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OUR DES

OMPTES

Taxes and Social Contributions

in France and in Germany

March 2011

Notice

Summary

of the Public Thematic Report

his Summary is designed to make the Report of the

Cour des Comptes more accessible for reading and

commentary.

The Cour des Comptes is responsible only for the

content of the Report.

Replies from the administrations and entities directly

concerned are appended to the Public Report.

Contents

Summary

of the Public Thematic Report of the

Cour des comptes

Introduction

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

The characteristics of taxes and social

contributions in France and Germany

. . . . . . . . .

Review by Blocks of levies . . . . . . . . . . . . . . . .

Main Findings from the Comparison . . . . . . . . . .

General Conclusion

. . . . . . . . . . . . . . . . . . . . .

Main Observations

. . . . . . . . . . . . . . . . . . . . . .

Recapitulation of Main Recommendations

. . . .

Introduction

n September 2010, the Cour des Comptes undertook a project aimed at com-

paring the French and German taxes and social contributions, thus acceding

to a request made by the President of the French Republic.

The Cour des Comptes felt that such an examination must necessarily make allo-

wance for the context in each country, and in particular their respective situation with

regard to the economy and public finances. It carried out a comprehensive analysis of

both countries’ taxation and social security systems, whilst never losing sight of the fact

that the competitiveness and attractiveness of a country are influenced by factors other

than taxation alone.

In order to perform this analysis, the Cour des Comptes organised the broadest

consultation feasible: a group of experts was set up to inform the work of the Cour

des Comptes and hearings were held with officials from trade unions and professional

organisations and with taxation experts. Moreover, productive technical exchanges were

held with the German Federal Ministry of Finance, which had been designated as the

Cour des Compte’s interlocutor.

The report is issued under the sole responsibility of the Cour des Comptes

Summary

of the Public Thematic Report of the

Cour des comptes

Summary

of the Public Thematic Report of the

Cour des comptes

The Characteristics of

Taxes and Social

Contributions in France

and Germany

Background

Two Diverging Economic

Trends

France and Germany’s combined

GDP is more than half that of the euro

area and the two countries are relatively

homogeneous from an economic and

social point of view : per capita GDP is

close; the pace of growth is similar ; and

the scope of social protection is exten-

sive.

These similarities should neither

mask the deep structural economic dif-

ferences nor the existence in recent

times of contrasting developments.

Germany, in contrast to France, is

driven by medium-sized enterprises

(Mittelstand). The country’s growth is

based on industry (25.6 % of GDP,

compared to 13.6 % in France) and,

even more than in the past, on exports,

to the relative detriment of consump-

tion.

Average annual growth between

2000 and 2010 was slightly higher than

in France (1.5 %, compared to 1.1 %),

and since 2006, the pace has been more

brisk in Germany. Recovery from the

economic crisis has been quicker.

Germany looks set to have an apprecia-

bly higher pace of growth during the

years 2010-2012.

The higher growth rate in Germany

since 2005, the reforms undertaken on

the labour market and the extensive use

of partial unemployment during the

2008-2009 crisis enabled Germany to

reduce its unemployment rate to 6.6 %

at the end of 2010, as compared to

9.7 % in France.

The share of value added has deve-

loped differently over the 2000s. The

share of wages and salaries remained

stable in France. It decreased by five

points in Germany, having started from

a higher level. This phenomenon

reflects, over and above the initial shock

of German reunification, the effects of

the country’s wage moderation policy.

Structural Gaps in

Competitiveness, Recent

Trends Favourable to

Germany

Competitiveness in France and

Germany has followed diverging path-

ways.

Germany has for quite some time

benefited from a non-price competitive

edge : German products are seen as bet-

ter quality ; the strategy of establishing

subsidiaries in export markets; the larger

The Characteristics of Taxes and

Social Contributions

in France and Germany

Summary

of the Public Thematic Report of the

Cour des comptes

size of its export sector ; and better geo-

graphical diversification of its export

firms.

Cost-based competitiveness has

significantly improved over the decade

since 2000. The rise in unit wage costs

(including both hourly wage costs and

progress in productivity) has been 10

points higher in France than in German

industry over the 2000-2008 period. The

advantage that France enjoyed in this

area in the early 2000s has now been

lost.

The German trade surplus has

continued to grow (€134 billion in

2009) ; the French deficit has continued

to worsen (€53 billion in 2009). France’s

market share, both within and outside

the European Union, dropped by about

three points between 2000 and 2009.

Redistribution: A More

Extensive Mechanism in

France

The scope of social protection is

more extensive in France than in

Germany : greater consideration given

to the burdens weighing on families ;

more protective unemployment insu-

rance ; the entire population covered by

a compulsory health care system ; com-

pulsory

supplementary

pension

schemes. These characteristics are of

major significance for redistribution :

they account, in France, for some 63 %

of the reduction of inequalities, while

the remaining 37 % can be attributed to

progressive taxes.

In the year 2000 income gaps were

smaller in Germany than in France. The

situation reversed as of 2006, before the

two countries converged an arrived at

very close levels in 2009. The Gini coef-

ficient – an indicator of inequality – has

remained stable in France throughout

the period. It increased by 20 % in

Germany. The relative rate of poverty

increased by half in Germany between

2000 and 2009, whereas it decreased by

20 % in France.

Fiscal Policy: More of a

Priority in Germany

Germany gives greater priority to a

balanced Government budget. France

has not seen a budget surplus since

1974. Since the year 2000 German

Government budget were in a surplus

during three financial years.

