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France Cuts Taxes for Small Businesses to Shrink Unemployment

by wchurchill Mon Mar 19th, 2007 at 04:02:51 PM EST

I was not aware of some of the regulations in France regarding small businesses, so I found some of these changes very interesting, and positive.  This likely requires a subscription.  It is more than tax cuts, and it sounds like changes in regulations are making a big difference.  The government claims that a million small businesses have been created since 2002, 30% more than the previous 5 years.

I hate the way reporters take a good news story, and write it in a way that is at least slightly negative,,,,,like always stressing there is more to do.  Is it something in the genes?  But here goes:

The climate is still far from ideal, said Raymond Torres, head of employment analysis at the Organization for Economic Cooperation and Development.

``It's more the taxes and the regulations rather than a lack of entrepreneurship that hold France down,'' he said. While France jumped 12 spots in the World Bank's 2007 ``Doing Business'' rankings, it is still ranked as the 35th-best place in the world to start a company.

``The charges for small, new entrepreneurs are much higher in France than in Singapore, the U.S., more than in the U.K.,'' Torres said.

Tax Bite

A French company must pay about 40 percent of an employee's salary in labor taxes, one of the highest rates among OECD countries, he said. In the U.K. it's about 20 percent, and in the U.S., 10 percent.

``That makes it difficult for entrepreneurs to hire,'' Torres said.

While France is working on making things more conducive to business creation, it needs to do more, he said.

``It's true that it may be easier to set up your own business in the U.S., but it isn't that difficult in France anymore -- it has changed,'' Andre Marcon, who heads the French Trade Chambers' business support network, said in January.

IMHO it's important to recognize that small businesses often fail
Almost 40 percent of new businesses in France fail in their first three years, figures provided by the Ministry for Small Businesses show.
, so one can't put severe penalties into place that make the failure even harder than it already is--such as jeopardising the home of the owner of a failed small business, or putting laws in place making it hard to get rid of people, because when you just start, it's very easy to make the mistake of over-hiring.
Minister for Small Businesses Renaud Dutreil said a 2005 labor law that eased firing rules for companies with fewer than 20 employees created about 720,000 jobs. Companies were more disposed to hire without the fear of legal battles if they had to reduce staff, he said.

<snip>

An individual's home no longer can be seized if his business fails. Documents needed to start a new business can be scanned and posted on an Internet portal instead of being sent to three different agencies.

There seems to be a lot of entrepreneurial zeal, and a very dynamic market--not surprising to me.
Marc Rochet, 56, who was chief executive officer of defunct AOM-Air Liberte, started a new airline called L'Avion, which offers business-class-only trips between Paris and New York. He collected 25 million euros from investors and hired 50 employees.

``I could have based my airline in the U.K., where it would have been so much easier,'' he told about 4,000 people at the Entrepreneurs' Fair on Feb. 1 in Paris. ``The burden of red tape is still huge, but it's worth it. The French market is dynamic.''

Entrepreneurial Zeal

A survey by Paris-based pollster Ifop for the Trade Chambers and the Entrepreneurs Fair showed that 21 percent of French people want to start their own companies. Almost half of those ages 18 to 24 said they planned to do so.

Does this sound reasonable to those of you that know the French tax system well?
This fiscal year, her first in business, she is benefiting from deferred labor taxes. Next year, she will pay as much as 68 percent in income taxes, far more than the 46 percent rate in the U.S. or 35 percent in the U.K.

``Ideally, I would like to hire one person in the coming months, but I need to expand a bit more and I will have to think twice with the taxes,'' she said.

It just seems very quick for someone just starting their business to get into such a high tax bracket.  And actually the top individual rate in the US is 35% for Federal tax, so they must be adding a high state tax rate,,,,and then I'm not sure how they are handling social security.  

But anyway, an interesting article, and seemingly some great early results.


