Why the Mayor must clean up corporate tax loopholes

The end of the idyll between the government and the bosses? Since Emmanuel Macron announced that part of the 5 billion reduction in income tax would be financed by a reduction in tax loopholes for businesses, the employers see red. “These niches, they have a reason, reacted immediately Geoffroy Roux de Bézieux, the president of Medef, it is the very high level of taxes on companies.” And to insist that the pro-business policy started under François Hollande is yielding results: some 800,000 jobs created in five years.

The duo of Bercy, which prepares the arbitrations for June, denies any change of course. The Minister of the Economy, Bruno Le Maire, assures us that he wants to continue to reduce “higher production taxes in France than in our neighbors”. As for his acolyte of Public Accounts, Gerald Darmanin, he figures the blow of the plane at “a few hundred million euros” only out of a total of 40 billion. But LREM deputies are pushing to go further. The spokesperson for the majority group, Olivia Grégoire, even sets the target at 1.5 billion. “We tax companies a lot but we give them back a lot in the form of reductions and niches, observes Philippe Martin, the head of the Economic Analysis Council, placed with Matignon. It would be more coherent to reduce taxes and make a cleaning of reliefs. ” X-ray of the main niches which deserve to be “cleaned”.

• The CICE and the research tax credit, untouchable niches

Leave the two biggest tax loopholes from which companies benefit. After Emmanuel Macron’s speech, Prime Minister Edouard Philippe quickly reassured the bosses. “There are two devices that will not be taken into account, he said on April 29, it is the research tax credit (CIR) because it is considered an essential instrument for the development of competitiveness French, and what was called the tax credit competitiveness-employment (CICE) and which is now a reduction of charges. ” In the list of tax loopholes published by the Ministry of Finance each year, these two measures win the most costly prize: the CICE should represent a loss for the State of 19 billion in revenue in 2019 and the CIR of 6.2 billion. !

Praised by industry circles, the research tax credit leaves economists more perplexed. Launched in 1983 and greatly expanded in 2008, this niche is now the first public aid for business innovation, representing nearly 60% of the total budget. Some 26,000 companies use it, against less than 6,000 in 2003. “The studies conclude that there is an overall positive effect, underlines a recent report from France Strategy while noting an impact that is still barely perceptible in terms of innovation and economic activity” . On average, one euro of additional CIR results in one euro of additional expenditure by companies in research and development (R&D), economists calculated. That is to say a ratio equivalent to the average of similar systems in OECD countries. Researchers from the Institute of Public Policy point to the few jobs created in R&D and patents filed compared to the billions spent since 2008.

CICE’s evaluations are also mixed. “The effects are positive on company margins, notes economist Antoine Bozio, but modest on employment and virtually zero on investment.” According to OFCE, the CICE created or saved between 110,000 and 300,000 jobs during its first three years of existence at a cost of some 50 billion euros.

The complexity of the system – a reduction in corporate tax equivalent to 6% of salaries below 2.5 SMIC – and its retroactive nature partly explain the weakness of the results. Its transformation into outright social contribution relief in 2019 should improve its impact on job creation.

Another criticism: the ceiling set at 2.5 Smic is too high. In January, the Economic Analysis Council showed that reductions in social contributions on wages above 1.6 minimum wage were ineffective both for employment and for supporting exporting companies. The LREM deputies, Sacha Houlié and Pierre Person, intend to rely on this study to question the reductions in contributions above this threshold. At the end of the day, a gain of 4 to 12 billion euros. But Matignon is opposed to it and Bercy recalls that France is far ahead of the major European countries when it comes to employer contributions beyond 2 minimum wage. The battle has only begun.

• The puzzle of reduced VAT rates in catering and construction

This is one of the tax loopholes most criticized by economists: the reduced VAT rate on catering, set at 5.5% by Nicolas Sarkozy in 2009, then raised by François Hollande to 10% in 2014, costs 2 , 9 billion. Less than a year ago, the Minister of the Economy Bruno Le Maire invited the deputies to examine its effectiveness. Today, he assures Echos that the government will not touch the catering VAT “because in fine, it’s a tax on households. ”A questionable claim.