Germany used the period of relati-

vely high growth that it experienced

before the recession to reduce its

Government deficit. In 2008, at the

onset of the crisis, France’s deficit was

3.3 % of GDP, whereas Germany had a

surplus of 0.1 % of GDP. Today, the

French structural deficit is more than

three points higher than that estimated

for Germany.

The gap between the German and

French budget situations can for the

most part be explained by the dynamics

of public spending. Between 2000 and

2008, Germany slowed down the

increase of public spending (drop from

45.1 % of GDP to 43.8 %), which was

The Characteristics of Taxes and

Social Contributions

in France and Germany

Summary

of the Public Thematic Report of the

Cour des comptes

not the case in France. In 2000, French

Government debt was lower than

Germany’s,

and

lower

than

the

European Union average. In 2010,

Government debt equalled 80 % of

GDP in Germany, compared to 83 % of

GDP in France.

The Level and

Structure of Taxes

and Social

Contributions

High Taxes and Social

Contributions in both

Countries; Sharper

Reduction in Germany

Many of France’s taxes and levies

have no equivalent in Germany; the

converse is far less often the case. This

is particularly true for taxes paid by busi-

nesses and which burden production

costs; these account for an estimated

total amount at €58 billion in 2008, in

other words, 3 GDP points. These taxes

are levied on the payroll (€26.5 billion),

fixed capital and turnover. Regarding

taxes on households, the CSG and the

CRDS partially compensate for the nar-

row scope of personal income tax; the

taxe

d’habitation

(residence

tax)

(€13.3 billion) and the ISF wealth tax

(€4 billion) have no equivalents in

Germany.

The tax-to-GDP ratio in both coun-

tries is considerably higher than the ave-

rage across the European Union (at 27),

but the gap between the two countries

in terms of overall taxes is significant

(approximately 3.5 % of GDP). More

than two-thirds of this gap can be

explained by the different scope of the

social protection.

Taxes and Social

Contributions by Level of

Government

In Germany, 40 % of taxes and

social contributions go to social security

funds ; 30 % to the central State ; and

30 % to local authorities and Länder.

The breakdown has not changed in

recent times. In France however, the

proportion of taxes and social contribu-

tions which goes to the central State has

decreased by 3.2 % of GDP between

2000 and 2008, to the benefit of social

security funds and local authorities. In

2008, 36 % of overall taxes and social

contributions were apportioned to the

central State ; 52 % to social security

funds ; and 12 % to local and regional

authorities.

Germany is a federal State but there

is little autonomy regarding local taxa-

tion. In France the revenues of a num-

ber of levies are 100 % earmarked for

funding local and regional authorities. In

Germany 75 % of the Länder’s tax reve-

nues are derived from taxes which are

shared with the federal State, and then

The Characteristics of Taxes and

Social Contributions

in France and Germany

Summary

of the Public Thematic Report of the

Cour des comptes

re-distributed in accordance with a for-

mula.

The Economic Analysis of

Taxation

Eurostat data slightly overestimates

the difference in taxation on capital

(about 3 GDP points), but it is nonethe-

less significant. In France, between 2000

and 2008, it is taxation on consumption

that decreased the most (-0.9 GDP

point); in Germany it was taxation on

labour (-2.7 GDP points).

Source : données Eurostat

Breakdown of Taxes and Social contributions by Economic Function

(as % of GDP)

The Characteristics of Taxes and

Social Contributions

in France and Germany

Summary

of the Public Thematic Report of the

Cour des comptes

Taxation on Consumption

France

has

reduced

taxes

consumption, whereas Germany – as is

the case on average among the countries

of the European Union – has tended to

do the opposite. In 2008 France taxed

household consumption at the rate of

19.1 %, as opposed to 19.8 % in

Germany, and 21.5 % on average in the

European Union.

This tendency can be explained in

France by the drop in the normal VAT

rate, the extension in scope of applica-

tion for the reduced rate, the elimination

of the “vignette” vehicle tax and modi-

fications made on the TIPP (a tax on oil

products). In Germany, the upsurge is

due to the three-point increase of the

normal VAT rate (from 16 % to 19 % as

of 1 January 2007), designed to finance

Government deficit reduction and half

of the 1.6 % net drop in social contribu-

tions.

Taxation on Labour

The rates of taxation on salaried

labour are similar in France and

Germany (41.4 % and 39.2 % respecti-

vely) and are above than the European

Union average.

This rate has been stable in France

since 1995. The impact of the decrease

in social contributions levied on low

salaries was neutralised over the period

in question by the increase in other

wage-based taxes. Germany has, on the

contrary, been decreasing wage-based

taxes since 2004 in order to improve the

competitiveness of its enterprises (drop

in social contributions on low wages

under the so-called “Hartz” Laws, drop

of 1.6 points in social contributions in

2007, reduced personal income tax rate

since 2000).

Taxation on Capital

The German rate of taxation on

capital has decreased considerably since

2000 and is now well below the

European Union average. France has a

significantly higher rate: in all, capital

was taxed at 38.8 % in 2008, compared

to 23.1 % in Germany, and the

European Union average of 26.5 %.