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Some remarks :

she will pay as much as 68 percent in income taxes

Top marginal income tax rate is around 40 % in France...
The article might be reporting about labor taxes, which in effect are at about 68% of net wage (and include mostly health, unemployment and other insurances)

An individual's home no longer can be seized if his business fails

SARL and EURL, statutes for anonymous or unipersonal companies that made sure one's house wouldn't be seized, are rather older than that...

Minister for Small Businesses Renaud Dutreil said a 2005 labor law that eased firing rules for companies with fewer than 20 employees created about 720,000 jobs. Companies were more disposed to hire without the fear of legal battles if they had to reduce staff, he said.

That must be the CNE about which most estimates claim about 24000 job creations. Although more CNE contracts have been signed, most of those jobs would have been created anyway...

A French company must pay about 40 percent of an employee's salary in labor taxes, one of the highest rates among OECD countries, he said. In the U.K. it's about 20 percent, and in the U.S., 10 percent.

Ah, the joys of deregulations... And millions of working poors, not covered by basic health insurance. And the fact that part of the wages goes to the state rather than the worker is pretty irrelevant to the difficulties of hiring...


Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Mon Mar 19th, 2007 at 05:16:10 PM EST
Seconded!

As linca says, this article mixes up old existing measures and new ones. And I agree with every point he makes, especially about the claim that the 2005 law created 720000 jobs: even right-wing politicians acknowledge that it has not created more than 30000 jobs...

And, yes, the 4O% of the salary that are paid are not taxes, but contributions for the health, unemployment and retirement schemes...

But it is true that there have been improvements: the administrative burden for business creation has been reduced and business creation is growing. Here are the last figures (in French, with charts)

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Mon Mar 19th, 2007 at 07:02:03 PM EST
[ Parent ]
I also agree that paying 40% of salary for a combination of taxes, health, unemployment and retirement schemes is not a problem.  the french get a lot for this in return.  but I'm just confused with this statement which I think refers to her own personal tax rate:,
This fiscal year, her first in business, she is benefiting from deferred labor taxes. Next year, she will pay as much as 68 percent in income taxes
which seems like a lot for someone just starting a business.  I think it must be poorly worded, and means something differently than I'm interpretting.
by wchurchill on Mon Mar 19th, 2007 at 09:08:18 PM EST
[ Parent ]
Deferred labor taxes mean that she isn't paying for those in her first year, but will have to pay for them later... two years of labor taxes that have to be payed in a single year could add up to 68% labor taxes during the second year. It's certainly not income tax. Although i'd bet that Berenice, like most "entrepreneur", has difficulties separating revenues of the company and personal income.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Mar 19th, 2007 at 09:19:13 PM EST
[ Parent ]
That's 46% in income taxes, I guess?  I think they've got the tax rates mixed up for Britain and America.  I believe Britain has a 40% bracket that kicks in roughly at £40k/year.  As you said, the top rate in the states in 35%, and I doubt most people are paying very high income-tax rates at the state and local levels.  Total government spending -- federal, state and local -- in America was only 35-36% of output, last I read, but that's adding in sales, property, luxury, etc.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 20th, 2007 at 11:18:05 AM EST
I think what is meant is that employers have to pay 68% over net wages in social payments. That makes the effective rate 68/168 (or 40%).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Mar 20th, 2007 at 11:27:12 AM EST
you are probably right.  and it is a "non-traditional" way to make the point.  I've not noticed anything by this writer before,  Helene Fouquet, and found the "improvement but it's got to be better" slant of the article annoying.  the article was interesting to me because I know so little about start-up business in Europe, while it's an area of interest for me in the US.
by wchurchill on Tue Mar 20th, 2007 at 11:45:18 AM EST
[ Parent ]
The point made about payroll taxes is a little overstated. This government, and previous governments over the years, have lowered the employer's share on more moderate salaries so that it is now - if you're in catering as Berenice is, and so hiring low-to-moderate salary people - around 30%. These are (along with around 20% paid by the employee) contributions to the social safety net and health insurance systems, so not really taxes at all (in that they are paid into specific funds and give rise to specific rights).

