IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
The game of representative democracy is such that we constantly have to choose, not between policies, but between programs that are best seen as baskets of policies to be implemented if the candidate supporting that program is elected. The basket that the French President, Nicolas Sarkozy, “sold” to his electors in 2007 was, as always, made of all kinds of policies. But there was one on which he particularly insisted on during the elections and that, in my opinion, brought him the support from many voters: the promise that, if he was elected, individuals who will work more will earn more. “Travailler plus pour gagner plus”— with those words, he was promoting a move away from a society in which the extra money you make is redistributed away from you. At least that’s the way many people understood it.
Once elected this electoral promise was translated into a new law enacted in August 2007: the TEPA Act (the law on Work, Jobs and Purchasing Power). Pursuant to this law, employers do not have to pay social taxes on overtime work by their employees and employees are exempted from income tax on the extra money earned through overtime. The implementation of this law has been complex and there were surely simpler ways to make sure that those who “work more” could “earn more”. But at least, some of the spirit of the electoral promise was saved.
Not for long! Last week, pretending to take into account the disastrous state of public finances, the government announced a series of measures, one of them consisting in greatly reducing the impact of the TEPA law by making it less advantageous for employers to pay overtime (although it is still advantageous for the employees… if their employer agrees to pay them overtime).
What is sad about this measure is not only that incentives to work are hence reduced, but also that it testify to the absence of economic understanding on the part of Sarkozy and his government (one must indeed recall that, since 2007, the government makes no move without prior approval from the President). The roots of the current crisis lays in an excessive redistribution (that is, public spending) unmatched by the creation of wealth in the country. The TEPA law, at least in its inspiration, was pointing in an interesting direction. By abandoning that direction the government shows that its analysis of the crisis is flawed.
The rest of the measures announced last week is unfortunately in the same spirit. Although things are often presented as “planning the niches”, what it comes done to is higher effective tax rates on tobacco, alcohol, sodas and amusement parks, capital gains, corporate income, insurance benefits, and more. And let us not forget the new, but temporary, 3-points increase of the tax rates on income above €500,000 (wages and capital gains included). This new contribution is made to last until the deficit of the State passes again below the magic level of 3% of GDP. Interestingly, many media, knowing that the actual government plans to reach the 3% threshold in 2013, present this new tax on the wealthiest as a temporary measure to last until 2013.
But, with a government behaving like if the crisis had nothing to do with the welfare state, it is a safe bet that the deficit will not be reduced below 3% by 2013. According to the government’s own calculation, a 3-points increase of the income tax rate for the wealthiest will bring in 2012 a pathetic € 200 million in the Treasury coffers. And considering the whole package of new taxes introduced last week, the government expects “to raise” an extra €1billion for 2011 and €11 billion for 2012.
Will it make a difference? According to the National Institute of Statistics, at the end of the first trimester of this year the level of the (Maastricht) debt had reached €1,641.1 billion, the State had borrowed, since the beginning of the year, €41.5 billion, while the agency managing the social security programs had borrowed an extra €20.6 billion. And if one needs more comparisons: the level of public deficit targeted by the government for 2011 is at € 92.35 billion. Again, what the plan announced last week testifies for is a lack of responsibility combined with a flawed analysis of the current situation. But it is true that I am neglecting here one essential element of the present situation: we are only months away from the next Presidential elections.