Revenues from taxation of capital

income are comparable in the two coun-

tries. France levies more taxes on capital

stock (4.5 % of GDP, as opposed to

1 % for Germany). Most of the gap bet-

ween the two countries in relation to tax

on capital stock comes down to, on the

one hand, levies that exist in France

alone (the taxe professionnelle; the ISF

wealth tax; transfer taxes; C3S, a solida-

rity tax weighing on businesses; the taxe

d’habitation, or residence tax), and, on

the other hand, the fact that taxation is

considerably heavier in France (the taxe

foncière, or property tax; mutations à

titre gratuit, tax on inheritance and

gifts).

The gap between the two countries

as regards taxation on capital income is

slight and has not changed since 2000.

In 2008, this taxation amounted to

5.8 % of GDP in Germany and 5.3 % in

France. In terms of rates for taxation on

The Characteristics of Taxes and

Social Contributions

in France and Germany

Summary

of the Public Thematic Report of the

Cour des comptes

capital

income,

both

France

and

Germany remain above the European

Union average (21 % and 19.7 % res-

pectively, compared to 19.3 %).

Environmental Taxation

Revenues from environmental taxes,

as defined by Eurostat, are lower in

France (2.1 % of GDP in 2008) than in

Germany (2.2 %) and lower than in the

remainder of the European Union

(2.6 %).

The progression of environmental

tax revenue was nonetheless similar in

the two countries between 2000 and

2008. The tax burden on energy pro-

ducts is markedly higher in Germany

than in France. Taxes levied on the

transport sector are more prevalent in

France, due primarily to the versement

transport (transport tax) (€6 billion)

which does not exist in Germany, but its

classification within the category of

environmental taxes is subject to debate.

Summary

of the Public Thematic Report of the

Cour des comptes

Review by Blocks

of Levies

Taxes and Social

Contributions levied

on Household

Income

Different tax and social

contribution structures

The architecture of taxes and social contri-

butions

The share of income tax in GDP is

more than three times higher in

Germany than in France (9.6 % of

GDP, as against 2.6 % respectively).

Taxation of household income in

France has been impacted since the

beginning of the 1990s by the introduc-

tion and subsequent upscaling of pro-

portional taxes (the CSG and CRDS)

earmarked for funding the social protec-

tion system; these levies essentially

replaced social contributions. In 2008,

these proportional taxes accounted for

4.6 % of GDP.

Social contributions are significantly

higher in France than in Germany (res-

pectively 15 % and 12.6 % of GDP).

They are not shared out between

employers and employees in the same

manner : whereas in Germany the

employer and employee share is practi-

cally identical, in France the employer

share is more than double that of the

employee (respectively 11 % and 4 % of

GDP).

Personal income tax

The top marginal personal income

tax rate is higher in Germany than in

France: 45 %

(1)

in Germany, as compa-

red to 41 % in France. This situation

arises from the fact that the rate for the

highest marginal bracket has dropped

more significantly in France over the last

20 years.

Personal income tax in both France

and Germany are subject to an income

splitting system that applies to married

couples, whereby the overall income of

the household is considered for the pur-

poses of assessing payable tax. German

households nonetheless have the option

of being taxed separately.

The way that children are accounted

for is noticeably different in the two

countries; Germany does not have any

familial income splitting system analo-

gous to the French one. German house-

holds have a choice between receiving

family benefits or being granted a tax

allowance.

(1)

A “solidarity surcharge” of 5.5% of the amount of tax owed is added to this 45% rate.

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

In both countries, a cut for work-

related expenses may be calculated

either on a fixed-rate basis or with

regard to actual expenses incurred. The

fixed-rate method in France is markedly

more advantageous than in Germany

(10 % of wages and salaries subject to a

€13,948 cap in 2010, compared to €920

in Germany).

Income tax in Germany is withheld

at source, but this does not exempt most

taxpayers from having to file a supple-

mentary tax return.

Tax expenditures relating to income

tax are significant in both countries, but

are more numerous and more costly in

France.

Social taxes and contributions

Germany has not diversified the

methods for funding social security in

the same way that France has with the

CSG, which weighs largely on house-

hold income and, in particular, on capi-

tal income. The overall contribution

from income to social security is signifi-

cantly more regressive in Germany than

in France.

Opportunities for exemption from

social contributions are much more

extensive in France (for a cost of more

than €30 billion) and mainly concern

employer contributions on low earnings

(up to 1.6 minimum wage). In Germany,

relief is granted only on social contribu-

tions and it is more restrictively targeted

than in France.

Generally similar effects in

terms of labour costs and

redistribution

In 2008, social contributions levied

on household income came to 23.3 % of

GDP

France,

and

24.9 %

Germany. The impact of social contri-

butions (payroll contributions, adjusted

for concessions and exemptions) and

tax (on income and, in France, the CSG

and CRDS) on labour costs is compara-

ble in the two countries. The ratio of

aggregate income tax and social contri-

butions to overall labour costs incurred

by employers – also referred to as the

“social contribution and tax wedge” – is

49.2 % in France and 50.9 % in

Germany for the average wage. This

ratio is far higher in both countries than

the average for the OECD countries,

which is 36.4 %.

As for comparative taxation of

higher earnings, in addition to the

higher top marginal rate in Germany,

the tax shelters likely to be used by

higher earners to ease their tax burden

are less common and capped at lower

levels than in France.

Finally, alongside the taxes and

social contributions on household

income, both countries grant significant

relief to families. The German system

appears to be a fraction more generous

for families that have one or two chil-

dren as regards benefits in cash. The

French system is more advantageous in

the area of benefits in kind (child-min-

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

ding schemes). It is more beneficial to

families with three or more children and

to families earning higher income.