However, the businessperson - the legal head of the company - has personal social contributions to make, and, in the case of a start-up, the first year may be exonerated. These contributions kick in in the second year, therefore, and, if provision hasn't been made, may come as a shock. They will run to perhaps 40%-45% of salary.

If we add that to whatever income tax Berenice has to pay (a separate matter), we could very well find those 68% of income. Or rather, of her salary.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 20th, 2007 at 04:04:22 PM EST
I am advised by a person living in the Real World that social contributions on the businessperson's salary may well reach 60+%. So presumably this is what is meant in the article (neither payroll taxes relative to her personnel, nor her personal income tax).

But it's optional to put yourself on the books as an employee of your own company. What you may gain by it is unemployment insurance - if your company fails, you'll be well covered for some time afterwards. What you lose is that the total rate of social contributions is high. A non-salaried businessperson pays lower rates on the same sum considered as non-salaried "remuneration". Berenice could halve her 68% by doing this.

However, win some, lose some: lower costs => higher company margin => higher company tax...

Up to about €38,000 profit, company tax is at 15%; thereover, at 33.33%. A small start-up like Berenice's might well wish to stay in the low bracket at first.

It's a question of jungling with these parameters.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 21st, 2007 at 04:03:23 AM EST
[ Parent ]
Thanks for this afew.  Comparing your data and the article:
social contributions on the businessperson's salary may well reach 60+%
versus
A French company must pay about 40 percent of an employee's salary in labor taxes, one of the highest rates among OECD countries, he said.
These two comments are consistent, obviously, if the rate is either higher for the highly paid, or higher for the lower paid.  Do you happen to know, does the rate go up for higher paid employees, or (as in the US with social security where it is only taxed up to a certain level--I believe 6.25% up to something like $90,000) does the rate effectively go down as it relates to the social contribution for higher paid employees?

I guess I'm trying to get a feel for the entrepreneur thinking of adding a lower paying employee, say who earns 20,000 euros.  From the standpoint of managing his expenses, he's either taking on 28,000 or 32,000 of expenses.  For startup companies with, say 500,000 of turnover and say a 10% pretax profit margin, this is quite a decision.  Particularly if it is hard to let someone go if business falls off--which I understand per the article it is not now,,,,but perhaps was in the past.

by wchurchill on Wed Mar 21st, 2007 at 02:35:34 PM EST
[ Parent ]
There's a distinction made between the employees and payroll taxes on their salaries, on the one hand, and the employer (businessperson, boss, entrepreneur) on the other.

The businessperson can opt to be a salaried employee of the company. In that case the rate applied to her salary may reach somewhere above 60% for a salary of around &euro32K (though this percentage falls as the salary rises). If she opts to be non-salaried, (the company remunerates her work, but she's not on the payroll as an employee), the rate will be about half that. (However, she will forgo some advantages like unemployment insurance.)

As for hired employees, the lower salaries (€15K - 19K) cost about 33% in payroll tax. More than half of salaries paid in France are in that bracket (I don't have a recent figure for the median salary to hand, but I think it's €16K-17K). From €20K the rate rises to 40%. There are ceilings that bring it down again on higher salaries.

The system looks scary, but in fact it's been in operation for so long everyone has adapted to it - meaning an employer looks at (or should look at) the total an employee costs as a single salary mass (so, &euro28K rather than €20K). Meanwhile take-home pay is relatively moderate. That means more salary going into redistributive and social safety-net mechanisms, and less available for immediate consumption.

It does, however, also have the appearance of, and is often understood as, a tax on labour, and I think it's one of the reasons for structural unemployment in France, since taxing something tends to discourage its use. There has already been a partial transfer of these costs to a social contribution (CSG) based on all incomes, not just salaries, and I think this movement should be amplified.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 21st, 2007 at 04:23:43 PM EST
[ Parent ]


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