In a blog post published today, Laurent Bach, Professor of Finance at ESSEC and co-director of the IPP’s Business Programme, discusses the major discrepancies in the successive revenue forecasts for the current fiscal year.
This post is based on an analysis of these discrepancies (positive or negative) over the last 20 years, and investigates the situation for the current year (which is still ongoing !) in the light of budget documents and available data.
Summary
Laurent Bach explains why and how the corporate income tax (CIT), which accounts for less than 5% of tax revenue, is largely responsible for the overestimation of tax revenue for fiscal year 2024 (by more than €40 billion between the initial estimate in autumn 2023 and the revised estimate in October 2024).
First, there is a tax base effect: profits soar when things are going well, only to fall sharply when things are going badly. Nearly €9 billion in forecasted corporate tax revenue will have disappeared by the end of 2024 because taxable profits for 2023 were more than 10% lower than forecast in autumn 2023.
This still leaves €6 billion of corporation tax that would have evaporated even if profits had been correctly forecast. The most plausible explanation is that companies, which had been very generous with their advance payments of the corporate tax in the wake of the pandemic, have since slowed down their payments. These changes in cash flow behaviour have had an accordion effect on corporate tax receipts.
However, these cash flow effects are not confined to the CIT alone, as companies pay other taxes without actually being liable for them: VAT, social security contributions, etc. This may explain why errors in forecasting revenues from the various taxes often occur in sync, even when the level of economic activity is well predicted, as is the case this year.
The first lesson to be drawn from this analysis is that, in order to avoid the accordion effect of taxes paid by companies, tax collection must be stricter when companies’ liquidity situation can be assumed to be sufficiently strong. The law is already moving in this direction, with one CIT for large companies and another, with more flexible payment conditions, for SMEs. However, this targeting is neither sufficiently discussed nor evaluated in the public debate. If it is relevant, why not extend it to the other compulsory levies paid by businesses?
The second lesson is that the data sources used to forecast corporate tax receipts need to be more instantaneous and more individualized than they are at present. Companies already provide infra-annual accounting information to government agencies and financial markets. A slight tightening of reporting requirements for large companies would therefore be sufficient to improve tax revenue forecasting.
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