIONAL MONETARY FUND B. Key Features of Capital Taxation in France 5. France's tax ratio is higher than in most comparator countries, reflecting the large size of the public sector. At more than 56 percent of GDP, government spending is one of the highest in the OECD. The state plays an extensive role in the economy, especially in social protection and health. Accordingly, at 53 percent of GDP, the revenue ratio exceeds that of most comparator countries. Taxes are equivalent to 45½ percent of GDP, again one of the highest in the OECD. 6. The composition of tax revenues (the tax mix) is broadly similar to comparator countries, whereas tax-to-GDP ratios are relatively high, except for indirect taxes (Figure 1). Both the level of capital taxes (about 10.8 percent of GDP), and their share of total tax revenues (23.5 percent), are higher than the EU average and Germany, but broadly in line with Italy and the UK. Labor taxes are high in relation to GDP, though their share in total tax revenue is comparable to many European countries. By contrast, the share of indirect taxes in total revenue is below that of most other countries. Figure 1. Levels and Composition of Tax Revenues Source: Eurostat statistics. 7. A considerable portion of capital taxation is insensitive to income or profits, including taxes on personal wealth, real estate, and local taxation of businesses. The tax on capital is split into a tax on the capital stock (4.3 percent of GDP) and a tax on capital income (6.5 percent of GDP). The latter is decomposed as 2.8 percent from corporate income ("impôt sur les sociétés"; IS, referred to in this paper as CIT), 1.8 percent from household income, and 1...