French Prime Minister Édouard Philippe this month set out his government’s 2018 budget measures, which centre on both reducing public spending while lowering taxes. The target is to reduce the public deficit next year to 2.7% of Gross Domestic Product, and to attain economic growth of 1.7%.
Philippe announced tax cuts worth a total of of 11 billion euros for 2018, along with a series of new fiscal reforms that are to be introduced during the first budgetary year of Emmanuel Macron’s five-year presidency. These include limiting the base of the wealth tax so that it becomes a property ownership tax [1]; partial exoneration from residential tax [2]; and shifting payroll deductions for sickness and unemployment to the “general social contribution”, the CSG [3], enlarging its base to revenues other than salaries. A single standard deduction on revenues from capital will also be introduced, a move originally planned for 2019.
Changes enacted by the previous government that favour the corporate sector will also come into force next year. A tax credit for companies that was introduced under the government of François Hollande, in a so-called “responsibility pact” in exchange for more hiring by firms, will be increased and entitlement to it broadened, while corporate tax will be cut from 33.3% to 28%.
The intention is to compensate for the government's sharp budgetary squeeze – a spending freeze that implies, as Philippe himself has said, a real cut of 20 billion euros – with an "effect of fiscal stimulus in favour of investment, employment and growth". But this in effect assumes that taxation is the only thing hampering growth in the French economy.
Certainly Philippe refers to other avenues for stimulus, particularly the 50-billion-euro investment plan over five years promised by President Macron. But even this, which is only a weak stimulus, could be subject to budgetary priorities. In practice the government is banking on a fiscal stimulus to boost growth.
Just who will benefit from the tax breaks, and what their effects are on social inequality, will be decisive in determining how, or not, they will boost the economy. The French Economic Observatory (OFCE), a publicly-funded independent institution, has looked into the question using the same model that government departments themselves use to measure the redistributive effect of fiscal policy. Its model also included the tax hikes the prime minister has announced, like higher tobacco prices and environmental taxes, such as on diesel.
The results show clearly that the richest 10% of households gain most from these measures, from which 46% of the gains would go to them. And the richest 1% – just 280,000 households – take the lion's share of the gains.
In fact, households in the top 10% but which are not among the richest 1% gain only about the same as those in the ninth decile, that is, households in the top 10-20% income bracket (income levels are divided into 10 equal income segments of 10%, with the first decile denoting the poorest 10% of the population and the tenth decile denoting the richest 10%). And those in this last category are the main losers because they will not be exonerated from the residential tax. So Philippe's fiscal policy amounts to generous giveaways that benefit the “ultra-rich” which, according to OFCE economist Xavier Timbaud, is a similar feature of former president Nicolas Sarkozy's fiscal policies in 2007.
Two measures explain this effect. The exoneration of investments in securities from the wealth tax, and the introduction of a single standard deduction on revenues from capital both obviously favour households whose revenues are derived mainly from capital, in other words, the very wealthiest. It is also not yet clear exactly how much the government will give away: the OFCE estimates the total value of the tax cuts at 9.1 billion euros, well below the government's 11 billion figure. It is hard to evaluate the difference as all the details have yet to be defined.
Despite the bias towards the very rich, the planned tax changes affect all revenue levels. There is little gain for the eighth and ninth deciles – the top 20-30% and the top 10-20% income brackets – at just 0.7% and 0.1% of current net income. The seventh and third deciles – the top 30-40% and the bottom 20-30% – can hope for a 1.5% boost to their net income. The second decile – the bottom 10-20% – gain 1.4% and the fifth and sixth deciles – those just above and below median income – gain 1.3%.
The poorest 10% are penalised by heavier taxes on tobacco and diesel, and will receive an income boost of 1%. Overall, therefore, these measures are strongly skewed towards the richest 10%, who will see a fiscal gain of 2.6%, and mostly disadvantage the poorest segments [4].