Taxes and Social

Contributions levied

on Wealth and

Assets

Taxation of assets: a

much higher tax burden in

France than in Germany

Germany, with its moderate pro-

perty taxes (approximately €11 billion),

the suspension of its wealth tax since

1997, and the tax on trading capital that

was abolished in 1998, has chosen to

apply a very low level of taxes on capi-

tal. The overall level of these taxes and

social contributions account for 0.46%

of GDP, well below the OECD average

of 1.13 % of GDP.

In contrast, the level of taxes and

social contributions levied on assets in

France is higher than the OECD ave-

rage. It accounts for 2.6 % of GDP.

This is essentially a result of the rapid

growth of real estate taxes over the last

decade, yielding aggregate revenue of

nearly €33 billion in 2010. Furthermore,

the ISF wealth tax (€3.6 billion in 2010)

has become a French peculiarity in the

European Union (although Norway and

Switzerland have maintained a tax of

this type). Germany decided to “sus-

pend” this type of tax, which earned

some €4 billion, in 1997. In Germany,

there is no legal ceiling on overall taxa-

tion like France’s “tax shield”, but com-

pliance with the principle of outlawing

any over-taxation or confiscatory taxa-

tion is carefully supervised by the

Constitutional Court.

Asset transfers and dispo-

sals – a heavier burden in

France despite similar

policy choices in recent

times

Only real estate transactions are

taxed in Germany at a lower proportio-

nal rate than in France. In France, pro-

perty transfer duties are levied not only

on real estate assignments, but also on

transfers of shares and business intangi-

bles. In aggregate, the revenues collec-

ted in France (approximately €9 billion

in 2010) are double the German amount

(€4.8 billion).

In recent times, Germany and

France have made generally similar

choices in the area of taxation of capital

gains and gift tax. Taxation of gains on

divestitures of securities was increased

in Germany when the flat and final

withholding tax was implemented, as of

January 2009, and in France as one of

the measures designed to fund pension

scheme reform. The recent reforms of

taxation of donations and gifts – passed

in 2007 in France and 2009 in Germany

– both substantially lowered duties on

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

direct line inheritances, and indeed

exempted inheritances involving small

or medium estates.

Income from assets – an

overall equivalent tax bur-

den, but differences in

methods

Taxation of income from assets

produces relatively comparable revenue

in the two countries : some €25 billion

not including taxes on real estate

income.

Since 2009, Germany has introdu-

ced a flat and full withholding tax

almost across the board that is simple to

apply to all income from assets. France,

for its part, collects both income tax and

social contributions – the overall weight

of which has quadrupled in the last ten

years – but also offers myriad tax

exemptions and incentives.

On balance, the taxation of wealth

and assets in Germany, which in nearly

all respects is below the OECD average,

relies mainly on the taxation of income

and of capital gains earned from assets.

France instead has opted for tax policies

that result in assets being taxed across

the whole chain, from holdings to dis-

posal/transfer, as well as asset-genera-

ted income, at levels that have increased

over time to the point that their econo-

mic incidence (3.4 % of GDP) is far

higher than the average for the OECD

countries (1.8 % of GDP).

Corporate Taxation

Different priorities and tax

structures in the area of

corporate taxation

Local taxation of businesses based on diffe-

rent taxes

In both Germany and France, com-

panies are subject to taxation at two

levels. In addition to corporate tax, busi-

nesses must also pay local taxes: the for-

mer French trade tax that morphed into

the

“Territorial

Economic

Contribution” in 2010; and the trade tax

(Gewerbesteuer) in Germany. While

corporate taxation is based on similar

principles in both countries, the trade

taxes (France’s Territorial Economic

Contribution and the German trade tax)

are different in design. The former com-

prises a contribution based on the value

of the company’s real property, plus a

contribution based on its added value.

The latter is assessed in a manner very

similar to corporate tax. These diffe-

rences are reflected in the respective

burdens that these two taxes represent.

The French trade tax has accounted for

a declining share of contributions levied

on companies over the last ten years; the

proceeds from the German trade tax

have increased considerably. In 2008,

revenues from the French trade tax

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

came to 1.01% of GDP, whereas this

figure was 1.65% in Germany.

A clear-cut divergence in the area of corpo-

rate tax

Starting in the late 1990s, successive

German Governments reformed corpo-

rate taxation with the stated aim of

enhancing the competitiveness of firms.

The reform was implemented in two

stages : first in 2000 and then in 2008. It

led to a sharp drop in the corporate tax

rate, which went from 30 or 40 % in

1999 (depending on whether or not pro-

fits were distributed) to 15 % in 2008.

The reform also entailed a broadening

and simplification of the tax base.

During the same period, there was

little change in France’s corporate tax.

As a result, the proceeds of corporate

tax place a very different burden on

businesses in the two countries : 0.64 %

of GDP in Germany and 2.53 % of

GDP in France. The very small share

arising from corporate tax revenues in

Germany is due not only to the reduc-

tion in the rate of this tax, but also the

fact that 83 % of German businesses

are actually partnerships that are subject

to income tax (as opposed to only 57 %

of French enterprises).

