TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, June 8, 2012

Tax Expenditure Theory in France

Eric Pichet (BEM-Bordeaux Management School), Tax Expenditure Theory and the Reform of French Loopholes:

This study has a dual ambition. One is to develop, for the first time ever, a complete Theory of tax expenditures and, therefore, a proposal for reforming the French tax loophole system. Having noted the proliferation of such loopholes in France and elsewhere over the past 20 years or so, we provide a succinct analysis of their political origins and highlight the absolute necessity of stopping a deviation that risks undermining the very foundations of efficient and fair taxation, the only possible basis for a social consensus and citizens’ ongoing willingness to pay tax. The first section, from a theoretical point of view, offers our Theory of tax expenditures as well as a new and more complete definition of this construct, thereby tracing an idealized border between tax determination modalities, the elements that are inherent to any benchmark tax system and actual tax expenditures. The second section, from a pragmatical point of view, recalls three possible methodologies for assessing tax expenditures, evaluating the many different analysts that work in France (all deeply rooted in an initial spending paradigm) before offering our own methodology, one based on the double criteria of effectiveness and fairness. On this basis, we analyze France’s 17 main tax expenditures today in 2012 and invite the next Parliament to keep any legitimate tax expenditures (after modifying them, if need be) while eliminating many costly, ineffective and inadapted loopholes, along with any that generate windfall effects (what we might call illegitimate tax expenditures). Lastly, we suggest a new global architecture for tax expenditures, one relying on clear and coherent foundations.

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The abstract offers the possibility that Pichet is offering a general theory of tax expenditures. However, although I haven't read it very carefully, he seems in fact to be offering a country-by-country approach, as reflected in the following excerpt from the concluding section.

"The study’s more theoretical initial section offered a Tax Expenditure Theory of three key
concepts for addressing the usefulness of tax expenditures, The first was the benchmark tax
system, which is more useful than tax norms since the many social realities characterising the
developed world destroy the illusion that it is possible to define or find a tax norm that is ideal
and can be followed across the OECD. There are as many benchmark tax systems today as
there are countries, despite all of the convergence work that the EU has been doing."

Posted by: Dave Anderson | Jun 10, 2012 2:32:24 PM

Some insightful guotes from the article, with my words in square brackets:

all legislative, regulatory or administrative provisions whose implementation causes a loss of income for the authorities, with a certain category of taxpayers enjoying a lesser tax burden compared to what they would have had to pay had the norm been rooted in the general principles of tax law typifying the benchmark tax system.
[This requires us to construct a relatively simple and completely fair benchmark tax system, likely an impossible task]

there is no doubt that tax expenditures are sometimes preferable to budget expenditures, meaning that tax deduction techniques can be classified as budget savings.

a windfall effect is always a criterion for illegitimacy, to be legitimate a tax expenditure must necessarily be incentivizing.
[provided that the benchmark tax system is considered completely fair]

According to the OECD, presently there are three main methods for classifying tax expenditures. The first involves evaluating the initial loss in tax revenues...assuming no change in beneficiaries’ behaviour.
The second evaluates the loss in ultimate tax revenues... including the effects of any shifts in taxpayer behaviour.
The third method revolves around the notion of equivalent expenditure, based on an assessment of the direct pre-tax expenditure that would be required to get the same post-tax effect as the one associated with the exception in question...
... [analysts] all follow the first evaluation method, which is the most simple.

The paradox of [the first] method is that it only applies to tax loopholes that, within the theoretical framework defined above, should not even exist. ...the hypothesis of taxpayers’ stable behaviour contradicts the very logic of creating tax expenditures that incentivise people to behave virtuously.

... we must always remember that the amounts targeted via tax expenditures are notional, and that the savings derived from their elimination always constitute a cap that can sometimes be very far below the actual costs.

Posted by: AMTbuff | Jun 11, 2012 12:58:10 PM