CHAPTER XIV

TAXES ON BUSINESS

55. The French Business Tax. Established in 1791 and receiving practically its present form in 1844, the French business tax (impôt des patentes) is one of the oldest taxes on business profits, and has served as a model for business taxes in many other countries. The following description of this tax is taken from a recent treatise:1

The tax is defined by the law of 1880, as follows: "Every person, Frenchman or foreigner, who carries on in France any trade, industry, or profession, not expressly exempted by the law, shall be subject to the business tax."

The tax, then, is general. The law aims to reach all profits from industry or profession without any exceptions other than those expressly granted. The omission of any occupation from the published tariff of charges is no reason for exemption; in this case, an administrative ruling is made in order to reach a taxpayer who would otherwise escape.

The impôt des patentes is composed of a "fixed" and a "proportional" duty. The purpose of the law in providing a proportional as well as a fixed duty was, on the one hand, to make a proper distinction between various occupations, and, upon the other, to proportion the tax to the profits realized by persons engaged in the same occupations. The fixed duty, therefore, seems to be a tax on the occupation, independently of the conditions under which it is carried on; while the proportional duty is designed to take account of these conditions.

1 J. Caillaux, Les impôts en France, I, 46 et seq. (Paris, 1904).

THE FIXED DUTY

The occupations subject to the fixed duty are described in three schedules, A, B, and C, which are appended to the law. (1) Schedule A includes the general run of merchants and artisans. Merchants can be divided into three classes: those who sell principally to other merchants (marchands en gros), those who sell both to retailers and to consumers (marchands en demi-gros), and those who ordinarily sell only to consumers (marchands en detail).

In this schedule the fixed duty is based upon the nature of the occupation and the population of the locality. The occupations are divided into eight classes, for each of which nine rates of duty are prescribed according to population. For example, in order to ascertain the fixed duty to be paid by a grocer in the city of Toulouse, it is necessary first to determine in what class his occupation belongs. He will be in the first class if he is a wholesale grocer; in the second class, if he sells both to retailers and consumers; and in the fifth class, if he is a retail dealer. Then, in the second place, it will be necessary to examine the rates of duty applying to the class in which the grocer belongs, and to select the one which corresponds to the population of Toulouse.

(2) Schedule B applies to a certain number of occupations, such as bankers, proprietors of department stores, and water or omnibus companies. It was thought that the population of the locality was not the only element to be considered in graduating the rates for different persons in any one of these occupations; and also that the occupations themselves could not be classified, as are those in Schedule A. Therefore a special charge was established for each of these occupations; and an attempt was made to adjust the fixed duty according to profits, by breaking it into two parts in the majority of cases. The first part is a determinate charge (taxe determinée) which varies for the same occupation according to the population of the locality and, in exceptional cases, according to other circumstances. The second part is a charge based upon the number of persons employed in excess of five, and applies to most of the occupations in the schedule. In some cases, however, such as water, omnibus, and

hack companies, there is no tax upon employees, but simply a special set of charges for these occupations. (The author then describes an amendment of 1893 relating to department stores. This amendment imposed rates which increase progressively according to the number of employees and the population of the city.)

(3) Schedule C applies to industrial pursuits. It takes no account of the population of the locality where an establishment is situated, since this generally has little to do with the importance of the enterprise. Here the fixed duty may be simply a determinate charge, a charge composed of variable elements, or a combination of the two.

The determinate charge is uniform for all taxpayers in the same occupation. It is, for instance, five francs for all tile makers whatever the conditions may be under which they carry on their industry.

The variable charge is intended to take account of the importance of the establishment and to proportion the tax to the size of the plant. The law selects in such occupations whatever appears to be the best index of the probable profits. Thus a brewery is taxed according to the capacity of its boilers; a hat maker, according to the workmen he employs; a chocolate manufacturer, according to the number of workmen and machines in his factory.