Far more taxes charged to businesses in

France than in Germany

In addition to corporate tax and the

Territorial Economic Contribution, the

French tax system includes a large num-

ber of levies on businesses, principally

the tax on wages and salaries, paid

mainly by banks and insurance compa-

nies in return for exemption from VAT

or the transport charges. Out of these

taxes, the ones that are assessed on

wages and salaries accounted for tax ear-

nings of €26.5 billion in 2008 (1.2 GDP

points) ; they have no equivalents in

Germany.

True Differences but Not

to be Over-estimated

The German corporate taxation approach

places greater emphasis on the objective of

neutrality than in France

In Germany, one of the goals pur-

sued by public policies, more actively so

than in France, is neutrality. In France,

public authorities have turned taxation

into a lever for economic policy and use

it to guide stakeholders’ investment

choices and behaviour. In Germany, the

emphasis has been placed on allowing

market processes to determine the pro-

duction factors.

This objective of neutrality was pur-

sued in relation to the legal form of

businesses, by seeking to harmonise the

tax burden on partnerships and stock

companies. It was also pursued with res-

pect to types of investment, with depre-

ciation regulations being considerably

simplified. During the same period, the

French tax system continued to develop

incentives that have no equivalents in

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

Germany, the main one being the

research tax credit (€5.8 billion in 2009).

In Germany, alongside the decrease

in rates, the tax base was broadened as

part of the drive to achieve neutrality.

Measures were thus implemented in

2008 to even further widen the corpo-

rate tax base, by setting a cap on the

amount of interest on loans that could

be deducted and by restricting the car-

ryovers of losses.

Both systems achieve an overall equivalent

rate of taxation on businesses

The effects of the two tax systems

are very alike in the area of taxes char-

ged to corporate groups and to divi-

dends between linked companies.

While some of the tax cuts in force

in France have no equivalents in

Germany, the reverse is also true : in

contrast to French legislation, for ins-

tance, the German scheme allows for

depreciation of “goodwill”, thereby

encouraging

external

growth

German companies.

Rates of taxation on profits are of

the same order of magnitude in the two

countries. The overall rate of taxation

on profits, obtained by considering cor-

porate tax, the trade tax and the tax on

profits, stood at 31 % in Germany in

2009 ; in France, it was 34.6 %.

VAT

Apparent convergence

between the French and

German VAT regimes

The tax base for VAT has been sub-

ject to European Community rules since

1967; it is therefore mainly in the area of

rates that Germany and France have

moved closer to one another. Today, the

normal VAT rates are practically identi-

cal in Germany and France, at 19 % and

19.6 % respectively. The reduced rate is

also similar : 5.5 % in France and 7 % in

Germany. These rates place the two

countries at a level that is significantly

below the European average, which, in

2010, stood at 20.52% for the normal

rate and 8.46 % for the reduced rate. As

a result, the share of VAT revenues in

the GDP of the two countries (7 %) is

also lower than the European average

(7.6 %).

Lingering differences

VAT revenues have more sharply increased

in Germany than in France over the last 20

years

The similarity in the French and

German VAT schemes is the outcome

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

of two different trajectories. Since 1990,

Germany has increased its normal VAT

rate by five points, while France raised

its normal rate by one point. The share

of VAT in overall tax revenue is cur-

rently higher in Germany (18 % of tax

revenue) than in France (16.4 % of tax

revenue).

Reduced rates and special exemptions widely

applied in France

France makes more widespread use

of reduced VAT rates than Germany.

The main differences relate to cafés and

restaurants and to “labour-intensive ser-

vices” within the meaning of the VAT

Directive, such as renovation and

repairs of dwellings, which is subject to

the reduced rate in France, but to the

normal rate in Germany.

In addition, France implements

exceptional rates that have no equivalent

in Germany: in particular, the “super-

reduced” rate on medicines covered by

the French national health system and

on newspapers.

As a result of Germany’s more sel-

domness use of the reduced rate and

the inexistence of special rates, VAT

there is more efficient in terms of yield.

The VAT increase as part of Germany’s

Government deficit reduction strategy

Two out of the three percentage

points by which the normal VAT rate

was raised in Germany on 1 January

2007 were earmarked for reducing the

budget deficit, while one point was allo-

cated to reducing unemployment insu-

rance contributions. While a further

increase in the normal VAT rate is not

currently envisaged in Germany, some

thought is being given to reducing the

scope of application of the reduced-rate

so as to raise additional budgetary

resources. Whereas in France the public

authorities have assigned to VAT, and

particularly to its reduced rate, a series

of objectives that this instrument some-

times has difficulty achieving (support

to certain economic sectors, employ-

ment, bringing illegal labour under

control), Germany appears to have set

budgetary yield as being VAT’s main

objective.

Aligning the French reduced rate

and its scope of application with those

applied in Germany would generate an

additional €15 billion in budgetary reve-

nue.

Environmental

Taxation

Heavier taxation on

energy in Germany than

in France

The failed attempts to introduce a carbon

tax in France

France has attempted on two occa-

sions to introduce a carbon tax: the

Review by Blocks of Levies

Summary

of the Public Thematic Report of the

Cour des comptes

“TGAP” on energy products in 2000,

and the “carbon contribution” in 2010.

Both of these attempts were thwarted

by the Conseil Constitutionnel on the

grounds that they infringed the principle

of taxpayer equality.

Environmentally-focused taxation reform

gradually implemented in Germany since

1999

In contrast, Germany carried out an

environmentally-focussd tax reform

(Ökosteuerreform) in 1999 that led to te

creation of an electricity tax and a gra-

dual rate increase (by 3.07 cents per year

and per litre for five years) for the tax on

mineral products. The proceeds thereof

funded a 1.7 point reduction in contri-

butions to the retirement insurance

scheme. This reform was furthered in

2006 when excise duties on coal were

established. The overall level of taxation

on automotive fuels and electricity is

now higher in Germany than in France.