A study by the Institute of Public Policy, published in 2018, shows that prices fell by just 1.9% thirty months after the VAT cut while restaurant owners saw their profits soar by 24%, pocketing more half of the gain. Conversely, it is true that when the rate was raised, this was largely passed on to customers’ bills. In addition, economists have not found that restaurateurs had hired hard. The available estimates put the number of jobs created between 6,000 and 9,000, or an average cost of 175,000 to 262,000 euros per position!

The reduced rate on catering clearly illustrates the difficulties in characterizing the niches which are supposed to benefit households but of which companies can monopolize a large part. This is also the case of the reduced rate on home renovation, for which the government has not yet specified its intentions. Like catering, these expenses are now taxed at 10%, against 5.5% before 2012. The loss of revenue is estimated at 3.2 billion compared to the standard rate. An amount to which must be added the cost of the reduced rate on energy improvement works, which remained at 5.5%, for 1.1 billion.

Here again, the State justifies the existence of this niche by its desire to support activity in the building industry and to fight against moonlighting. “But no serious study could be presented to justify that this costly measure would achieve this objective”, recalls the Court of Auditors, in a report published in March. In 2011, the Inspectorate of Finance estimated the number of jobs created at only 32,000, including 14,000 in construction. In a budget document, Bercy estimates that the average cost per post would be between 40,000 and … 170,000 euros! “The effectiveness of this tax expenditure could usefully be compared to other more lasting measures in favor of employment”, note the magistrates treacherously.

In addition to catering and accommodation, many sectors also benefit from reduced VAT rates: cinema, books, hydrotherapy, live entertainment, hotels, etc. “Playing on VAT to help sectors is a bad idea , reduced rates are often poorly targeted and ineffective, criticizes François Ecalle, specialist in public finances. The VAT is used to finance public services, not to make economic policy. In an ideal world, there should be only one rate.”

• Diesel, sponsorship… Sectoral niches in the sights

The sensitive subject of diesel taxation is making a comeback in the public debate. In the fall, the government wanted to abolish the reduced tax rate on non-road diesel, used by construction companies for their construction machinery. The measure made it possible to generate savings of one billion while penalizing the use of polluting products. But it sparked a bronca from building contractors, who joined the mobilization of the yellow vests, forcing the government to declare a six-month freeze. The executive now plans to put the measure back on the table, this time spreading it over several years. In a report on green taxation, published in the summer of 2018, the head of the LREM deputies at the Finance Committee, Bénédicte Peyrol, considered it necessary to also provide for compensation measures.

His colleague from the majority, Joël Giraud, rapporteur for the budget, could go back to the niche on the subject of tax credits in favor of film and audiovisual production. He had, in fact, failed to pass amendments aimed at limiting these devices, the cost of which has exploded to reach nearly 300 million. In particular, he wanted to cap certain eligible expenses, such as the actors’ meals and travel expenses. “It is out of the question to present luxury bills to the taxpayer, plague Giraud. I want to hear everything about the evolution of international cinema, but we can no longer continue to chase after the lowest tax dollars.”

Another niche with a cultural touch in the sights of deputies and Bercy: fiscal patronage, which allows companies to deduct from their corporate tax, 60% of donations to a foundation (within the limit of 0.5% of the figure of ‘business). The cost of the measure, which now benefits 69,000 companies, has increased tenfold in ten years to reach 900 million. In a recent report, the Court of Auditors pinned LVMH for having saved 518 million by building its “museum” of contemporary art in the Bois de Boulogne. The magistrates suggest lowering the ceiling or reducing the deduction rate to stop this drift.

Finally, the Treasury and Budget departments are also campaigning to abolish the corporate tax exemption, benefiting HLM organizations, which costs 1.2 billion. This niche is supposed to encourage donors to reinvest their profits in the development and improvement of social housing. But the Court noted that “the annual profits made by these companies were not necessarily reinvested and that this exemption was likely to favor organizations building little or having a stock occupied by better-off households.” However, it is unlikely that the government will quickly reverse this advantage. Indeed, he already intended to puncture social landlords from 1.5 billion by 2022. An effort that he has just revised downwards to around the billion, under pressure from the sector.

By David Bensoussan and Laurent Fargues