Journal of Financial Economics

REF 131 Finance and Taxation

The taxation of capital plays, among other factors, an important role in the composition of households' savings, be it their real estate investments or their financial portfolio. It thus constitutes an important public policy instrument, with major effects on households' welfare, but also on the real economy's access to capital, financial stability and public finance. This article contributes to the analysis of French capital taxation in two respects: first by summarizing the main arguments of the debate on the taxation of capital and its impact on households' saving and investment behavior, and second by comparing capital taxation systems across advanced economies. This approach highlights both the common features between France and its partners (notably the incentives for owner-occupancy) and the specific features of French taxation (such as the high level of gift and inheritance taxes). The most singular feature of the French capital taxation appears to be the unusual complexity of the taxation of savings, and in particular the large number of tax-favored instruments (regulated saving accounts, life insurance...), a practice much less common in other countries.

The more favorable treatment recently granted to household financial assets (repeal of the solidarity tax on wealth (ISF) and the creation of the flat withholding tax (PFU)) certainly does not make it possible to attain the goal that had been set out for these measures (improved financing of business equity capital). There are certainly many reasons for the reservations households have about stocks in our country. Moreover, the virtual abolition of the housing tax puts local governments in a delicate situation concerning the financing of spending, even when curbed. Consequently, in both instances, the feeling that these are temporary solutions remains. To begin with, the proposal is made, in the era of “big data,” to turn to an adapted form of modeling in order to calculate the rental or market values of a building “whose worth can't be estimated”. In order to come closer to European practice, the tax on real estate wealth (IFI) could then be replaced with a reasonably progressive schedule of property taxes, which of course would remain quite inadequate for balancing the budgets of local government. It would therefore be necessary to resort to other resources. Concerning income from property, for tax purposes it is often treated in Europe as income resulting from financial assets. Therefore, both for rents and for real estate capital gains, using the PFU would have the advantage of being simple and fair. A lasting, more unfavorable treatment of income from property could moreover eventually have negative effects on the maintenance of our housing stock and its growth. To increase transfers between age groups, we also advocate encouraging early donations on the basis of full ownership. Finally, to facilitate financing the equity capital of our companies, we suggest a means that is certainly more effective than the IFI: opening a new stage in regard to capitalized retirement, both individual and collective.

French taxes on household savings comport several features. First, their steep level: in 2016, they represented 6 % of Gross Domestic Product (GDP), putting France in first place, tied with the United Kingdom, in the European Union (EU), for which the average rate is 3.8 % (3.5 % in the eurozone). Secondly, these taxes, looked at both separately as well as in comparison with other countries, are characterized by their unstable nature, as well as their complexity and the creation of distortions in favor of certain products or intermediaries, particularly risk-free savings, intermediation by life insurance, and company savings plans. On the basis of this observation, the article begins by questioning whether the taxation of household savings in France is appropriate from a theoretical point of view. It then goes on to evaluate its impact on asset allocations and the financing of the economy. The accent is placed on financial savings, particularly in the second part of the article.

Between 2010 and 2017, French banks were subjected to a roughly 25 % increase of their compulsory withholding taxes, mainly because of a steep increase of specific contributions to the banking sector, in particular to the Single Resolution Fund (SRF). The high level of these withholdings, which weigh on banks, led to the share of financial sector businesses increasing about 10 % within the total amount of compulsory withholding taxes. However, banks are today faced with a triple challenge, regulatory, economic and technological, compelling them to increase their equity capital in a context that weighs on their profitability. This context sheds particular light on the problem of the competitiveness of French banks, which year after year have been subjected to an increase in their tax costs in relation to production costs. Continuing these costs over the long run presents a major problem considering competition in Europe at a time when the cards of the market are going to be partially reshuffled on the backdrop of Brexit, and especially because of the implementation of the banking union and the capital markets union.