By comparison with the other members

of the European Union, these two

countries tax automotive fuels heavily,

whereas the opposite is true for other

fuels. This leads to a situation whereby

the taxation of one tonne of CO2 is

below the generally accepted shadow

price of carbon of €32 : €3 for coal and

€23 for household heating oil in

Germany; €21 for household fuel in

France.

Taxation of road trans-

port: more consistent

changes in Germany than

in France

Under the reforms that have been

carried out since 1999, Germany has, on

the one hand, readjusted tax rates for

motor vehicles on the basis of their

CO2 emissions and, on the other hand,

introduced a toll for heavy goods vehi-

cles (LKW-Maut).

The policy implemented in France is

less consistent. Concomitantly with the

Germans introducing an environmen-

tally-focussed

reform

taxation,

France abolished the “vignette” road tax

for privately-owned vehicles, but subse-

quently established new taxes, such as

the automobile bonus-penalty system

and the tax for heavy goods vehicles

(concurrent with the German toll

charge).

Following these changes, the situa-

tions are at variance. Taxes on privately-

owned vehicles are now significantly

lower in France as compared with the

other side of the Rhine (the correspon-

ding revenues come to €2.5 billion and

€8 billion respectively).

Summary

of the Public Thematic Report of the

Cour des comptes

Main Findings from the

Comparison

Tax Equations that

are Similar and yet

Different

Similar taxes and social

contributions overall, with

significant discrepancies

France and Germany both enjoy

high levels of social protection, finan-

ced mainly through social contributions.

Because of this, both countries have

devoted particular attention to contai-

ning the cost of unskilled labour, with

Germany increasingly turning to the

general budget to subsidise social secu-

rity funds, and France tending to rely

upon specially earmarked tax revenues.

The French and German tax sys-

tems are characterised by taxes that are

often very similar, be it VAT (the normal

rate of which is 19.6 % in France and

19 % in Germany), personal income tax

(the top bracket is taxed at 41 % in

France and 45 % in Germany) or even

corporate income tax (33.3 % in France,

30-35 % in Germany, once local corpo-

rate taxes have been factored in).

Tax-to-GDP ratios in both coun-

tries are appreciably higher than the

euro area or the OECD average. There

is virtually no tax competition between

the two countries. The economic attrac-

tiveness of both countries stems essen-

tially from non-tax factors (infrastruc-

tures, public services, skilled work-

forces).

A comparative analysis did, howe-

ver, reveal often longstanding discrepan-

cies, as well as more recent divergences,

when it comes to tax policy :

- the main differences are: a more

integrated approach in Germany to

taxes and social contributions, since the

Länder, while financially autonomous,

do not have their own tax resources and

Germany has no specific taxation ear-

marked to fund social security ; the gro-

wing burden of social contributions in

France, where family policies are to a

great extent funded by levies on wages ;

a substantial difference in taxation on

wealthand assets, with higher property

taxes in France ; the existence in France

of several taxes that cause higher pro-

duction costs, and that have no equiva-

lent in Germany (of which €26.5 billion

are based on wages).

- with regard to policy divergences

over the last decade, three are particu-

larly significant: a lower priority in

France

given

controlling

Government deficits, in particular those

of its social security system; a faster

growth in tax and social contribution

cuts in France in the 2000s ; continued

Main Findings from the Comparison

Summary

of the Public Thematic Report of the

Cour des comptes

policy emphasis in Germany on redu-

cing Government deficits and restoring

competitiveness.

German Tax Policy

More Explicit and

Focused on

Neutrality

German taxation policy more clearly

identifies a priority objective for each

taxation category. Accordingly, the

three-point

increase

VAT

1 January 2007 was basically motivated

by the need to rebalance Government

accounts. The overarching objective of

corporate tax reforms in 2000 and in

2008 was to improve the competitive-

ness and attractiveness of companies

operating in Germany, and the redistri-

butive role of personal income tax was

unequivocally reaffirmed by the creation

of a bracket, taxed at 45 %, for income

higher than €250,000 per annum. In

contrast, the French debate on taxation

seems less clear-cut, with multiple

objectives assigned, implicitly or expli-

citly, to many taxes or tax adjustments ;

a recent example of this is the switch to

the reduced VAT rate for the restaurant

and catering industry.

The economic neutrality of each

individual tax is more clearly a priority

for German tax policy. With regard to

corporate taxes, income tax or VAT,

there is less room in Germany than in

France for tax incentives. The “tax inter-

ventionism” that is so characteristic of

France is due, in part, to a different

underlying economic conceptualisation

of the respective roles of the State and

the market.

Developments in tax legislation

appear less profuse, and more predicta-

ble, in Germany than in France. This is

undoubtedly due to the fact that tax

revenues are to a very large extent sha-

red between central Government and

the Länder, as well as to a political tradi-

tion marked by coalition governments,

with painstakingly negotiated pro-

grammes that are implemented throu-

ghout the duration of a legislature.

Lastly, the public debate over taxa-

tion in Germany tends, more so than in

France, to be organised around quanti-

fied targets, in particular ceilings on

taxes and social contributions. With res-

pect to social contributions, successive

governments have stuck to an overall

rate of 40 %. The corporate tax reform

of 2008 pursued a similar objective.

