Epicenter & IEM – No relocation without tax and regulatory relief

French inadequacies in the face of the COVID-19 crisis are giving rise to a fully fledged attack on globalisation. We are observing an increase in speeches aimed at regaining sovereignty, particularly in the field of health. But the challenge for France is, above all, to address its internal weaknesses. Excerpts from an interview published with the Director of Institut Economique Molinari in Atlantico.

Atlantico: What impact does French taxation have on the relocation of certain areas of production which are essential, especially in times of health crisis? How can we put together a set of fiscal conditions that would allow for a return of this production to France?

Nicolas Marques: French taxation pushes towards outsourcing and imports. We have the threefold issue of having very high payroll taxes, corporate taxes and production taxes. These taxes explain the persistence of abnormal unemployment in France. With over 8% unemployment, which is 1.5 points higher than the European average, we have 500,000 more unemployed than our neighbours. In order to reduce this unemployment and to preserve or even replenish production capacity, we would need a more lenient tax system.

The general public is beginning to understand that increasing payroll taxes leads companies and employers to Malthusian behaviour. But it is less receptive to the community’s interest in lowering corporate taxes. However, from an economic point of view, this taxation penalises, beyond shareholders, consumers, employees and the unemployed. It increases sales prices, encourages wage moderation and relocation.

If we want business to return, the priority must be to massively reduce production taxes. France is the leader in this area, with €109 billion of tax revenue coming from production taxes in 2018. This is as much as 23 countries in the European Union, including Germany, combined. These taxes are particularly harmful. They are calculated in advance of results, for example on turnover, payroll or value added. They penalise activities based on arbitrary criteria, regardless of their profitability. This encourages companies to relocate low value-added production, which is why the bulk of the production of masks and protective equipment is done abroad.

French production taxes are also particularly excessive in the field of medicines. They account for about 8% of turnover, which again leads to higher production costs. France is the European country where the pharmaceutical industry’s gross operating surplus is the lowest, with just 9% of turnover, compared to a 22% European Union average in 2017. As a result, pharmaceutical groups are encouraged to invest less and relocate. This explains why 60% of paracetamol powder, necessary for the manufacture of Doliprane, comes from China.

Atlantico: Has the French administration, and in particular the standards imposed on companies, played a role in the relocation of these production lines? 

Nicolas Marques: Our regulations in effect create a rigid business environment. They complicate the actions of companies in a variety of areas, from investments to personnel management. According to the World Bank, France is only 32nd in terms of ease of economic activity, which puts us between China and Turkey, and behind a large number of European neighbours. French overregulation comes on top of European regulation. In many areas we go beyond EU directives, which reinforces our regulatory burden.

This is combined with a cautious or overly moralising capital interventionism. The ‘Florange’ law and the double voting rights, the obligation of tax domiciliation in France of the bosses of the big companies, the public interference in terms of dividends exasperate and push the companies to expatriate. It is no coincidence that Airbus and STMicroelectronics are Dutch nationals and that the future Fiat Chrysler-PSA group will soon be too. Our Dutch neighbours are 25th in the Fraser Institute’s index of economic freedom, where France is only 50th out of 162. In addition, this movement affects businesses of all sizes, many SME managers have chosen to migrate to Belgium or Switzerland to protect themselves, at least in a personal capacity, from the French bureaucracy.

Atlantico: In short, the general impression is that the tax and administrative systems of the French public power are too ‘heavy,’ should we move towards a general simplification of regulations in the hope of regaining autonomy in certain key sectors? 

Nicolas Marques: We should move towards a general simplification of regulations. French taxation and overregulation are stifling the economy, pushing businesses and individuals into exile. This tax and regulatory inflation penalises the whole of society, far beyond the production of market goods and services.

We’re suffering even in the fight against the coronavirus, hampered by finicky, contradictory and counterproductive standards. While we lack masks, the state has claimed the right to requisition future stocks, production and imports. Being itself beholden to inadequate public procurement rules, it has failed to obtain the missing material of protection directly. Our overregulation is also working against us when it comes to rolling out a policy of mass testing. Until 7th March, almost no private medical biology laboratories were allowed to perform screening tests, for normative reasons. Similarly, it was not until 5th April that public veterinary laboratories were allowed to intervene, although they have massive testing capabilities and have long known about coronaviruses.

Unfortunately, experience has shown that we in France are not the most efficient when it comes to reducing red tape. Despite the efforts of the current government, France is 41st and last in the Employment Flexibility Index published by the Lithuanian Free Market Institute, using the metrics of the World Bank.

Similarly, the reduction of production taxes is long overdue. This topic has been on the table for years, but remain at the stage of hollow rhetoric. In the government’s contingency plan, there is no production tax freeze. However, the slow agony of the French economy is likely to accelerate dramatically with the pandemic and confinement. A significant part of the economy is at a standstill, something we do not see in Germany. If production taxes are not massively reduced, the discourse on the interest of relocating production will remain wishful thinking.

Translation by Epicenter, the European Policy Information Center.