THE PROPORTIONAL DUTY

The proportional duty is based on the rental value of both the dwelling house of the taxpayer and the premises used in the profession or industry. The rate of this duty is not uniform, and is regulated by the provisions of a fourth schedule, Schedule D. For persons included in Schedule A the rate of the proportional duty varies from 2 to 5 per cent of the rental value; in Schedule B it is 10 per cent, with a few exceptions; in Schedule C it ranges from 1 per cent to 10 per cent. Often the rental of a taxpayer's dwelling is taxed at a different rate than the rental of the premises occupied by his business establishment. The so-called "liberal" professions, such as those of the lawyer, doctor, and the like, pay only the proportional duty in Schedule D, and are exempt from the fixed duties.

The rate of the proportional duty is generally 6 per cent of the rental value, but in exceptional cases it rises to 8 per

cent.

This general scheme is sufficiently complex; but in its practical application further complexities appear. Thus a person who carries on two or more branches of industry in separate establishments, pays a separate fixed duty upon each establishment. If, however, he carries on two or more occupations in the same establishment, some reduction is made, the mode of computation being peculiarly complex. Similar intricate adjustments are prescribed for the proportional duty under the circumstances just described. Partnerships and corporations give rise to further complexities. The senior member of a partnership pays the entire fixed duty; while, in addition, the junior partners pay a fractional part of the duty proportioned to the number of members in the firm. The proportional duty is paid upon the residence of the senior partner and all the buildings occupied by the firm, but the dwellings of the junior members are exempt.1 Corporations pay merely the fixed duty for every establishment they own. There is also a complicated system of

exemptions.2

Unlike most parts of the French direct-tax system, the impôt des patentes is a rated, not an apportioned, tax. In 1901 its total yield was 211,000,000 francs, an increase of 46,000,000 francs in twenty years. Of this sum 134,000,000 francs was raised for the national government, and 77,000,000 for the departments and communes. The relative importance of the four schedules is shown by the following figures which give

1 The result is heavier taxation of partnerships. Leroy-Beaulieu says that a manufacturer with 1000 employees in a certain branch of business would pay a tax of 10,266 francs if he carried on the business on his own account; whereas if he had two partners, the tax would rise to 15,336 francs.

2 Government employees, artists, and teachers are exempt; also farmers, whose profits are supposed to be reached by the land tax.

the amount collected, under each schedule, of the principal1 of the tax in 1902:

Thus the bulk of the tax is collected from the merchants and shopkeepers, large and small, who are included in Schedule A.2 The theory upon which the impôt des patentes is constructed is the same as that which underlies the impôt personnel-mobilier. Concerning it, Leroy-Beaulieu says: 3

In taxing the profits of industry and commerce we have but three methods of procedure: (1) the government can undertake inquisitorial inspections of books and documents of the taxpayers; (2) the taxpayers may be required to declare their profits, under oath; and (3) we can use external signs, indicia more or less vague, which allow us to value approximately, not the profits of any particular establishment, but those of each category of merchants.

Each method has grave faults. In France, a somewhat unstable democracy where every one is afraid of arousing public envy, the people are very unwilling to allow tax officials to become conversant with their personal affairs. It is feared that, if the officials take a single step across the threshold, they will soon wish to take ten; and it seems preferable to keep them outside the house rather than to contend later to fix a limit to official intervention and control. The maxim "principiis obsta” is universally approved in this matter.

The second method, that of taxpayers' declarations, may be criticised on different grounds. No society is composed wholly of men who are invariably honest; and, when declarations are employed, there are too many temptations to fraud. Doubtless

1 The principal of the tax is subject to additions both for national and local purposes. These additions, made on a percentage basis, bring the total yield up to the figures given above.

2 Of the eight classes of taxpayers in this schedule, the fourth, fifth, and sixth, representing establishments of moderate size, pay over three fifths of the tax.

3 Traité de la science des finances, Pt. I, Bk. II, ch. 8.