French people have a very particular relationship with taxes. They always think they pay too much ones and especially that their neighbor doesn’t pay enough ones. In the same time, they ask for better public services and a large and fair social protection. When they are shown that their country has a level of compulsory levies among the highest in the world, that doesn’t dissuade them to ask for more, to the condition it is “the neighbor” who pays. And when, in presence of the accumulation of deficits and the public debt increase, it is suggested to reduce expenditures or to create new taxes, there are rumblings of discontent. It is what France is confronted with. The “yellow shirts” movement, whose real presence in the demonstrations is derisory, benefits from a large support, even if it is now declining, since it is proposed to cancel the CSG increase on pensioners or to reestablish the wealth tax.
French taxes are very ancient. It is the reflection of the “old world”. Income tax has been instituted more than a century ago and the family allowances after World War 2. VAT has been created during the Fifties, the real estate tax under Georges Pompidou mandate, the CSG later, at the beginning of the Nineties, right after the wealth tax which has suffered vicissitudes with its cancellation, then its reintroduction under a new name and at last, the reduction of its basis last year. Passions which it generates are in an inverse proportion of its yield which is marginal if it is compared to the others forms of taxation, especially when it is noticed that the real estate tax, whose basis is close to it and which is paid by every home owner, carries ten times more money. This tax system is also complex and unstable. Each year, new items are added which modify the current texts or create new conditions to apply in order to benefit of one or another regime. Are that fiscal practice and its result, the Tax code and the Social Security one, adapted to the “new world”? Definitely, not.
Three major changes occurred during these last decades. First, French people considerably increased their wealth. Somebody who is rich is not, against what we hear in political speeches, somebody who makes a lot of money, but somebody who has a lot of money or assets. INSEE published the figures for 2017. Household net wealth, once debts are deducted, reached 11 500 billion euro. Between 2015 and 2017, it increased by 7%, much more than the growth of revenues. The second major change is about the generalization of competition in supplying goods and services. It results from the trade liberalization and from the political choice to introduce competition in activities which were usually public monopolies. The result has been a near disappearance of inflation which had marked the second half of the 20th century. At the end, innovation, which has also contributed to the cost reductions, has allowed a mobility of products, financial assets and information which has disrupted the economic models and the tax systems conceived for a simply half-open world. 21st century tax policy must adapt itself to these changes.
Household direct taxation can’t forever give a miss in the own goods and assets. Public expenditures are not only used to protect people. They also guarantee the protection of assets. These ones will have, through a way or another, to be included in the tax basis. But a huge effort of pedagogy must be undertaken. The purpose is not to look at wealthiest people to implicitly denounce them and to explicitly tax them but to include goods and financial assets in what will become the unique direct tax paid by household to the profit of the State. It is in conformity to the spirit of the Constitution which indicates that everyone must contribute to public charges according to its means (and not only to its revenues). Real estate assets would be reevaluated each year and the values included in insurance contracts would be included in the tax basis which could permit to solve the complex problem of personal properties and collectables. With a global unchanged taxation or even a reduced one, taxes on wages would be reduced.
The competition strengthening changes the context in which VAT is working. During the past, a rate increase was weighting on purchasing power. Governments always hesitated to move in that direction. Many industrial products, thanks to innovation and, it is honest to say to de-localizations, saw their prices falling. A VAT increase would offer new fiscal receipts without being automatically and globally passed on due to competition pressure. It would be partly beard by big retailers which, in the past, have benefited from generous tax reductions as the CICE or the reduction of corporate tax, without any financial or social compensation.
Globalization and innovation incite to think again about corporate taxes model. The current debate about GAFA is just an introduction. Regarding the complexity of French tax system, any idea about harmonization at the European level is an illusion. The project of a simple agreement with Germany, announced by Nicolas Sarkozy more than ten years ago, never lead to any result. To align rates is not able to solve the issue as soon as basis isn’t and it is not near to be. The first priority inside the European Union is to prove itself the highest firmness with the unfair countries, Luxembourg with its mailbox companies, Ireland with manipulation of transfer prices and Nederland with its dubious financial arrangements. In that matter, it is not only an issue about fiscal choices but about the honor and, in a certain way, of the future of the European project.
The success of the transformation of the French tax system, about which some possible tracks have been mentioned, lies also on the method which could be used to elaborate its content. A radical change is indispensable. The matter is not communication, or to appoint a “president” to elaborate a “grand plan” or leads a “great debate” with an agenda or to organize a “Grenelle of the tax system”. Why not, for once, to come back to the practices of the “old world”? In that time, an institution, which has today disappeared, the Planning Agency, organized working groups gathering professional and labor unions, experts and even sometimes politicians to think together freely and with discretion to the major issues at that moment. We could take inspiration from this method to debate, to exchange arguments, to make participants acquainted with the data and the results of the simulations produced about proposed fiscal measures. Bercy would accept to lose its monopole on these issues, even if it participates to the debate. Parliament members could bring their contribution, even if, at that stage, the project has not as a purpose or an objective to draft a text.
To think together freely, without any calendar or indiscretions in the media to elaborate an essential project for France. Does that also be part of the “new world”?