French News in English
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
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
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)
|4.7 to 7.64
|7.64 to 15.16
|15.16 to 23.54
|23.54 to 45.58
|45.58 to 100
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
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
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
|Less than 26100
|26100 - 51340
|51340 - 90370
|90371 - 146320
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
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
- On Fixed Assets
- On Salaries
- to bescrapped overthe next fewyears
|Tax on Business Offices
- Transfer duties
- Registration fees
- For corporateshareholders
- For individuals
|Ceiling on transactionsof
- Trading activities
- Services and liberalprofessions
|Deemed Net Income
ofMicro-enterprises (aspercentage of declaredtotal income)
- Trading activities
- 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
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
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
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
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
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
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
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
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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