French News in English 

Published by France Now Association

Editor: Arvind Ashta

Editorial Committee:

W. W. Strangmeyer,

Emmanuelle Ashta





French News in English

October 1998

Monthly, Issue No. 18

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Dominique Strass-Kahn, the Minister for Economics,Finance and Industry has presented the Finance Bill for1999 to Parliament. His proposals will be debated inParliament and by the public for the next three months tillthe budget is finally approved in end-December. Budgeted expense for 1999 is FF 1666billion (against a budgeted FF 1591 billion for 1998). Net Receipts are budgeted at FF 1429billion (against a budgeted FF 1333 billion for 1998), up by FF 96 billion or 7.2%. Thebudgeted deficit is planned to reduce marginally from FF 258 billion in 1998 to FF 237billion in 1999. The budgeted receipts are indicated net of tax expenses due toreimbursements and tax exemptions of various sorts. Gross receipts are budgeted at FF 1752billion (compared to FF 1626 billion for 1998). This includes non-tax receipts as well as adeduction for the European Community and to local authorities. Gross tax receipts arebudgeted at FF 1840 billion (compared to FF 1727 billion for budget 1998), an increase of FF113 billion. Already, 1998 receipts are likely to exceed the original budget by about FF 40billion, mainly due to fiscal drag: since 1997 economic performance was better than expected,1998 tax collections were higher. And 1998 economic performance is even better than 1997.So 1999 tax collections would be a bumper harvest, since Mr. Strass-Kahn does not intend tolower VAT back to 18.6% from today's rate of 20.6% , introduced "temporarily" two yearsago. We summarise the highlights and the background to the tax proposals.

1. VAT on electricity lowered:

The most important reduction for the ordinary consumer is that the VAT on the EDF bill isbeing reduced to 5.5% instead of 20.6%. Partly, this is being done because electricity and gaswill also be provided by other countries, with the opening of European markets. And Frenchelectricity and gas would be unnecessarily more expensive if it is taxed at a higher rate thanthose of neighbouring countries. Of course, lower VAT on electricity means that the cost ofelectricity to the consumer would be reduced and he would increase his demand not only ofelectricity (substitution effect, more waste?) but also of all other goods (income effect),especially complementary goods such as consumer durables running on electricity. All thisshould generate employment. Whether employment would increase depends on new jobscreated due to increase in demand and old jobs destroyed owing to increased dependence ondurables (capital goods). But employment is Mme Aubry's problem.

Other goods which are also being reclassified to attract lower VAT duty are devices meant forthe handicapped and diabetics, on local government services which collect and sort out thedifferent kinds of garbage, and renovation work subsidised by a government agency (ANAH)for housing benefiting from an APL (Aide Personnalisée au Logement) contract. This lastmeasure is likely to cost the government FF 200 million.

2. Wealth Tax.

Last year, total wealth tax collections were FF 10.1 billion, a 12% increase from FF 8.9billion in 1996. 180,000 out of France's 60 million people paid wealth tax in 1997 - a 3%increase over the 175,000 who paid this tax in 1996. Assuming that the newest 3% paid verylittle tax as they must have just entered the tax bracket, the entire 12% increase must havecome from existing taxpayers. The increase in tax of FF 1.1 billion is due to the increase inwealth of the wealthiest, and FF 0.1 billion can be attributed to the surcharge of 10% on thehighest bracket in 1997 (those paying 1.5%). Obviously, if the wealth of the richest grew by12% and the GDP as a whole grew by 3%, you know who lost!

This year, the government plans to close a number of loopholes and to increase collectionsfrom the Wealth Tax.

In the Finance Bill for 1999, it is proposed to make permanent and include in the revised ratethe surcharge of 10% on the highest bracket. A new rate of 1.8% wealth tax has been addedfor the wealthiest: those with a fortune of more than FF 100 million.

The new rate schedule proposed is:
Taxable Wealthbrackets (Millions of Francs) Taxrates(% )
< 4.7 0
4.7 to 7.64 0.55%
7.64 to 15.16 0.8 %
15.16 to 23.54 1 %
23.54 to 45.58 1.3 %
45.58 to 100 1.65%
> 100 1.8 %

Of course, for computing personal wealth, all business capital owned will continue to beexcluded under the heading «instruments of work or livelihood». Art objects are excluded.Forests are excluded. In fact, it would be difficult to see what one would have to buy to gettaxed. Note that as income increases (say, beyond FF 100 million), one no longer spends onnecessities. One buys luxuries, most of which can easily be categorised as pieces of art. Onealso reinvests: most investments can be classified as «instruments of work». And to cap it all,the Wealth Tax is limited to 85% of one's incomesubjected to the income tax.