Factors Specific to

France’s Situation

There are three characteristics of

our country’s situation that limit the

scope for potential rapprochement or

convergence.

The overriding need to redress fiscal

policy requires strict and lasting control

over public expenditure, without ruling

out the tax revenue lever. Any conside-

ration of tax reform must assume

constant yields in the immediate, and be

based on prudent hypotheses.

Main Findings from the Comparison

Summary

of the Public Thematic Report of the

Cour des comptes

Competitiveness plays a central role,

given the risk of a growing gap between

the two economies, and the loss of the

relative cost advantage that France

enjoyed in the early 2000s.

Redistribution plays a more promi-

nent role in our tax system. Income,

however, may be redistributed in two

ways : through taxes and social contribu-

tions ; but also by the benefits and trans-

fers. The latter tool is undoubtedly finer,

and often better suited to the objective

of redistribution.

Potential

Developments

Based on Clear

Choices

Possible Avenues, per

Block of Taxes and Social

Contribution

In France, the drop in progressive

taxation of income (the relative weight

of income tax has been halved over the

last 20 years, and represented a mere

2.59 % of GDP in 2008), paralleled by a

rise in proportional taxation (CSG,

CRDS), should prompt us to re-exa-

mine all taxes concerned, and the overall

degree of progressiveness desired. In

comparison, income tax in Germany

has continued to be higher and somew-

hat more progressive, but taxation of

wealth has remained limited, and the

funding of social protection is based

less on solidarity.

With regard to unit salary costs, the

trend in the two countries has been

divergent over the last ten years. Priority

must thus be given to ways of decrea-

sing the relative weight of labour-based

taxes, especially those borne by compa-

nies exposed to international competi-

tion.

Above and beyond these two issues,

the juxtaposition of high employer

contribution rates and of massive exo-

nerations for low salaries makes the

French system less transparent, and

raises the question of modifying the

contributions scale to more clearly

reflect the actual rates paid.

With respect to VAT, too, the trends

in France and Germany have been

divergent. VAT revenues in France

dropped by 0.4 GDP points between

1995 and 2008, as opposed to the gene-

ral upward trend in Europe. In budge-

tary terms, two-thirds of additional

revenue to be gained from harmonising

the scope and rates of reduced VAT

between the two countries (€ 15 billion)

could come from two entries alone

(repairs, upgrades or maintenance work

undertaken in dwellings and restaurant

and catering services).

Regarding

corporate

taxation,

although the overall level differs little

between the two countries, Germany

has, over the decade since 2000, develo-

ped its regulations along the lines of a

broader tax base and a reduction in

rates.

Main Findings from the Comparison

Summary

of the Public Thematic Report of the

Cour des comptes

When compared with other OECD

countries, taxation of wealth and assets

is very low in Germany. Because of this

atypical situation, the latter cannot be

considered an ideal benchmark for

France. Certain aspects of wealth taxa-

tion do nonetheless deserve considera-

tion:

- Germany has opted for taxation of

asset-generated earnings, and lowered,

or kept at low rates, taxation on hol-

dings and transmission. At the same

time, it has kept its income tax high,

with its top bracket taxed at a higher rate

than in France;

- the elimination of an overarching

wealth tax, in Germany and elsewhere,

was in part due to the legal and political

difficulty in establishing satisfactory

bases for the valuation of real estate

holdings to be factored into the tax

base. In this respect, the French wealth

tax (ISF), based on market value assess-

ments, seems more robust. It suffers,

however, from two intrinsic shortco-

mings: a narrow tax base; and progres-

sive rates that run higher than current

rates of inflation or of return on finan-

cial investments;

- when it comes to taxation of

income from assets, Germany recently

opted for a flat and final withholding

tax. The French approach, combining

proportional social contributions with a

State taxation that in turn juxtaposes

payment according to scale and an

optional flat-rate levy in discharge, des-

erves a comprehensive re-examination;

- lastly, the German situation regar-

ding taxation of the transmission of

professional assets is characterised by

the absence of any imposition on dives-

titure of company goodwill and shares.

To benefit from these more favourable

conditions, however, German compa-

nies must submit to stricter require-

ments regarding maintenance of jobs

and activity in the event of transfer.

When it comes to environmental

taxation, an examination of German

legislation reveals two areas in which a

rapprochement could bring out some

budgetary elbow room: taxation of

energy consumption and of privately-

owned vehicles.

The Big Choices Ahead

The

comparison

leads

conclude that France must, in the near

future, remedy the divergences with

Germany observed recently in terms of

fiscal policy and competitiveness. This

will not be possible without resorting to,

inter alia, the tool of taxation.

In addition to the tax shelters that

deserve re-examination, two areas offer

some leeway: taxation on consumption,

with the scope and rate of reduced

VAT; and environmental taxation (taxa-

tion of energy products and privately-

owned vehicles). The additional revenue

thus generated could be used to reduce

Government deficits or to improve

competitiveness by easing taxation on

labour and the costs of production

borne by our companies.

Main Findings from the Comparison

Summary

of the Public Thematic Report of the

Cour des comptes

In order to reduce costs and bolster

competitiveness, priority could be given

to employer contributions (family bene-

fits branch) or to labour-based taxes that

increase production costs. In time, fun-

ding collected from firms for public

policies bearing no direct link to compa-

nies (family, transport or housing poli-

cies) could be phased out and gradually

replaced by universal funding, provided

that due attention is given to the redis-

tributive impact of such changes.

