This is their idea of pro growth:

In a speech given in Paris on January 3rd, the President of France Nicolas Sarkozy confirmed that the country will soon see an increase to the national rate of value added tax and a reduction to the mandatory social security contributions paid by employers.

This is on top of the increase in the reduced rate of VAT in France (from 5.5% to 7%) that was announced earlier.

An increase in standard VAT rate (19.6%) in France (even though still under consideration), could have quite a significant impact on EU HICP and FR CPIx

19 Responses

  1. only the pros grow;
    everyone else is distracted putting money into one pocket, and taking in out from two others!

    at least France is modern enough to save money on paperless bullshit;
    don’t they publish all their tax code revisions online?

  2. It (only temporarily according to mainstream micro) shifts the tax burden from employers to employees–thus it’s a nationwide wage cut. Portugal did the same thing a while back. It’s a way to lower wages without inflation, without exchange rate changes, and without nominal wage changes. Basically France has decided to take the same “competitiveness” medicine they’re urging on the periphery.

    1. @Chaz,

      Unbeliavable if that is the reason.

      Here they want to reduce rates that employees pay as íncome taxes and shift the tax burden to comsumption. That would not lower labor costs to employers so I quess excuses must be different. I could not quite never crasp what they were saying.

      Shifting tax burden to consumption would encourage savings, which escape these taxes, and make economic problems worse.

      And of course it is heavily political because it would shift tax burden to low income people because they consume most of their income, while high-income individuals do more saving and thus, for this proportion of their incomes they evade paying these taxes.

      And when tax base has shrunk from incomes to comsumption of course tax rates have to be somewhat higher to collect same amount.

      1. @Hepionkeppi,

        I wonder if this isn’t a cheap way of getting around the fact that the French cheat on their income tax like mad.

        In any case, even if you let the employer keep more money, you take away customers via the higher VAT.

      2. @Hepionkeppi,
        “Here they want to reduce rates that employees pay as íncome taxes and shift the tax burden to comsumption. That would not lower labor costs to employers”

        I think you’ve misread a word from the OP. The tax they’re cutting is paid by employers, not employees. So it really will “work” towards its misguided goal. It will lower labor costs for employers, assuming they do not raise wages to compensate.

  3. I don’t really believe that the employee ends up paying all of the payroll tax. The cost will be borne by some combination of employer, employee and customer, depending on relative market power.

    If the employee invariably ends up paying it, why not simplify the tax paperwork by putting the entire 15.3% FICA levy on the employer? The reason this is never suggested (while employer-only payroll tax cuts frequently are) is that nobody really believes the employee ends up paying all of the payroll tax. :o)

    1. @beowulf, I agree that at a systemic level, costs are shuffled around. But at the margin, where costs are imposed has a big impact. And in a deflationary environment, these costs have more “inertia” than during normal times, because money is not circulating as easily.

      The French must be thinking this is an investment problem and by shifting costs away from business, somehow economic activity will pick up. Of course, since they want to be budget neutral, they shift the costs to the employees, reducing aggregate demand. It is painful to watch.

  4. For increased competitiveness a country needs to cut one or more of the taxes that increase the cost of goods (e.g. VAT, employer funded payroll tax, etc). That induces foreigners to buy more of the country’s stuff. At the same time, demand from the country’s own citizens needs to be cut, e.g. by raising personal taxes.

    So if Sarkozy is aiming for competitiveness, he’s messed it up. The VAT increase makes French stuff more expensive for non-French customers, while the reduced employer contribution to social security costs makes French stuff CHEAPER for non-French customers.

    1. @Ralph Musgrave,
      It is the case of Portugal too. They want to increase competitiveness, but they raise the tax for electricity and gas, increase corporate taxes, and tolls – the so-called exports route will now cost 40€ per trip. The second biggest retailer in the country has already moved to the Netherlands.
      The IMF wanted the Government to cut the employer’s contribution to social security, but the ECB and the European Commission said NO.

      1. @CiG,
        If it increases VAT of electricity and gas for example, those are not refunded. It is just an added cost to producers.

  5. I think the way it’s supposed to work is by reducing exports and stimulating domestic production.

    The idea being that a widget costs:

    price = materials + wages + tax-on-wages + VAT

    the Chinese widget is getting an “unfair” advantage because there’s very little tax on wages in China to pay for a luxurious welfare system (or so say the French politicians, it may not be precisely true, but let’s assume it for explanatory purposes), so even if the Chinese worker wages per unit were the same as the French, the French widget would be more expensive due to the tax effect. By moving taxes from the “tax-on-wages” variable to the “VAT” variable, the competitive advantage of countries with low taxes on wages vanishes, ergo everybody in France can buy French again, hence domestic growth.

    At the margin it could well work for a few things, and thus create 0.0002% domestic growth. The main weakness is that there’s too few widgets where the taxation issue dominates the price difference, and that a developed economy is not that much about widgets anyway.

    1. @CiG,

      But Chinese wages are low because their productivity is low. If there is one fundamental law in economics it is that you can consume as much as you can produce. And usual case is also that you can import as much as you can export. Exports pay for imports. Take Euroland as a whole, for example, and that is the case. There is no trade surpluses or deficits, in any significant scale. Inside of the euroland it is a different story. Huge imbalances.

  6. Well all the talk this week on the slopes is that prices of ski passes are going up in France due to the VAT increase …and across the border in Switzerland they are offering discounts of up to 30% to attract skiers ….

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