OWNDuring the debate over the Zucman tax, discussions regarding the impact of taxation primarily revolved around the risk of tax avoidance by individuals. On several occasions, the choice to become an entrepreneur and innovate, or even emigrate when wanting to start your own business was also discussed. Moreover, the phenomenon of emigration is a reality: many American unicorns were founded by French entrepreneurs, after studying in France.
However, the impact of the tax environment does not stop with individuals. This also determines the company’s choice of location in France and, in particular, for economic sectors with higher added value; those who offer the best salaries.
These sectors are key to the French economy, as well as public finances through the tax revenues they generate. However, the presence of these sectors and the very high returns they offer should not be underestimated, as the example of the UK over the last decade shows.
Very high revenues are concentrated in a small number of companies
But this presence sometimes has nothing to do with it. In a series of research articles, we have identified that most high-income communities are concentrated in a small number of sectors and cities. These sectors are essentially business services; a French specialty, our country has gained a comparative advantage in this area while gradually losing ground in basic manufacturing industries.
These cities are the largest urban areas such as Paris, Lyon or Lille. Even in urban areas, high earners work in multiple locations which appears to encourage a clustering effect between businesses and workers.
These results invite us to think that the presence of high-income groups in France essentially depends on the location decisions of a few leaders and the ecosystem that forms around them. The risk is clear: these companies, when faced with a less favorable tax environment, may choose to exit. Business services, which are generally not much hampered by physical borders, can in fact be moved in whole or in part, without interruption, to other countries in the European Union.
For service companies, alienation will be very easy
There are many potential host countries: London, Amsterdam, Milan, Geneva, Copenhagen or Stockholm… Supported by a solid university system, not to mention an attractive tax system, these cities today offer an increasingly high quality of life and economic opportunities. Thanks to labor market reforms and highly growth-oriented financial and educational policies, Sweden, for example, has the second highest number of unicorns in the world, just behind Silicon Valley.
In recent decades, the concentration of the highest-paying jobs has increased in business services, although indicators of income inequality have remained constant since at least the 2000s. These services are an important source of growth worldwide and represent significant productivity improvements.
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Under these conditions, it does not seem appropriate to take fiscal measures, such as the Zucman tax or other measures debated recently in the National Assembly, that would encourage them to leave the country. Instead, we should propose policies that are in line with these trends.
An economy based on business services requires a continuous flow of intelligent, creative, and highly educated individuals. In this regard, the current state of the French education system is unsustainable: inefficient, including for the elite, and unequal depending on the region. Rather than taxing, shouldn’t we pragmatically question the conditions for achieving greater ambition and greater meritocracy in our school systems?
*Éric Mengus and Tomasz Michalski are professors of economics at HEC.