European Policies

and the Franco-

German Framework

for Impetus and

Consistency

The Limits of Policies

Introduced at the Level of

the European Union

Within the European Union, the

provisions provided for in the Treaty

regarding taxation are constrained by

the rule of unanimity. They are also gui-

ded by one central objective: the smooth

operation of the internal market. The

fact that common bases and minimum

rates for indirect taxes have been set has

not prevented France and Germany

from pursuing divergent policies in

recent years. Tax competition within the

EU is on the rise, especially given gro-

wing heterogeneity among member

States due to enlargement. The traditio-

nal tools for harmonisation are losing

steam, and many issues are in fact set-

tled by the European Court of Justice.

The lack of any momentum toward

convergence within the EU is echoed in

the euro area, which is precisely where

convergence is most needed. The reason

can be found in the feebleness of the

tools for coordinating economic poli-

cies, which have proved unable to pre-

vent certain States from pursuing

“aggressive” corporate taxation policies.

The Possibilities of the

Franco-German

Framework

Assuming that there is a strong poli-

tical will on the part of both States,

several levers for action could be used to

lock the two countries’ tax policies into

a dynamic of increasing convergence:

- the definition of common posi-

tions that could facilitate the emergence

of a convergence process at the level of

the European Union : Franco-German

common positions could constitute a

core around which a broader form of

convergence could emerge, for example

in the framework of closer cooperation

as provided in the Treaty ;

- the identification of good prac-

tices, each country being free to

improve the performance of its own

taxation system ;

- the implementation of a simplifi-

cation programme aiming to offer both

enterprises and households concerned a

Main Findings from the Comparison

Summary

of the Public Thematic Report of the

Cour des comptes

guarantee of “convergence on a daily

basis” (cross-border business transfers,

rules on transfer pricing).

This non-exhaustive list highlights

what can be gained from continued joint

effort to analyse and resolve these diver-

gences in taxation practices.

For these levers to be effective,

however, they must be underpinned by a

strong long-term political will. The

impetus may be provided by the Franco-

German Council of Ministers and the

pivotal role played by the Franco-

German Economic Council. There are

several ways in which this could be

achieved :

- regular exchanges (during the first

half of each year, in connection with

the “European semester” initiative on

budget policy run by the Commission)

of a comprehensive nature on short-

and medium-term tax policy orienta-

tions in order to promote convergence ;

- an annual working programme

aimed at resolving technical or practical

problems that cause difficulties for eco-

nomic stakeholders and individuals ;

- comparative studies on topics rela-

ting to taxes and social contributions

and their economic and social impact.

General Conclusions

Summary

of the Public Thematic Report of the

Cour des comptes

With regard to levels, structure and effective rates of tax and social contribu-

tions, France and Germany are in many respects very close. The two countries could

join forces in order to further European initiatives in favour of greater tax harmo-

nisation, for example in corporate taxation. Within the euro area, the scope of

Franco-European economic cooperation could be extended to cover taxation matters.

A comparison between the French and German taxes and social contributions

provides many useful lessons, but also much for concern.

The structural Goverment deficit of France, to which the Cour des Comptes has

unceasingly drawn attention, is more than three points higher than in Germany. It

is above all due to the fact that France has proven less able than Germany to contain

the rise in public expenditure. It is also linked to differences in the political princi-

ples underlying tax policy (greater priority given in Germany to maintaining reve-

nues, a philosophy focussed on economic neutrality) or budgetary policy (de facto pro-

hibition of a sustained social security deficit).

Above and beyond these factors, certain elements bespeak a wider economic

divergence and arouse concern over the French situation. Germany, throughout the

decade beginning in 2000, has given priority to improving its competitiveness. It

today is reaping the benefits of this approach, which has had a positive impact on

costs, employment and the trade balance. Taxation policy has played a role in this

improvement.

France cannot afford to let these factors of divergence go uncorrected. With res-

pect to tax and social contribution policy, it must aim at redressing its fiscal policy

and improving its competitiveness, within a sufficiently stable and predictable fra-

mework. The comparison with Germany highlights potential areas for additional

revenue collection (by rethinking certain tax and social cuts, the scope and rate of

reduced VAT, or the taxation of energy goods and transport) and the uses to which

it may be put (further reduction of deficits, lightening taxes and social contributions

on labour).

For such changes to become truly effective, they must elicit the broadest possible

support on the part of political, economic and social stakeholders, and lead to an

explicit medium-term taxation strategy, enshrined in public finance programming

legislation, whose continuity is ensured over time.

List of Main Observations

Summary

of the Public Thematic Report of the

Cour des comptes

General characteristics of

the countries and their tax and

social security systems:

for some years, the economic

trends in France and Germany, with

regard to growth, export competitive-

ness and the unemployment rate, have

been divergent. The only aspect in

which Germany has fared worse than

France has been the rise in inequalities;

the rise in unit salary costs in

French industry was ten points higher

than in German industry over the

period 2000-2008; this trend, which

was not specific to France, bridged the

gap that existed at the beginning of the

decade ;

the situation with regard to fis-

cal

policies

different:

the

Governemnt

structural

deficit

France is higher than in Germany by

over three GDP points ;

compared with other European

countries, the burden represented by

taxes and social contributions is high in

both France and Germany. It has,

however, had a tendency to decrease