“Last month we laid out the reasons why France was On The Brink Of A Secondary Depression—in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately, subsequent data confirms the bleak trajectory:
The INSEE Business Climate Survey has fallen below 88 (or two sigma below the mean). This indicates France is entering into a recession as nasty as 1993 and perhaps as nasty as 2008-2009. She will enter into this recession with government spending at 57% of GDP, an all-time high, and with a debt-to-GDP ratio close to 90%—and that’s not including the liabilities for civil servant pensions. If they were included, the debt to GDP ratio could double, according to some estimates (see the report on public finances by Michel Pebereau).
Even Francois Hollande is beginning to wake up to just how destructive and anti-business the French agenda is. On Monday, Hollande announced measures designed to encourage the French entrepreneurial spirit – essentially by watering down programs he himself imposed after winning the presidential election last year.
The new agenda includes cuts in capital gains taxes. The effective capital gains tax will now decline by 2 percentage points, to 32.5%. This is better than last year’s outlandish move to effectively bump up the capital gains tax to as high as 62% in some cases. But the president’s reversal is the desperate move of a cornered politician, not a sign that we will see a steady hand on the tiller of reform in coming years.
Take a look at the table above. France is a serious laggard against most of the other major European economies (except Italy) on almost all tax indicators.
- Between 2000/2011, the overall tax to GDP ratio went down about -1.6 percentage points across the European Union: -2.6pp in Germany, -1.4pp in the UK, and -7.2pp in Sweden. In France it contracted by just -0.3pp. France is now poised to overtake Sweden as the most heavily taxed major country among the 27 nations in the European Union, with an overall rate of 44% vs 39% for the EU as a whole.
- French implicit taxes on capital gains rose by 4.3pp in 2000-2011, an increase surpassed only by Italy and sharply at odds with the declining trend in Germany (-5pp), the UK (-9.1pp), Sweden (-16pp) and the Netherlands (-7pp), not to mention euroland as a whole (-2.7pp).
- In absolute terms French implicit taxes on capital are a gigantic outlier at 44.4%, compared to an average of 27.2% among the 17 nations in the euro area.
In this context, Hollande’s reversal on capital taxes reminds me of the guy walking up the steps to be hanged, who slips, falls and says “could have been worse.” France remains one of the deadliest environments for entrepreneurs…..”
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