Continuity: "Sarkozy n'a pas fait que des conneries."

Now it's official: Hollande's competitiveness policy is in a direct line of descent from Sarkozy's:

"Sarkozy n'a pas fait que des conneries. Il s'est trompé en voulant faire les choses de manière précipitée et en choisissant la TVA, mais réduire les cotisations famille n'est pas idiot", reconnaît un conseiller qui travaille sur le sujet.

The goal is to reduce payroll taxes (in this case, cotisations familiales) paid by the employer, in the hope that the cost savings will be reflected in the selling price of manufactured goods, thus increasing French competitiveness. The tax burden formerly incident on payrolls will be spread to a much broader base, probably via the CSG. The left prefers this to the social VAT because it is less regressive, presumably, although the precise details of the new tax, not yet announced, will be important here.

The Budget

Taxes will be raised in France. Although the government has emphasized tax increases on high earners (75% on individuals earning more than  €1 million and creation of a new 45% tax bracket), a substantial portion of the increased revenue comes from freezing the current set of tax brackets (that is, not adjusting for inflation), a decision already made by the Fillon government. Call this a subterfuge or not, it extends the effective tax hike to some 36 million individuals. Coupled with spending cuts, this represents a serious contraction of the economy. France may have no choice if it is to keep its borrowing costs in line, but the likelihood is that this budgetary contraction will push France into recession next year. Since similar contractions are occurring across Europe, and since the countries of the EU trade intensively with one another, these national contractions will be mutually reinforcing. It is hard to see how Europe avoids a fairly sharp recession next year, and this may upset the budget calculations of any number of countries, including France.

A wave of layoffs is to be expected. Arnaud Montebourg, the minister of productive reinvigoration (I love that title!), has been ubiquitous on TV since taking office. He seems to be following a strategy pioneered by Sarkozy: nurse one's presidential ambitions by cultivating the media in a ministerial role. He chose discretion yesterday, however, avoiding an appearance at the auto show, where pickets from PSA and Ford loudly lambasted him for his failure to prevent layoffs by their firms. The previous day, however, he was on the spot at Arcelor-Mittal, assuring workers that he would somehow save their jobs. On dirait l'avatar de Sarkozy! Productive reinvigoration evidently does not encompass thought that there might be overcapacity in certain industries (steel and autos, for example), and that France's best course might be to shift capital and labor to other uses. The obvious gap between the government's embrace of austerity and Montebourg's one-man dervish effort to stimulate investment with lots of jaw-flapping but without actual funds is likely to end in embarrassment on both sides. Is Ayrault allowing Montebourg enough rope to hang himself, or is he simply using him as a fig leaf to cover the fact that his government has repudiated Keynes and placed its faith in what Paul Krugman calls the confidence fairy?

Types of Taxation

Via Dylan Matthews:

Taxing Virtue

Well, I've heard of sin taxes, but the Germans have now decided to tax virtue: you have no right to join a church unless you pay the church tax. Perhaps this was adopted on the theory that society ought to tax things it wants less of, like cigarette smoking and greenhouse gases. In France, however, a church tax wouldn't net much revenue. A tax on unauthorized use of the imperfect of the subjunctive might do better.

Taxes: Taking a Bigger Bite

Henri Sterdyniak analyzes the French tax structure and wonders if Hollande can really take a deeper bite without severely reducing household demand. This is the dilemma of austerity and pro-competitiveness measures, and Sterdyniak argues that France is at the upper limit of what it can tax its citizens and firms.

Le gouvernement doit marcher sur une crête étroite entre les préoccupations de justice sociale et celles de préservation de la demande des ménages, celles de compétitivité des entreprises et de santé financière des banques et le risque d’évasion à l’étranger des plus riches.

Fears of fiscal escape abroad may be exaggerated, in my view, but fears of falling demand are more reasonable. Sterdyniak:

Les mesures de hausses d’impôt déjà prises ou annoncées par le nouveau gouvernement représentent 20 milliards d’euros en année pleine (voir tableau 3). Elles ont permis de rendre notre système fiscal plus juste, en augmentant la taxation des revenus du capital, en supprimant des niches fiscales ou sociales injustifiées, en luttant contre l’optimisation fiscale, en augmentant la taxation des successions. Seule la suppression des exonérations des heures supplémentaires touche les classes populaires et moyennes et risque d’avoir un effet important sur la consommation, mais ces exonérations constituaient une niche fiscale et sociale économiquement contestable et brisaient l’universalité de la CSG.
Toutefois, le rétablissement du barème antérieur de l’ISF, mais sans bouclier fiscal, aboutit à des prélèvements importants sur certains ménages que le Conseil constitutionnel n’a accepté qu’à titre temporaire : l’ISF devra être repensé. Du point de vue de l’équité fiscale, il serait souhaitable qu’il frappe ceux qui échappent à l’IR : les propriétaires de l’appartement qu’ils habitent et les bénéficiaires de plus-values non-réalisées.