For the calculation of this ceiling, income is reduced bycarrying forward deficits from previous years. Theinclusion of income exonerated by the income taxlegislation is also proposed in the Finance Bill. Thiswould have the effect of increasing the «income» criteria,and accordingly lifting the 85% cap. So, wealth taxshould increase.

As stated above, professional assets are not included inthe computation of wealth tax. As per the Finance Bill,furnished apartments would be considered professional assets only if they are put out for rentfor more than FF 150,000 per annum and this constitutes more than 50% of the person'staxable income.

Property which is fragmented and distributed, but where the original owner maintains ausufruct during his life-time, would be taxed to some extent in the hands of the owner.

The venal value of buildings is assessed as if it were sold free of all occupation. This meansthat people are not allowed to benefit from a lower selling price indicating that the propertybeing occupied (by a tenant who refuses to move out), the sale proceeds were rather low.

Last year, François Pinault, (owner of Printemps, Redoute, FNAC and other super-chains) gotaway with knocking off corporate debts (debts for buying shares) against personal wealth.After giving him this present, the government now intends to provide a procedure of rules toensure that the debt has some relation to the personal portion of the wealth. The loophole isbeing closed to all others.

On the other hand, some relief is provided. Now, a 20% abatement is planned for primaryresidences. On big estates, the 20% is obviously bigger.

3. Personal Income Tax

The marginal tax rates are modified since they are indexed for inflation
Tax bracket(FF) MarginalRate
Less than 26100 0%
26100 - 51340 10.5%
51340 - 90370 24 %
90371 - 146320 33 %
146320 -238080 43 %
238080 -293600 48 %
More than293600 54 %

The government alone knows why the first bracket pays 10.5% instead of a straightforward10%. What difference would 0.5% make on the lowest bracket when we know that most ofthe tax (at least half) comes from the highest bracket alone.

The benefit from the family quotient is being limited to FF 11,000 (instead of FF 16380). Theupper-middle classes would therefore pay more.

The income of journalists is being considered as expenses to the tune of FF 30,000. This is abig allowance for the media. It enables media owners to pay less to their new employeesindicating that the employees pay less taxes. Existing employees are given this sop to makethem less critical of the government.

4. Corporate taxes:

It is planned to modify the tax base of the Professional Tax and phase out «salaries» from thetax-base over the next few years.

Uniformitisation of the taxes on business offices is planned.

It is proposed to limit the Franking Credit on Dividends to corporate shareholders.

Micro enterprises, which are dispensed of the obligation of maintaining accounts for theirexpenses, are being encouraged. For such enterprises, a percentage of total sales or totalincome is considered as net income (and the rest as expenses), without the need for keepingbills or maintaining books of accounts. The ceiling of business to be considered a microenterprise is being raised. Besides this, the forfeit income margin is also being modified

Tax Now Proposed
Professional Tax

- On Fixed Assets

- On Salaries




- to bescrapped overthe next fewyears

Tax on Business Offices

- Transfer duties

- Registration fees


1 %

4.8 %

4.8 %

Franking Credit onDividends

- For corporateshareholders

- For individuals

50 %

50 %



Ceiling on transactionsof Micro enterprises

- Trading activities

- Services and liberalprofessions

100,000 Francs

100,000 Francs

500,000 Francs

175,000 Francs

Deemed Net Income ofMicro-enterprises (aspercentage of declaredtotal income)

- Trading activities

- Services

- liberal professions







5. Property taxes: It is proposed that the Perissoladvantage be modified.

Under this scheme, tax advantages are offered to people who buy property and then rent itout. The apartment has to be rented out for nine years (new apartments) or for six years (oldones). Now, the government is modifying the conditions. The apartment has to be rented out«cheap» (10-15% below market rates) to poor people (who nevertheless may earn more thanthose eligible for HLM government subsidised housing). For example, for a person with twochildren (earning less than FF 34,400 per month), the landlord should charge less than FF 75per square metre in Paris for new apartments and less than FF 65 per square metre for oldapartments. The income criteria and the rent are modified depending on the kind ofagglomeration.

The advantage offered was that the owner could depreciate his assets at the rate of 10% forthe first four years and 2% for the next 20 years (total of 80%). Now, it is proposed that thisdepreciation allowance be changed to 8% for the first five years and 2.5% for the foursucceeding years (total 50%). Property losses can be set off against rental income till FF100,000. Now, this ceiling is being lowered to only FF 70,000.

6. Transfer duties on Property

Those who acquire property from 1st September, 1998 onwards have been offered a 20%reduction in transfer duties. This is because the regional portion (1.6%) of the duty is beingannulled. With this, the average rate of duties on purchase of residential property will godown to 6%.