The exact impact of these changes will depend on how households contribute to financing them. The OFCE put forward two hypotheses: either proportional to revenues, such as a rise in the “general social contribution” (CSG), or through social transfers. There will probably be a mix of both methods, but it is fair to say that the government's stated desire to cut public spending tends to suggest reductions in social transfers like housing and health subsidies. In that case, once again, the top 10% would be the biggest winners.
If the tax cuts were funded proportionately to income, the top 10% would see a fall of 0.4% in income and the top 10-20% a 1.3% fall. The bottom 10% would see a gain of 1.2%. But if social transfers were used, the top 10% would suffer a 4.1% decline in income while the top 10-20% would see a 2% slide. Only the poorest 10% would benefit, with gains of around 2.1%, the OFCE calculated.
Over and above the details that would clarify the impact of these changes, it seems clear that the government's fiscal policy initiates a transfer of wealth towards the richest segment of the population to the detriment of the upper middle class and/or the least well-off. Yet the macroeconomic effect of such a transfer is highly debateable.
The theory behind of Prime Minister Édouard Philippe’s programme is that increasing the wealth of the richest few eventually benefits everyone below. But that view is dismissed by a number of economists, for several reasons. Firstly, because if this enrichment benefitted growth and employment, it is doubtful whether the size of the economic acceleration would compensate for the net tax breaks that are envisaged. “There would have to be a very sizeable fall in unemployment for a compensation of such a tax transfer, and that is not very likely,” argues Xavier Timbaud. The OFCE forecasts a fall in unemployment of 1.6% over five years, equivalent to 0.3% per year over the same period.
There is no certainty that increasing the wealth of the richest 1% of the French population would actually boost the national economy. A number of economic studies show that the positive effects on the economy from lowering taxes are greatest when they are granted to the least well-off. The wealthiest tend to invest any tax-break windfall on financial markets which promise attractive returns, and productive investment would benefit only marginally from the measures. In the United States or Britain, where such measures were introduced in the past, productive investment has bottomed-out.
On the contrary, tax breaks open up the risk of expanding further speculative bubbles which are already fuelled every month by the European Central Bank. At a time when financial regulation is coming to an end (and while deregulation looms), the attractiveness of the markets is greater than ever. But the financial markets today are increasingly disconnected with the real economy because of the predominance of derivatives and indexed commodities. The stock markets contribute only marginally to productive investment through initial public offerings (when a company is introduced on a public stock exchange for the time) and capital increases, events which have become a fragment of activities in the financial world. There is therefore no proof that the 4.2 billion euros of tax breaks for the richest 1% would boost the French economy.
Meanwhile, economic science has underlined over many years the negative effects of social inequalities on potential growth and productivity and, contrary to what the business lobby suggests, France is not a country with fewer social inequalities than other major economies. France’s Gini index, calculated by the OECD, remains superior to that of Germany. On the other hand, inequality has developed less in France than in Germany over recent years, and precisely because of labour law reforms of the type that the new French government plans to introduce this year.
Far from leading a balanced economic policy programme, the French government is, with the priority of reducing taxes on the wealthiest, engaged upon introducing an economically liberal “shock” comparable to those adopted by the US and Britain in the 1980s, the consequences of which are clear. In sum, Emmanuel Macron’s self-styled modernising government is pushing through an outdated programme, founded upon an outdated theory
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[1] France first introduced a wealth tax in 1982 under the first Socialist government of President François Mitterrand. It was enacted in its present form as the Impôt Sur la Fortune (ISF) in 1989. Edouard Philippe's government plans to turn it into a tax on owning property called Impôt sur la Fortune Immobilière (IFI).
[2] In France each household pays a residential tax (taxe d’habitation) that serves to finance services by local authorities. Households that own their residence also pay a further tax called the taxe foncière.
[3] The general social contribution (Cotisation Sociale Généralisée - CSG) was introduced in 1991 to finance Social Security, which includes healthcare, industrial accidents and diseases, pensions and family support.
[4] For recent figures on average income in France see here and here.
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The French version of this article can be found here.
English version by Sue Landau and Graham Tearse