And still it won't be enough:

Reste une quinzaine de milliards d’euros à trouver pour satisfaire aux objectifs fiscaux du quinquennat, parmi un ensemble de mesures envisageables qui pourrait rapporter jusqu’à 40 milliards d’euros, frappant surtout les ménages.
Ces mesures poseront toutes des questions d’acceptabilité par les personnes concernées, que ce soit les retraités, les fonctionnaires, les non-salariés. Leur impact sur la consommation risque d’être important. Imposer à la CSG-CRDS les loyers fictifs des propriétaires-occupants pourrait rapporter plus de 10 milliards d’euros mais serait très impopulaire. Remettre en cause certaines avantages fiscaux des revenus du capital (exonération des PEA et de l’assurance-vie, l’abattement forfaitaire sur les dividendes) pourrait rapporter 2 milliards d’euros. La remise en cause de la TVA à taux réduit des hôtels, cafés, restaurants rapporterait à elle seule 5 milliards d’euros. Faut-il procéder par petites touches, au risque d’accumuler les mécontentements ? Faut-il une grande réforme abolissant toutes les niches fiscales afin de revoir à la baisse les taux du barème ?

No Longer Passing Between Raindrops

On his inauguration day, François Hollande was drenched by heavy rains, but in the ensuing months he seemed to passer entre les gouttes, as they say. No longer. His approval rating has been falling sharply:

Un effritement à l'ifop (moins 2 points), un fléchissement chez CSA et TNS Sofres (moins 5 points), un affaissement pour Ipsos (moins 11 points).

The reasons will be clear to anyone who has been reading this blog over the past few weeks. Hollande's program has been looking increasingly incoherent. Any pretense to combat Europe-wide austerity seems to have been shelved. He has meekly accepted the fiscal pact, which he had promised to renegotiate. While that promise has been forgotten, other promises--to subsidize youth employment, roll back gasoline prices, hire new policemen and teachers--have been kept, but so has the insistence that the budget will somehow be balanced to respect the fiscal pact. Some tax increases have been announced, but not enough to compensate for the new spending.

The next few weeks may well prove decisive. Either he has a real plan in mind, or he intends to hold these contradictory good intentions together with chewing gum and baling wire, in which case the whole contraption may well fall apart, triggering protests from both his left and his right. I wish him well, but at this point it is hard to see where he is headed. If, in fact, his goal is the "balance-budget stimulus" recommended by Joseph Stiglitz, then he really owes it to the country to lay out in detail how he will shift government spending priorities to bring about growth while at the same time raising revenues to meet the requirements of the fiscal pact, which he now apparently supports.

Budget Control

Mediapart has published a draft of the law implementing the fiscal pact in France. The draft envisions the creation of a High Commission of Public Finance, which will be charged with monitoring compliance with the terms of the fiscal pact and reducing expenditures deemed excessive in case of divergence. In particular, control of social security and local government expenses is to be exercised by the High Commission. The government insists that this text is merely a draft.

The Travails of Wealth

Imposing a 75% top marginal rate on incomes over €1 million has surely brought François Hollande a lot of attention, in addition, presumably, to some number of votes in the election, which may well have contributed to his margin of victory. The New York Times takes notice of the policy today with a certain amount of the usual disbelief: "What? 75%, you say? Can they get away with that?" In search of proof that such a "confiscatory" tax rate will wreck the French economy, the Times intrepidly sets out in search of tax accountants and their clients. But despite a good deal of heavy breathing, it doesn't come up with much:

“Should I be preparing to leave the country?” the executive asked Mr. Grandil.
The lawyer’s counsel: Wait and see. For now, at least.

Or, to get right down to the nitty gritty, we can look at actual numbers:

A tax accountant in Paris with many wealthy clients, Steve Horton, has calculated that a two-parent, two-child household with taxable annual income of a bit more than 2.22 million euros ($2.75 million) now has after-tax take-home pay of about 1.1 million euros ($1.35 million) under France’s current tax system.
That household would end up with 780,000 euros, or $966,000, if the Hollande tax took effect, Mr. Horton says. (The same family, with comparable income in Manhattan, would take home $1.55 million, the dollar equivalent of 1.25 million euros, after paying federal, state and city income taxes, he calculated.)

"Confiscation" looks a little less bleak now. A family of four should be able to get by on $966,000 after taxes, even in Paris. Perhaps the rich won't be forced to avail themselves of the privilege they share with the poor, to sleep under bridges, after all. And if Johnny Hallyday and Laetitia Casta decide to make their homes elsewhere, France will still have Sylvie Vartan and Sophie Marceau to console itself.

