France has maintained a relatively high rate of economic growth ever since the end of World War II. During the 1960s, real GNP increased by 5.8% per year, 23% faster than the average for all industrial countries and almost 50% faster than the rate achieved by the United States. Industrial production rose by 75% over the last decade. France was the first Western industrialized country to make use of long-term indicative planning. Its high rate of economic growth was facilitated by a series of multi-year plans which attempted to anticipate the requirements for sustained economic expansion and to gear government policy to its achievement. The sixth such Pian, covering the years 1971-75, aimed at a $1.8 billion increase in annual exports of industrial products to be achieved through increased industrial investment and further industrial reorganization and concentration in larger enterprises. The government has used an elaborate and sophisticated combination of monetary and fiscal incentives to encourage the level and type of new investment needed to fulfill the Plans. Government-owned enterprises play an important role, supplemented by governmentowned banks, specialized credit institutions and control over the allocation of credit to privileged sectors at low rates of interest. Equipment grants by the Treasury averaged over $560 million a year from 1959 to 1965 and $1.25 billion from 1966-70. More than four-fifths of these grants went to publicly-owned enterprises. On the other hand, France has also experienced persistently recurrent inflationary problems. By the end of 1973, the index of industrial prices was 69% above the 1963 level and the consumer price index was 64 percent higher than 10 years ago. The problem of rising prices became particularly acute again in 1973, with the prices of industrial goods increasing by 23% and hourly earning by 15%. As measured by the GNP deflator, French prices increased 4.3% a year during the 1960s, while U. S. prices rose only 2.7%. Partly as a result of the internal inflationary pressures, France has also had recurrent balance of payments problems. Until the end of 1958, it had difficulty in maintaining its official reserves at the $1 billion level. Over the next decade, reserves increased steadily until the end of 1967 when they reached almost $7 billion. By the end of 1969, they had been drawn down to $3.8 billion, after which they rebounded to over $11 billion by mid-1973. At the end of January 1974, French reserves had fallen again to $8.3 billion and a significant decline continued until the spring of 1974. The franc was devalued in 1957, 1958, and 1969. Its value in terms of the dollar was raised at the end of 1971 and again early in 1973. Between October 1973 and the end of January 1974, its value declined steadily relative to the dollar. French tax revenues are relatively low compared to those of most northern European countries, accounting for about 21% of GNP somewhat less than the U. S. The tax system also appears to be significantly less progressive. Payments into its social security system absorbed an additional 14% of French GNP, well above the rate prevalent in western Europe and about 3 times the U.S. percentage. Taxes on income and profits were the equivalent of 5. 6% of GNP between 1965 and 1971, compared to 10-13% in most other industrialized countries. About three-fourths of government receipts are provided by payments into the social security system and indirect taxes on pur chases of goods and services. Corporate income taxes accounted for 2. 1% of GNP in 1971, and much of that became a tax credit for recipients of dividend income. Income earned on operations carried on outside of France are not taxable. Long-term corporate capital gains are taxed at only 10%. Taxes on personal income were only 3.6% of GNP, compared to 9.3% in the U.S. and Germany. Moreover, the effective personal income tax rates appear to be less progressive than in the U.S. and long-term gains by individuals from the sale of securities or properties are not taxable. France pioneered the use of the value-added tax, a more equitable version of the sales tax that has subsequently been adopted by all its Common Market partners. By 1971, the value-added tax provided 41% of all tax collections (excluding social security payments). The French tax system thus seems designed to permit a high rate of savings on the part of upper income taxpayers and to encourage investment in corporate securities and certain other forms of savings. While the corporate tax rate is high (50 percent), liberal tax provision for depreciation and other reserves permits high cash flows in profitable corporations. The system fosters new investment, whether through the use of such reserves or the flotation of securities. (1) Tax Rates Corporate income is taxed at a flat rate of 50%, in However, cluding short-term capital gains which are defined as gains on the cost of assets, less depreciation, that have been held for 2 years. as of 1973, the tax on short-term gains may be paid over a 3-year period (previously over a 5-year period). The full short-term gain is reported Taxes are paid quarterly on The final settlement of the as the current accounting year's profit. Personal income tax is paid at a progressive rate. However, on earned income only 72% of the net salary is taxable. Taxable income may be divided into shares, depending on the number of dependents, with the applicable tax rate being that appropriate to each share. Thus a couple with two children can divide income into 3 shares. Such a couple would pay tax at an overall effective rate of 14.7% on $22,000 of earned income, 23% on $46,000 and 28.5% on $81,000. The highest marginal effective rate is 43. 2% on earned income over $81,000. (The U. S. marginal rate is 58% for income between $76-88,000 and 70% for taxable income over $200,000.) A 42% rate applies to joint returns on taxable income from $32-36,000. As for dividend income, the system is not progressive, each recipient getting a tax credit equal to 50% of his receipts. Non-residents of France are subject to a 25% withholding of dividend payments. The intent of such a tax credit is to avoid double taxation of corporate profits. The "avoir fiscal" system, as it is called, was designed to improve yields to shareholders, to encourage the distribution of dividends by domestic corporations, and thus to encourage investment in common stocks. Depreciation may be charged on the basis of a straight line or declining balance method, using a reasonable normal asset life. The normal straight line rates are 10-15% for machines and tools, 2025% for autos and trucks. If the declining balance system is used, the rates may not exceed 2-1/2 times the straight line rates for assets with a life in excess of 6 years. Companies may shift from an accelerated to a straight line basis, at their option. Depreciation over the life of the asset may not exceed its cost. In the event of a loss, depreciation may be carried forward and deducted from the first available taxable profits. Under this system, for industrial machinery and equipment, a French corporation using the declining balance system may deduct 31.3% of the cost in the first taxable year of the purchase, 67.5% in the first 3 taxable years and 94.9% in the first 7 taxable years. Such capital recovery rates rank well above U. S. rates. In addition to the depreciation reserve, French corporations may establish a reserve to finance the increased cost of inventories, but such reserves must be returned to income by the end of the 6th following taxable year. Reserves may also be set up equal to the uninsured part of export credits. Long-term capital gains (more than 2 years) are sub ject to a 10% profit tax. This applies only to business profits. Long- |