The nature of banking justifies the application of a specific taxation for banks. First, considering that financial leverage cannot be disassociated from bank intermediation, it is hardly pertinent to adjust for the “fiscal bias of debt” or to place a ceiling on interest charges as is the case with non-financial companies. Second, measuring value added is no easy task, which explains why most of the developed countries have exempted financial services from VAT, and have adopted alternative mechanisms such as the payroll tax in France. Earnings, in contrast, are taxed in the same manner in both the financial and non-financial sectors, with the exception of surcharges levied in certain countries. Our calculations at the euro area level, based on national accounts, show that the fiscal contribution of financial institutions, as a share of value added, is higher than for non-financial companies, and that this gap has tended to widen since the financial crisis, notably under the influence of new banking levies introduced in several countries. Lastly, there are some complementary features, as well as the risk of redundancy, between bank taxation, contributions to the Single Resolution Fund and prudential regulation.

This paper analyses the effects for companies of this major trend observed over the past two or three decades: the steady decline in corporate tax rates. Contrary to current opinion, lowering the rate of corporate tax does not necessarily favour shareholders; the tax saving is far from remaining in companies' balance sheets. The reason is that the corporate tax has the characteristics of a largely neutral tax: its level has a relatively low impact on the return on capital and the behavior of firms in terms of output and employment. How else could we make sense of the big economies having prospered in the post-war period with tax rates of around or above 50 %? The article shows that the increasing openness of borders and capital markets is a major game-changer, where the corporate tax loses much of its neutrality. Lowering the tax rate creates a one-off benefit for companies in the country that triggers the reduction, before the tax regains its (quasi) neutrality under the effect of the strategic response of the other countries. This is fueling the race to lower tax rates, ultimately futile, but very destabilizing for public finances.

Without claiming to be exhaustive this article attempts to illustrate some aspects of the relationship between finance and taxation. The subject is addressed through three viewpoints. The first one examines the relationship between fiscal decisions related to public budgets and their effects on the design or changes of financial products. The second one shows how some products are used in a creative way to optimize specific fiscal situations such as the level of profits or the amount of dividends. Finally the third viewpoint is about the creation of new markets linked to fiscal decisions, like the carbon tax.

This paper proposes an overview of what we currently know about financial transactions taxes (FTT). I discuss to what extent an FTT can be seen as an efficient tool to fulfill three types of objectives: (1) correcting market failures; (2) redistributing economic resources; (3) financing public expenditures efficiently. Using recent research papers and some new simple computations based on the French FTT, I conclude that an FTT doesn't really seem to fulfill any of these three categories of objectives. This article concludes that, rather than applying the old idea of an FTT, policymakers could use more modern and targeted tools to achieve the same objectives more efficiently.

The accounting standard IRFS have integrated the bulk of derivatives (the off-balance sheet in this paper) in the balance sheet of the banks at the cost of masking their leverage effect. We describe the bank activity and we show that these derivatives correspond to a financial intermediation function of the banking system, which supplements the standard lending role of banks. We show that the banking activity naturally increases the possibility set of the capital market that we define in general terms. As all innovations, this increase bears additional risk. The off-balance sheet appears in this framework as bringing a leverage effect without natural limit. We study what could be the role of different types of taxes: first, correcting and capturing the rents, second, limiting the systemic risk, third, mastering the “growth of the feasible set”. A tax base consisting in financial liabilities (in absolute value) associated to positions on financial derivatives may be viewed as well-focused to limit the growth of the possibility set and therefore of the risk.

The article reviews the proposals and experience of the Pigou taxes (“bank levies”) that were implemented on financial institutions in the wake of the 2007-2008 financial crisis aiming at internalizing systemic risk or other externalities stemming from financial activities, in contrast to direct control of financial activities. It aims at explaining the reasons for the reluctance to generalize this instrument and to broaden its applications. First, introducing a Pigou tax requires several conditions that are not often met. Then, there are several operational bottlenecks when implementing a tax on financial activities in terms of calibration, management of asymmetric information and moral hazard, as well as regarding the governance of the tax. Finally, several instruments of direct control, like the separation of risky activities (e.g. separation of market activities by banks non directly participating in the financing of the economy), appear to be more efficient to ensure financial stability than a Pigou tax. However, the latter may be viewed as close to other instruments of direct control that also affect financial institutions' incentives, like the resolution of distressed financial institutions, but resolution authorities have been granted legal powers that go far beyond simple taxation.