This decrease in residential property taxes goes against the notion of tax competition of fiscalfederalism experts who believe that in federal States, as capital and labour become mobile,fixed property taxes have to increase! But, then again, duties on buying and selling propertycan also be considered taxes on capital, because people wanting to invest in property can nowdo this anywhere in Europe. It is the residence (habitation) and property (foncier) taxes whichshould really be considered as fixed property taxes. And these are therefore expected toincrease.

Far more interesting is the new tax imposed on incorporeal assets transferred by someonewho doesn't like French taxes and would like to change his domicile. In such cases, theFrench government proposes to charge a capital gains tax at the time the domicile istransferred out of France. Since the person is leaving in any case, he might as well be asked topay the tax on all increase in his property while he was in France. This tax would apply onlyto those who have domiciled themselves in France for at least the last six years.

If all the European countries pass similar legislation, it is obvious that a person who wants toavoid this tax should change his residence every five years to a new country within theEuropean Union.

So far, the donor was subject to gift duty and succession duties. The donee or the heir was nottaxed. So the donor or the defunct had to be domiciled in France for French gift tax andsuccession duties to be applicable. Now, this is being extended even to donees or heirs wholive in France, even if the donor or the defunct live outside. Property situated in France heldby non-residents through companies or trusts, are also going to be liable for transfer duties aswell as wealth tax.

7. Miscellaneous taxes and fees scrapped

Stamp duties on national identity cards are being scrapped. Also being scrapped are taxes onexaminations for obtaining driving licences. All these are being scrapped because youngpeople find these expensive and these have become essential to finding a job in France.

Taxes on perfumes, toilette products, alcohol for medicinal use and alcohol used in foodproducts are being scrapped in consonance with European legislation.

To reduce the cost of French wine-base aperitifs, taxes on inputs (sugar, glucose, isoglucoseand syrups) are being scrapped.

A tax on enterprises engaged in the mining of hydrocarbons and taxes on matchboxes andlighters are being scrapped because the formalities are too cumbersome and the receipts ratherlow. For the same reason, an application for permits for activities related to developingnatural mineral water is being scrapped.

A tax on land is imposed for the benefit of the agricultural social services. This has alreadybeen partly phased out. It is now proposed to scrap it.


New Classical Economics


Speculation on the Stock Exchange

Arvind Ashta

If an increase in the money supply won't change anything except price level, what good ismonetary policy? The only role it may have is that unexpected changes in the money supplymay lead to temporary changes in demand. This is the basic difference between the newclassical economists and the monetarists who believe that the money supply influencesaggregate demand. New Classical economists should also be differentiated from Neo-classical economists who believe that the economy would find a long-run equilibrium throughchange in factor prices.

The new classical economists' rational expectations theory (see Robert E. Lucas, Nobel Prize1995) says that any rational individual will construct his expectations so that, on the average,he is correct. So if the government increases the money supply by 5%, everybody willrationally expect a price increase of 5% and they will accordingly adjust their demand. Thisleads to the Policy Ineffectiveness theorem which says that government policy is effectiveonly if it isunanticipated.

It also means thatshare prices arebased on rationalexpectations whichtake into account allinformationregarding the futureof a company. So itis only on newinformationpertaining to a company that price changes. And it does so quickly. What this means is thatthe person (or the entity) who has access to information has to act upon it immediately, aheadof others, so that he can make a profit (including for his clients). All others are merefollowers, making lower profits, till the information is made public - by which time only atemporary spurt followed by market correction is expected.

So, large companies like Merrill Lynch, which maintain contacts with all companies, throughan international network of reporters and analysts, feed this market information into theircomputers and make it available to their international network of brokers. The firm istherefore able to manipulate these brokers so that they act in a certain way, on a world-widebasis. As long as the directors of the big investment institution buy and sell before theirbrokers and their clients, they gain even more.

What this also indicates is the importance for companies of maintaining good contacts withbrokers and the press. Because, when a company wants the share price to go up (before a newissue), it is important that good news reach the brokers, and after them, the public press. Thisgives brokers time to act (for themselves and their clients) and make money, till the publicresponds sluggishly, further driving up prices. The public demand finally settles down whenthey realise that the action is already over.

In fact, the public can only lose, because it doesnot know when the brokers have stoppedbuying. Why only lose? Actually, some makegains and some make losses. So, on the average,the public as a whole should get a zero return,one would think.

Even if the public as a whole expects a zeroreturn, two questions are raised:

1. Why take a speculative risk if the expectedreturn is zero?

2. Why pay brokerage costs if the gross expectedreturn is zero?

However, the return to the public is negative atleast because the person who does come in tobuy and then sells out to market correction losesat least the brokers' commission.

But we would go one step further. We expectthat the brokers know when the public startsbuying and when it stops buying. Therefore,they can go on buying or holding shares till thepublic buys, gradually releasing their holdings and making a super-profit. The entirespeculative profit could easily accrue to the community of brokers (and their favoured clients)to the detriment of the small investor.

