The move was approved by the government a day after a report called on the Socialist administration to slash payroll taxes by €30 billion ($38 billion) within two years.
The government signalled that easing a business tax burden that is considered a barrier to job creation would be financed by a combination of cuts in public spending and an increase in Value Added Tax (VAT).
France's standard rate of VAT will rise from 19.6 to 20 percent from January 1, 2014. An intermediate rate currently applied at 7.0 percent will rise to ten percent at the same time. The minimum rate will be cut however from 5.5 to 5.0 percent.
The government also announced plans to cut €10 billion from public spending in 2014-15 and said it would introduce new green taxes from 2016 which will boost the public coffers by three billion euros per year.
Unveiling the measures, Prime Minister Jean-Marc Ayrault said the government was adopting almost all of the "shock" measures recommended in a report drawn up by Louis Gallois, one of the country's most prominent industrialists.
"The situation of the country calls for ambitious and courageous decisions," Ayrault said. "France needs a new model."