Since 2022, the French government has reduced several types of production tax. This is the case for tax based on corporate value added (CVAE), which was reduced gradually in 2021 and 2023, and will continue to be phased out in 2024, this process coming to an end in 2027.
Nevertheless, the burden of production taxes on non-financial corporations (NFCs) on GDP was just as great in 2023 as it was in 2017 (2.6% of GDP). This can be explained by favourable economic momentum, as the base of these taxes (primarily including labour, wages or property) is increasing faster than value added.
Production taxes (net of subsidies) reached 9% of the gross operating surplus (GOS) of NFCs in 2023, a record figure that could rise further in 2024 with the fall in GOS growth (2.6% according to our forecasts, compared to 10.8% in 2023) and the slow phasing out of CVAE.
In the history of taxation, it is not unusual for the proceeds from a tax to remain unchanged, despite the reduction in its tax rate, as the increase in the base of this tax progresses more rapidly. As a result, in the United States, despite the tax cuts implemented by the Trump administration, the ratio between personal income tax and GDP still stood at 8.2% in 2020 (as in 2017, before the tax cuts).
In France, production taxes are currently affected by this phenomenon. These taxes, which are not based on profit or income (unlike corporate tax or social security contributions), are often criticised because of their disconnection from companies' gross operating surplus (GOS). Companies have to pay these taxes even when they post lower profitability or see a drop in activity (which led the French government to increase operating subsidies during the
FRANCE: PRODUCTION TAXES IN % OF GDP (GROSS AND NET OF SUBSIDIES) Covid-19 period). France is therefore the second European country, after Sweden, to levy such a high level of production tax in relation to its GDP[1].
Aware of this issue, particularly in terms of competitiveness for companies (referred to as "NFCs" or “non-financial corporations” hereinafter in our analysis), the French government initiated a reduction in these taxes in 2021. However, their burden in terms of GDP in 2023 reached a level comparable to that recorded in 2017 (chart 1). Net of subsidies, these taxes had an even greater impact on GDP in 2023 than in 2017 (after a lower level during Covid-19, when these subsidies increased significantly).
Reduction in production taxes levied on NFCs
The high level of taxation applied to French companies is often criticised. However, the burden of these levies was not much reduced between 2017 and 2023. This taxation, which relates to employer’s social contributions, corporate tax (IS in the French acronym) and production taxes (excluding operating subsidies), represented 63.5% of companies’ GOS in 2023, compared to 65% in 2017 (chart 2)[2]. This drop remains marginal and benefited from a marked increase in GOS in 2023 (+10.8% compared to 2022). By 2024, the burden of levies could be greater. In fact, tax cuts will be smaller (against a backdrop of budgetary consolidation). We are also expecting a much lower increase in GOS (+2.6% in 2024).
FRANCE: TOTAL TAXES ON CORPORATES
IN % OF GROSS OPERATING SURPLUSNevertheless, several tax reductions have been implemented since 2017, particularly with regard to production taxes. NFCs have benefited from the reduction in property tax and corporate property contributions, i.e., nearly EUR 3.2 billion in 2021. CVAE was also reduced, first in 2021 (EUR 7 billion) and then in 2023 (EUR 4 billion), and it will be phased out by 2027 (- EUR 1 billion on average per year between 2024 and 2027).
Nevertheless, production taxes on NFCs (EUR 74 billion in 2023) reached 2.6% in % of GDP just as much in 2017 (see chart 1), i.e., before the introduction of these tax reductions. In addition, in 2023, their weight - net of operating subsidies - in GOS (chart 2) reached the highest level seen since 2014 (year in which profits had stagnated).
This unpleasant surprise can be explained by the following phenomenon: the base rose faster than GDP. The weight of these taxes in GDP was stable between 2017 and 2023 because tax cuts merely neutralised the effect of the increase in tax base. Budgetary revenues from CVAE did fall from EUR 12.6 billion in 2020 to 5.7 billion in 2021 (a difference close to the 7 billion tax cut) but were 6.9 billion in 2022 (up 21% on 2021, compared with +5.6% for nominal GDP).
Although in 2023, the fall in CVAE limited the increase in production taxes to +2.4% (compared to 6.4% for nominal GDP growth), production subsidies fell by almost 9%. Furthermore, taxes that have not been reduced, particularly those on wages and labour, have seen their proceeds increase, due to favourable developments in the labour market (significant job creation).
With the staggering of the reduction in CVAE, it is expected that its proceeds will decrease by just EUR 1 billion in 2024. According to our forecasts, this pace might not prevent production taxes from rising again (by 5%) more quickly than nominal GDP growth (3.3%).
