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France

Tax breaks hurt French economy, report says

Text by Joseph BAMAT , Sébastian SEIBT

Latest update : 2011-08-30

According to a new 6,000-page report given to members of parliament, fewer than half of all tax deductions on the books benefit France’s economy. Still, ministers are reluctant to close the loopholes.

Two-thirds of France’s tax breaks are ineffective or only slightly benefit the economy, an official report has said. These legal tax deductions deprive the government of €39.7 billion each year, the report added, according to a leading French daily.

The 6,000-page document said it carefully studied all the 538 tax deductions on the books in France. These include both breaks on income tax payments and reductions in social taxes, such as unemployment tax. It said 19% of them were ineffective and 47% scarcely useful.

“Changing [the tax breaks] could help simplify the tax code, and lead to a fairer distribution of public spending,” said the text by France’s General Inspectorate of Finance (IGS), a government auditing group that depends on the finance ministry, according to the right-leaning Le Figaro newspaper.

Many of the tax deductions deemed inefficient in the IGS’s study are likely to be questioned when lawmakers pass France’s next budget in September, and some promise to be the subject of heated debate in parliament.

Among the most costly to the state are the tax breaks on financial investments in France’s overseas territories and on hiring nannies, home nurses and cleaning staff. The report said these loopholes mainly benefitted France’s richest households.

A boon or bomb for Sarkozy?

The findings, presented to MPs by the office of Prime Minister François Fillon on Friday, came at a time when President Nicolas Sarkozy’s conservative government has asked for greater fiscal discipline and tried to launch a national debate on reducing the public debt.

But despite the report’s recommendations, France’s recently appointed finance minister, François Baroin, did not immediately jump at the opportunity to get rid of all the fiscal loopholes the IGS said could be hurting France’s economy.

While some "inefficient" tax breaks are already on the finance ministry’s chopping block, others could prove difficult to get rid of. The more controversial ones include a tax exemption on overtime pay and deductions on pensioners’ incomes.

Lifting taxes on overtime pay was a key measure introduced by President Sarkozy as part of his highly publicised plan to let French workers “earn more by working more”. But this key campaign promise was delivered in 2006, before the global recession forced employers to drastically cut back on employees.

"The thing to understand is that this tax exemption is difficult to justify in times of high unemployment because companies may prefer to use overtime rather than hiring," said Mathieu Plane of the French Observatory of Economic Conditions, a university research group.

Doing away with this specific tax break, whose effects the IGC said were questionable, could be seen as an indictment of Sarkozy’s economic policy less than a year away from the 2012 presidential election.

Rubbing out a 10% tax deduction in pensioners’ incomes could also be potentially harmful for Sarkozy, whose reform to raise the retirement age remains one of the most unpopular moves of his tenure.

Overseas and at home

The report said that closing a tax loophole on investments in France’s overseas territories and Corsica could add €4.7 billion annually to state coffers. Officially, these deductions exist to spur investment and check the economic isolation of places like the islands of Guadeloupe and Martinique in the Caribbean.

But according to Plane, in practice, the deduction does little to create economic growth. “It is clear that these investments are largely a cover for tax exemption,” he told FRANCE 24.

Breaks for hiring domestic workers were also criticised by the IGS for only benefitting France’s wealthiest. These cost France €6 billion each year, the group said.

However, some counter that, while expensive, this fiscal measure does help fight unemployment. "Some 3.5 million people employ more than 1.7 million workers in their home,” said the Federation of private employers (FEPEM) in a statement issued on Monday.

On the same day, Valerie Pecresse, France's budget minister, told Europe 1 radio that the government "would continue employment subsidies," suggesting this tax break, like many others, would not be reviewed.

Commissioned by the prime minister’s office, the report took over a year to complete, Le Figaro reported.

Date created : 2011-08-30

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