One of the serious problems of French finance since the war has been the tremendous increase in direct taxation of French citizens. Prior to 1916 direct taxation in France was very light and was based almost entirely on real estate (real estate tax, residence tax, tax on doors and windows), public services (tax for removal of garbage and trash, street and road taxes), business activity (the "patente"), and on income from securities. (The tax on income from securities is not considered in French tax legislation as a direct tax. However, economists and tax experts list this tax as a direct tax, and it is so considered in this article.) The idea of direct taxation of income in France originated in 1914, but application of the idea was delayed until 1916, when the General Income Tax was put into effect. In 1918 direct taxes on salaries, wages, pensions, and annuities, on industrial and commercial profits, on agricultural profits, and on profits from non-commercial professions were put into effect. At the present time direct taxation is one of the most important sources of government revenue in France. The increase in burden of direct taxation on well-to-do or prosperous French citizens deriving their income from salary or from salary and investments in securities (to the exclusion of real estate, business profits, profits from liberal professions, or agricultural profits) from 1914 to 1938 is given in the following table, which is based on a table appearing in the Agence Economique et Financiére of July 29, 1938. Rents are given in this table as they serve as a basis for the residence tax. It is assumed that incomes in general have increased seven times since 1914, while rents have risen only about half as much. In working out the amount of tax due, a married taxpayer without dependent children is taken as the base, and deductions allowed for taxes paid on income received in 1937 are made on the assumption that income in that year was the same as in 1938. It should be noted that deductions allowed for dependent children and income from tax-exempt securities can considerably lower the amount of tax shown in the following table: DIRECT TAXES DUE BY FRENCH CITIZENS DERIVING INCOME FROM SALARIES DIRECT TAXES DUE BY FRENCH CITIZENS DERIVING INCOME FROM SALARIES 8,500 18,000 18,000 25,500 25,500 32,500 32,500 ....... Total Income.... 140,000 140,000 250,000 250,000 350,000 350,000 500,000 500,000 Total Taxes..... 22,279 33,234 55,952 74,964 92,758 114,013 144,480 177,380 Percent of total income paid in taxes..................... 15.91 23.74 22.38 29.99 26.50 32.58 28.90 35.48 Direct taxation in France is applied on behalf of the State, the Departments, and Communities, with a small share of some taxes reserved for certain subsidized establishments, such as Chambers of Commerce, agricultural produce exchanges, and like organizations. Prior to the establishment of the income taxes the so-called "old" direct taxes were apportioned between the State, Departments, and Communities, but with the creation of the income taxes proceeds of the "patente" and the residence taxes were reserved for the departments and communities (the State deducting a share only to cover expenses of overhead and collection). The special Alsace-Lorraine taxes were also reserved for the redeemed departments and communities with the State deducting a share only to cover expenses of overhead and collection. The new income taxes were all reserved to the State. Traditionally, France was formerly a country dependant almost exclusively on indirect taxation for government revenue, but with the creation of income taxes a large part of government revenue is now derived from direct taxation. In 1937, with budget revenues estimated at 43,482 million francs, 11,893 million francs were derived from direct taxation. The following table shows direct tax assessments for 1937 for the income taxes (except for income from securities), the "old" direct taxes, and assimilated taxes, together with the latest figures on collections from the income tax securities. Direct tax assessments run very close to actual collections (though usually well under budget estimates of collections) with the exception of the tax on income from securities, on which collections are usually well above budget estimates. In the following table, most of the taxes are self-explanatory. The "patente" tax is a business tax based on number of employees and on the rental value of premises in the case of individuals or companies engaged in commerce, and on capital and on rental value of premises in the case of manufacturing concerns. The "mainmorte" tax is a real estate tax based on the estimated value of property in the hands of corporations, departments, communities, hospitals, et cetera, which escapes from taxation such as death duties, transfer taxes, et cetera, which naturally become due when property is held by individuals. The "other" assimilated taxes in the table collected to the profit of the State are taxes on transactions interesting national defense or made with public establishments, two mining taxes, a weights and measures tax, and other unimportant taxes. The table given below shows the sharing of direct taxes for the year 1937: *Agricultural Chambers of Commerce, Agricultural Corporations, and other establishments. State share is to cover general overhead and expenses of collection only. 2of which 652 million francs from street and road taxes. STATE SHARE OF DIRECT TAXATION