But what about the disincentivizing effect of high marginal tax rates, you ask? It's not clear that there are any, but economists convinced that entrepreneurs will go on strike if limited to a million a year will now have a natural experiment with which to prove their contention, if only they can somehow control for all the potential confounding variables, which are legion. To me, it's always seemed that one of the great attractions of building a company is the power that goes with controlling it. The income is nice, to be sure, but power, they say, is the greater aphrodisiac.

Le Cacheux on Competitiveness

Jacques Le Cacheux has an excellent analysis of France's competitive position and of proposals to improve it. Among other things, Le Cacheux notes (as I have repeatedly emphasized here) that France has a serious problem in manufacturing due in part to high unit labor costs in that sector:

Pourtant, l’indicateur se référant à la seule industrie manufacturière délivre un message bien différent (graphique 2) : en moyenne depuis le lancement de l’euro, la compétitivité-coût de l’industrie française par rapport à ses partenaires de la zone s’est sensiblement maintenue, se dégradant très légèrement sur la période ; mais dans le même temps, l’industrie allemande a, quant à elle, très substantiellement amélioré la sienne – de près de 20%.

This is not the whole story of France's deteriorating current account balance, to be sure, but it is part of the story, and Hollande's determination to attack this problem is praiseworthy. In the remainder of his piece, Le Cacheux carefully analyzes the positive and negative aspects of both the social VAT and the CSG. Here is his bottom line--cautious approval of the Socialist strategy.:

Alléger le coût du travail en transférant la charge d’une partie du financement de la protection sociale vers des prélèvements autres que les cotisations sociales apparaît souhaitable et possible, tout en rendant le système fiscal français plus juste. Pour ce faire, il convient de compenser la baisse des cotisations sociales, patronales, mais aussi éventuellement salariés, par un alourdissement des prélèvements pesant sur la consommation et sur les activités polluantes, afin de modifier résolument les prix relatifs, donc les incitations qui pèsent sur les entreprises et les ménages dans leurs choix de techniques de production et d’emploi et dans leurs choix de consommation ; et de conduire en même temps une réforme de la fiscalité directe qui permette de compenser les effets négatifs de ces modifications sur le pouvoir d’achat des détenteurs de revenus modestes et de rendre l’ensemble des prélèvements directs plus progressifs. Alourdir la CSG sans conduire cette grande réforme[2] serait léser ces catégories.

The New ISF in Images

Under the Socialists, the rich will pay more in wealth tax, more in income tax, and more in the CSG. In short, the entire fiscal program of Nicolas Sarkozy has effectively been repealed. The image shows the increase in wealth tax for various levels of wealth.

Overtime Taxed Again

Another Sarkozy reform disappears: taxation of overtime pay will resume on Aug. 1. There will be no retroactive tax, however. Overtime tax exemption did increase pay for a substantial number of workers, but it probably (the point is mildly controversial) encouraged employers to substitute overtime for new hires, so that its impact on employment was likely somewhat negative.

Le socialisme gestionnaire

Out of power, the Socialists pretended that France's competitiveness problems could be solved by "innovation." Creativity, after all, costs nothing, while the idea of nurturing it can justify the hiring of 60,000 additional schoolteachers. In power, however, the need to compete now, not ten years from now, has seemed more urgent and compelling. So, heeding calls from the Medef and left-leaning former EADS CEO Louis Gallois, among others, François Hollande has signaled his readiness to reduce employer contributions to social security and shift the burden to the CSG, which will broaden the tax base (including to income from capital) while presumably--presumably--allowing companies to reduce prices. Of course the additional burden on taxpayers may reduce demand as well (but, since every cloud has a silver lining, a reduction in demand for imports would in fact be welcome). Apparently, an increase in the VAT has been ruled out, for reasons that are unclear (to me, at least).

Whatever the merits of the move, this is the kind of reversal of direction that makes many people despair of politics. The ease with which firm principles and convictions are shed as a party moves from opposition to government easily leaves the impression that most political debate is Kabuki theater. Alas.

UPDATE: And right on cure, the UMP shows that it, too, can play this mug's game. Although only yesterday it was ready to approve a social VAT, today the idea of a "tax increase on those who work" is anathema:

"Une augmentation de la CSG, pour moi, c'est criminel", a déclaré mardi 10 juillet l'ancien ministre UMP Laurent Wauquiez sur France 2, en commentant la conférence sociale qui se déroule depuis lundi à Paris."La réalité, a-t-il poursuivi, c'est qu'on s'apprête à nous habiller sous des grandes phrases une hausse brutale d'impôt, et à augmenter la CSG mais surtout sur ceux qui travaillent".

Report on Taxation and Redistribution in France

From the Institut des Politiques Publiques, here. I haven't had a chance to read this yet, but it looks quite interesting.

Tax Reform and the Election

A special issue of the Revue de l'OFCE is devoted to the topic.