|France Announces Cut in Payroll Taxes for Businesses
By DAVID JOLLY
New York Times
RESPONDING TO calls to make French industry more competitive by reducing labor costs, the Socialist government of President François Hollande said Tuesday that it would cut payroll taxes for businesses. But the government stopped short of adopting the broader changes that an expert panel led by a prominent business executive, Louis Gallois, recommended a day earlier in a report that called for a “competitiveness shock” to the French economy.
Prime Minister Jean-Marc Ayrault, after a meeting of officials to discuss the economy, said in a statement on Tuesday that the government had to act because “France has known 10 years of industrial stagnation.” If the trend were allowed to continue, he added, the country’s decline “would be a certainty.”
The government’s plan to cut payroll taxes by 20 billion euros, or $25.6 billion, over three years is “a cultural shift for the French Socialists,” said Gilles Moëc, an economist at Deutsche Bank in London. “They’ve always looked with suspicion on the idea that there was a labor-cost problem in France.”
To make up for the revenue shortfall, the government plans to raise the main sales tax while also making budget cuts.
The Gallois report notes that France has lost 750,000 industrial jobs over the last decade as the country’s trade balance has deteriorated. Prominent among the report’s criticisms is that the tax burden borne by businesses and their employees — as well as contracts and rules that make it difficult to fire workers — renders French industry uncompetitive.
The centerpiece of the response announced by Mr. Ayrault is a payroll tax cut that will lower the cost of labor for French companies. In theory, that would encourage new investment and reinvigorate exports. The first stages of the tax break will be applied to businesses’ 2013 taxes when they file in 2014.
By 2016, the 20 billion euro tax break would be fully in place and offset by 10 billion euros of yet unspecified spending cuts and at least 3 billion euros in environmentally focused “green taxes,” as well as money from the higher sales tax.
The size of the payroll tax reduction is in line with the recommendation of the government-commissioned report prepared by the panel led by Mr. Gallois, a former chief executive of European Aeronautic Defense and Space. The report offered proposals meant to revive the French economy. But its prospects for success remain to be seen.
The government chose to phase in the reduction over three years, rather than the one or two years Mr. Gallois said was necessary for the full impact. And it rejected his proposal that the share of payroll taxes paid by employees be cut by 10 billion euros.
Mr. Ayrault said the tax credit would work out to a 6 percent reduction in social security charges on workers who make up to 2.5 times the minimum wage, which is now 9.40 euros an hour.
Paying for the measures will require the government to break a vow by Mr. Ayrault in September that there would be no increase in sales taxes during Mr. Hollande’s five-year term.
The decision could prove highly unpopular on the left because sales taxes are among the most regressive levies a state can impose, with the burden falling disproportionately on the poor, who spend a higher portion of their income than the rich do.
The main sales tax, the value-added tax, will rise in January 2014 to 20 percent from 19.6 percent, but the minimum value-added tax, on basic needs like food, will fall to 5 percent from 5.5 percent.
The “intermediate tax,” which covers things like restaurant meals and home renovations, will rise to 10 percent from 7 percent.
Mr. Hollande won the French election in June, and the confidence of many investors, with a promise to bring France’s 2013 budget deficit down to 3 percent — the standard set by the European Union — from about 4.5 percent this year.
But many economists and some of his allies on the left have argued that cutting spending and raising taxes could weaken the economy further at a time when the euro zone is in recession and the global economy is faltering.
The focus on cutting labor costs “is an economic misdiagnosis, it’s a social error,” Jean-Claude Mailly, secretary general of Force Ouvrière, a relatively militant union, told Europe 1 radio on Tuesday. It will lead to “social dumping,” he said, because the Germans will feel obligated to cut their own labor costs. “It will never end,” he added.
France’s welfare state, one of the world’s most generous, is largely financed by payroll taxes. And the so-called social wedge — the reduction in workers’ take-home pay that results from the taxes paid by them and their employers — is among the largest in the world, according to data from the Organization for Economic Cooperation and Development.
Unions and others on the left fear that reductions in financing for the system could lead to pressure for reduction in benefits for workers that include universal health care and solid pensions.
Jörg Krämer, chief economist at Commerzbank in Frankfurt, noted that Germany had gone through its own labor-market restructuring over the last decade. A core element of that program, he said, was a sharp reduction in benefits to the long-term unemployed and a wider availability of temporary work, which put pressure on the unemployed to take any job. The result was a more flexible labor market and more moderate wage demands.
The International Monetary Fund forecast on Monday that the French economy would expand 0.4 percent in 2013, after 0.1 percent this year. Mr. Moëc of Deutsche Bank said the government’s action would probably have little immediate economic effect.
“I don’t want to diminish the symbolic significance of what they’ve announced today,” Mr. Moëc said, “but the impact will probably be less than what the government would like to communicate.” For one thing, he noted, businesses are already facing a tax increase next year, “and this will partially offset that.”
To some extent Mr. Hollande’s government is giving back what it has already taken away. It raised business taxes in July as part of a supplementary budget. The 2013 budget that was introduced in September ended the full deductibility of interest payments, a de facto tax increase.
Mr. Hollande also alienated many of the country’s elite in September by announcing that he would raise the tax rate on all income exceeding $1 million a year to 75 percent from the current 41 percent.
Raising taxes on households to ease the burden on corporations is also tricky for the Socialists because they opposed a similar effort by former President Nicolas Sarkozy.
Speaking Tuesday on TF1 television, Mr. Ayrault denied that the government had gone back on its promises, saying, “The situation is quite serious and I’m looking at it straight on. We’re facing our responsibility.”
The tax cut would have an important impact, he said.
“A company with 20 employees, half of whom are earning the minimum wage, is going to see its taxes cut by about 30,000 a year,” Mr. Ayrault said. That, he added, would encourage the business to invest more and take on more workers.
He estimated that the tax cut would add half a percentage point to economic growth and generate as many as 300,000 or 400,000 jobs by 2017.