The State share of direct taxes is largely derived from the income taxes, including the tax on income from securities (with assessments-collections in the case of income from securities) from these sources totalling 9,747 million francs in 1937, as compared to 2,147 million francs from the so-called "old" direct taxes and the assimilated taxes. The decline in value of the French franc over the past 20 years (from 5.6 francs to the dollar in 1918 to 36 francs to the dollar in 1938) has so affected salaries, profits, rentals, and all forms of income that this factor must be carefully noted in considering the rising trend of tax receipts. However, tax rates have increased sharply. The three principal direct income taxes--on general income; on industrial and commercial profits; and on salaries, pensions, and annuities--were very moderate in 1918, with the general income tax graduated from 1.5 percent on small incomes to a maximum of 20 percent on large incomes; a non-graduated 'tax of 4.5 percent on industrial and commercial profits; and a non-graduated tax of 3.75 percent on salaries, pensions and annuities. The tendency of the Government until 1927 was to stress the general income tax as a source of revenue and to maintain relative low rates of taxation on industrial and commercial profits and on salaries, pensions and annuities. The maximum rates (on large incomes) of the general income tax were increased to 50 percent in 1920; to 60 percent in 1924; to 72 percent in 1925; and reduced to 60 percent in 1926. During this period the tax on industrial and commercial profits reached a high of 14.4 percent in 1925, but was dropped back to 9.6 percent in 1926, while the tax on salaries, pensions and annuities reached a moderate high of 7.2 percent in 1924, which rate was maintained through 1926. This tax structure was considered unbalanced, and in 1927 a tax reform reduced the general income tax and increased the tax on industrial and commercial profits and on salaries, pensions and annuities as follows: Direct tax receipts started to decline in 1930, and tax reductions in 1934 (maximum rate of general income tax, 24 percent) and 1935 (tax on industrial and commercial profits, 12 percent; tax on salaries, pensions and annuities, 6 percent) failed to encourage business and industry, and thus stimulate receipts. The continued need of revenue forced increases in rates again in 1937 and 1938 as follows: The 1938 rates apply to the roles for 1937 income. For the general income tax the law carries a provision which limits that amount of the tax as follows: "The maximum effective rate of the tax on the basis of the net global income before deduction of the general income tax paid in the previous year is placed at 36 percent." The present situation with a high general income tax compared to relatively moderate taxes on industrial and commercial profits and on salaries, pensions and annuities, is not greatly different from the situation which prevailed before the 1927 tax reform. During this period of constant changes of direct tax rates, the tax on income from securities, which administratively, is not considered as a direct tax in France, was increased steadily from 10 percent in 1920 to the present level of 26 percent in 1938 (16.20 percent for nominative securities). The only important decrease in the rates of this tax was registered in 1936, when the rate was dropped from 24 percent to 18 percent, to be increased again to 24 percent in 1937. 118007 0-39-4 Since 1925, revenue from direct taxation, including the tax on income from securities, has consistently made up slightly more than 25 percent of budget receipts in France. The progress of direct taxation (State share only) since 1920 is shown in the following table: DIRECT TAX ASSESSMENTS IN FRANCE (SHARE OF STATE) (1) Tax on commercial and industrial profits; general income tax; tax on salaries, pensions and annuities; tax on non-commercial profits. {૩} (2) Tax on real estate (built and unbuilt property); patente; residence tax. "Mainmorte" tax; exceptional tax on reserves, and miscellaneous small taxes. Tax year of 15 months. ** Tax year of 9 months. SHARE OF DEPARTMENTS AND COMMUNITIES IN DIRECT TAXES Prior to the war, and until 1916, before the creation of direct income taxes, which are reserved to the State, the State received approximately 50 percent of the proceeds of the "Old" Direct taxes, the remaining 50 percent being divided in almost equal parts between the Departments and the Communities. In 1917 the principal of reserving the proceeds of the "patente" tax and the residence tax to the departments and communities was adopted, and in 1918 the State share of "Old" Direct taxes dropped to 27.2 percent. The State share was maintained at about this level through 1928, but following that year started to decline steadily to reach a low figure of 16.5 percent in 1937. With the exception of assimilated taxes collected almost exclusively on behalf of communities--amounting to 1,532 million francs in 1937--all department and community revenue from direct taxes is derived from these "Old" Direct taxes. The following table gives the department and community shares of tax assessments under the "Old" Direct tax heading, together with the department and community percentual shares of total assessments under this heading for the years 1920-1937, inclusive: Year SHARE OF DEPARTMENT AND COMMUNITIES OF "OLD" DIRECT Share of Share of Percent of Total Assessments |