Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
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by ,

France is doomed

Nicolas Lecaussin analyzed the French President François Hollande’s interview on March 28 on TV. Nothing has come out of it: no reform, no tax decreases, no incentives. On the contrary, as Nicolas Lecaussin pointed out, François Hollande "stubbornly continues on the path of tax hikes and proposals remote from economic realities."

As Vladimir and Estragon, Samuel Beckett’s two characters waiting for Godot as a savior, the French waited with great impatience the televised speech of François Hollande. Compared to Godot who is a mysterious figure, a stranger, François Hollande is none other than a leftist French president. But both are ultimately absurd. Godot because it will never come and Holland because his proposals are completely disconnected from reality.

At the lowest in the polls (to levels never achieved even by his predecessor, Nicolas Sarkozy), the French president had to show initiative and boldness when all economic indicators of France are catastrophic. The unemployment rate (10.6%) reached record levels. With 3.1 million unemployed, the country is overtaking the level of 1997, the highest ever in the twentieth century. France’s debt is 90.2% of gross domestic product (GDP) at the end of 2012 (€1,833.8 bn), while the deficit reached 4.8% of GDP. Last year, the tax burden increased by 1.2 points, to 44.9% of GDP, an effect of the tax increase (30 billion euros in 10 months), while public expenditure rose by 2.9%, after 2.1% in 2011. Under these conditions, shock reforms would have been welcome.

However, what does François Hollande propose to revive the economy? After the failure of a 75% tax on income over €1 million (the proposal was declared unconstitutional by the Constitutional Council), he tried again by announcing a levy of 75%, at the employer’s cost this time, of remuneration exceeding 1 million. Whilst Great Britain, Sweden or Denmark announced significant declines in the rate of corporate tax, France taxes heavily those who run businesses. In Germany, there is no wealth tax and the tax rate on companies continues to decline: from 30% in the late 1990s, it went down to 26% and it is moving towards 15% for 2015-2016. In France, corporate tax rate is 34%. True, President François Hollande says he is aware that companies are swamped with administrative paperwork or that business transfer in France is too expensive compared to other countries, but promises to address them are fuzzy and do not augur anything concrete.

Concerning the PAYG French system, which is close to bankruptcy (in the next 5 years, € 20 Bn will be missing to pay the pensions of the French), François Hollande did not find better than the old proposal to work longer and contribute longer. Up to 90 maybe, if life expectency continues on this trend? he made no reference to individual saving accounts (horresco referens in France), or even to notional accounts. France is the only Western country to have only one pillar in its pension system.

Those who expected a shift in France were largely disappointed. The country spends each year €135 Bn more than Germany, which has 50 civil servants per 1,000 inhabitants (vs. 90/1.000 in France). The total cost of these public jobs relative to GDP is also 2 times higher in France than in Germany: expenses for public payroll account for 13% of GDP in France, almost the double of the German figure (7% of GDP).

Despite this situation, François Hollande has proposed nothing to reform the French state. He stubbornly continues on the path of tax hikes and proposals remote from economic realities. From saviour he turned into the person signing the death warrant of the country.

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