This does not end our speculation. Let us dwell a bit further. Mr. Bull is a broker with severalclients. He wants to make a profit for himself, but he also wants to make a reasonable profitfor his clients, so that he keeps them. He needs them, because he uses their money to fight inthe marketplace. «Fight», because he is actually waging a war with Mr. Bear who isspeculating on price reductions. The winner will be the one with greater funding and bettermarket information. All this to say a large brokerage firm needs its clients and has to pass offsome of its gains to its clients. So a small investor with a big brokerage firm can still expectnormal returns on his investment and, perhaps, a speculative bonus to retain his custom.

Of course, even big firms employing Nobel laureates may also be associated with big failures.The 1997 Nobel Laureates for Economics, Myron Scholes and Robert Merton, famous fortheir work on option pricing, have been associated with John Meriwether's Long TermCapital Management hedge fund which had to be bailed out in September by a special rescueconsortium of the world's leading investment brokers for fear that it would take them downtoo if it sank. Although the liquidity problem faced by the fund in meeting its margin-moneyrequirement is more a working-capital manifestation of the issue, the inability of even bigplayers to access pertinent market information remains the core unresolved problem. Whichmeans that the perfect market information assumption behind the New Classical economics'efficient market hypothesis is still a distant reality.

COB : Regulating market-interventions

From the above article, it is clear that people with inside information can make extra profit onspeculation of shares. Big players often intervene in the market, buying their own shares andsending the market in flutters. This creates resentments among small investors, who are moreand more educated and suspicious. In fact, this deters them from playing the market. To levelthe playing field, the COB (Commission des Opérations de Bourse) has decided to intervene.It has passed three regulations, one regulating the buyback of its capital by a company,another regulating other forms of market intervention by people issuing shares and, finally, athird regulating market information by others with inside information.

Before a reduction of its capital through purchase of its scrip in the market, a company musthave shareholder approval. But even before going to the shareholders, the first of theseregulations requires that the company must have the permission of the COB. For this, thecompany has to provide information as to why the capital is being reduced, the amount ofcapital reduction, etc. The COB has five days to examine the case, ask for further informationand authorise (or refuse) the buyback of the capital. All such authorisations arecommunicated to the public.

The company can then put the case for approval to its shareholders. The shareholders alsohave to be given at least fifteen days' notice before they decide. The shareholders can beinformed either by personal mail or by an advertisement in a major national financial daily,with a summary of the information, indicating that the details are available on demand at theregistered office of the company.

Once the buyback starts, the company has to provide monthly status information reports tothe COB. People owning more than 10% of the capital of the company also have to providethe details of any capital sold back to the company. Once the capital is knocked down, thedate and amount have to be indicated to the COB.

Besides a buyback of shares for reduction of its capital, the company can also intervene in itsown scrip for other reasons. This influences the market-price. Through the second regulation,the COB had regulated these interventions.

Firstly, the regular working of the market should not be affected so as to create an error in theminds of third persons.

Only one broker should intervene per session. An exception is made of new issues, wheremany brokers may be appointed and would intervene till about a month after quotation starts.

The transactions should not be at a higher price than on the stock-exchange when thetransactions are realised by sales of blocks of shares. They should also remain between thehighest and lowest prices of the day determined on the stock exchange.

For continuously quoted shares (CAC), the transactions or interventions should not have aninfluence on the opening price of the day, nor should it influence any derivative of the scrip.The maximum number of shares should be limited to 25% of the average daily over theprevious five days (for monthly settlement scrip) or over the previous month (for cash scrip).

The company should not intervene in the market for at least fifteen days before announcingits annual results (individual or consolidated). Nor can it intervene between the date it hasspecial information and before such information is rendered public. That is to say, even thecompany is not allowed to engage in insider trading.

The third regulation concerns other market players with inside information about companies.Take for example, a large brokerage firm also dealing in legal or accounting consultancy. Thelegal department of this firm may know that a Merger or Acquisition is about to take place. Itpasses on this information to the brokerage division, before the client company itselfannounces this to the other brokers, the press and the public. Obviously, there is an advantageto horizontally integrated firms which other brokers resent.

To placate such other large non-diversified brokers (and shrewd small investors), the COBrequires diversified firms to appoint a "deontologist" - a regulator of a code of conduct, whoensures that all regulations are being adhered to. These firms must themselves erect «ChineseWalls» between their different departments so that confidential information does not flowfrom one division to the other. The object is that no such action or market interventionsshould take place which causes outsiders to suspect that inside information has been used tomake capital gains.

All this to say, the great gambling house has to show that it is not rigged. And it is the COB'sduty to announce rules which enable people to believe that the game is «fair» for all.


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