UBS in 2008, Offshore Leaks in 2013, Lux Leaks in 2014, Swiss Leaks in 2015, Panama Papers and Football Leaks in 2016, Paradise Papers in 2017... Since the global financial crisis, scandals after scandals, tax havens are under pressure. Long considered marginal by economists, this issue has been the subject of much academic work in recent years. Studies confirm the massive weight of these micro-States (nearly 10 trillion assets registered, nearly half of foreign direct investments...), their very significant impact on the effective taxation of multinationals, the loss of tax revenue for other States (several hundred billion), as well as the key role played by financial intermediaries. Since the mid-1970s, the BIS has published data on cross-border bank outstandings, which shows that tax havens host nearly 20 % of cross-border outstandings when non-consolidated positions are considered. In addition, the European Union has succeeded in requiring since 2016 its banks to make public their activities in all countries, including tax havens (Country-by-Country Reporting, CbCR). These data show that tax havens account for 18 % of European banks' turnover and 29 % of their profit abroad, while they employ only 9 % of their workforce abroad.

The current set of rules governing the taxation of business income was conceived in the 1920s, in the heydays of the brick and mortar economy, when multinational enterprises created value primarily through low mobile production factors such as labor and tangible assets. Today, because of the booming of the digital economy, the secular connection between the physical presence of a company, through its human and material resources, and the markets on which it makes its sales, fades away. In addition, the current tax system is not properly apprehensive of the new value drivers in a digital and global world, such as the key role of intangible assets, know-how, the ability to exploit data. These highly mobile assets can be located anywhere and notably outside the countries where the customers are located. In this article, we discuss the limits of the current tax system, the possible solutions and the practical difficulties that make it particularly difficult to reach a consensus on a global solution. The digitization of the economy also results in massive changes in the relationship between taxpayers and tax administrations. The later now dispose of increasingly sophisticated tools to collect and control taxes and to fight against tax evasion. We briefly mention this new world, which is still largely unexplored.

A widespread globalization and the on-going digitalization of economic activities raise new challenges for fiscal administrations. These two simultaneous phenomena make it hard to localize profits in the international value chains and in digital activities. Michel Taly, a fiscal lawyer and former head of the French tax legislation, and Pascal Saint-Amans (OECD) discuss the very nature of these issues and their conceivable solutions. The traditional price transfer method faces the changes of companies' business activities. Hence, it should be adapted at an international level. What is at stake are both the amount of taxes raised by governments and taxpayers legal certainty.

Contrary to a preconceived idea which gives an excessive weight to the external resources (FDI, ODA, remittances), Africa mobilizes at first its domestic resources for its financing. The rate of fiscal pressure is situated between 16 and 22 % of the GDP. However, these resources are insufficient by half at its needs for financing of the Sustainable Development Goals (Agenda 2030). The margins of progress regarding fiscal mobilization are not unimportant, both to exploit new deposits and to improve the tax base. How to collect the more and the better so as not to harm the development potential?

This article analyzes the morality of speculation, in light of philosophical texts since antiquity. We aim at providing another approach for our current system. The moral determination of an act depends on the object, the circumstances, the intention and consequences. For this purpose, we study the causal links between need, price and speculation. For philosophers, the shortage, the gain by necessity, the utility of the good and the risk incurred morally justify speculation and the resulting profit. We show that, in practice, causes and consequences are often more and more reversed. The morality of the act is therefore in question. Disconnected from real economy, speculation becomes an end in itself and is potentially a source of systemic risk to the community.

Weanalyze the impact of fund size on fund performance. Using a sample of equity funds in the French market for the period from 2002 to 2014, we obtain a U-inverse relation between these two variables. Fund performance increases first and then decreases with fund size as assets under management reach a critical size. This result highlights the conflict of interest between investors and fund managers. Being payed a percentage of assets under management, fund managers try to maximize the fund’s size. An increase in fund assets, favorable to the manager, may negatively impact fund performance.