In France, Evaluating Tax Expenditure Effectiveness Remains a Challenge

This post was first published by Le Monde here.

The inability of the French government to ensure that a particular tax benefit reaches its primary goal – i.e. the assessment of public expenditure effectiveness – lies at the heart of the expansion of public subsidies.

As in previous years, the tax expenditure analysis 2016 by the Cour des comptes, the French Court of Audit, highlights “insufficient alignment between tax expenditures and public policy objectives”. It reports a total of “451 tax expenditures, 179 of which have been in place for more than 20 years without being evaluated. Among them, 37 schemes – accounting for 2 billion EUR – have not been modified since their creation. Moreover, 107 are defined as ’impossible to be quantified’, hence representing an unknown cost for public finances.”

Recently, the Minister of the Economy, Bruno Le Maire, announced the creation of a task force to evaluate the country’s fiscal policy that should submit its first report by April 2020. This is a laudable initiative, but far from being the first of its kind: in 2015, the Cour des comptes called for an exhaustive assessment of tax expenditures to be done by 2019. As recognized by the auditors themselves, “the recommendation has not been implemented because it is not supported by the administration” and, in any case, very often “it is impossible to link a particular tax expenditure to a specific policy objective.” In 2011, the Cour des comptes had analyzed the expenditures granted under the headline of “Solidarity, Inclusion and Equal Opportunities” (a comprehensive scheme including 5 programs covering areas such as poverty, disability and gender gaps), half of which – accounting for 6.5 billion EUR – were never discussed, even if “marked with a zero score”. Indeed, “none of the assessed tax expenditures were linked to performance objectives. Their target is rather defined based on the groups that benefits: “elderly”, “pensioners”, etc., which sounds more like a polite way of indicating that clientelism prevails over a coherent construction of public policy.

This inability to assess tax expenditures is explained by several factors, including “methodologic issues”, as the Cour des comptes explained in September 2016 during a hearing at the French Senate regarding the evaluation of tax expenditures in relation to their effects on sustainable development. Further obstacles included “ill-defined objectives, expenditures tracked with delay, insufficient data on beneficiaries, as well as imprecise estimates of goals’ achievement”. In addition, showing that a specific subsidy is the cause of a given behavior is a difficult task – as stated by Antoine Bozio – Director of the Institut des Politiques Publiques that currently evaluates the effectiveness of the Crédit Impôt Recherche (CIR), a tax credit for research and development (R&D) estimated to cost 5.8 billion EUR in 2018. “How could one estimate the counterfactual R&D of private firms without such a subsidy?” he asks. “What is evident is that the CIR has not been successful in boosting productivity, its primary objective.” This explains why Bruno Le Maire wants to discuss the re-introduction of the cap that the scheme used to have until 2007, when it was eliminated under the presidency of Nicolas Sarkozy – a measure that is estimated to have quadrupled the 1.3 billion EUR in revenue foregone originally announced by Eric Woerth, the Minister of Budget at that time; for a benefit that no independent institution has ever shown to be effective.

Often the beneficiaries of these subsidies are invited to get directly involved by providing their “expertise” to the government. When it comes to large general subsidies, it is AFEP and Medef, two large business associations, who engage in proposing and defending public aid schemes with the president, the minister of finance and both chambers. For sector-specific schemes, the lead is often taken by the different professional associations that offer both, expertise and solutions.

How could it be different when key data is exclusively available to the Executive? In the Nordic countries as well as in the UK and the US, independent researchers have access to tax data, which allows them to assess tax expenditures with regard to one and only one question: whether they are effective. And if they are not, they need to be abolished. Ironically, as mentioned by Antoine Bozio, assessing tax expenditures can cost several hundred thousand of EUR and is often more difficult to be approved than the 100 billion EUR foregone through tax expenditures.

All this notwithstanding, even when an assessment of a tax expenditure creates doubts about its effectiveness, who would be ready to face the political consequences of getting rid of it? “Under the last two presidencies, capping tax expenditures [instead of eliminating them] has been the preferred strategy in order to avoid conflict with their beneficiaries” explains Antoine Bozio. – Bruno Le Maire is ready to take the risk, by eliminating the ISF-PME scheme, a reduction in wealth taxes for those investing in small and medium-sized enterprises, because – he says – “earmarking, doesn’t work!”