It is perhaps strange to foreign observers that French politicians have become so passionate about a seemingly technocratic aspect of tax policy: whether or not overtime hours worked by employees should be taxed in the same way as normal pay. And yet last night’s parliamentary debate had to be suspended due to the level of vitriol that each side hurled at each other. What we are seeing is not merely an argument over the contents of the delightfully named article L 241-17 of the Social Security Code, but the whole point of tax policy itself.
Previous Presidents have tweaked France’s byzantine tax code; much of Jacques Chirac’s (admittedly limited) domestic legacy is in his progressive simplification and reduction of income tax rates. And then came Nicolas Sarkozy’s five years in power and the spiraling of loopholes and tax reduction schemes.
Many of these were beneficial, and not of his making. Popular tax reduction plans to encourage people to invest in property that would be rented to modest households (a dizzing list of schemes named after their UMP legislative creators: Scellier, Censi-Bouvard, Robien, Borloo…) were introduced and then modified on a yearly basis. The tax return now contains an extra page to deal with them. Deductions were created for employing staff at home to care for children, wash the dishes or teach yogo and creative writing (yes, really). But above all, Sarkozy’s slogan, “Work More to Earn More”, probably the only political slogan the average voter knows off by heart, depended on making overtime pay tax-free.
This measure was designed to ensure that individual employees would be encouraged to work more overtime (because of the increased financial gain) and that employers would be encouraged to allow them to do so because their employers’ contributions were reduced as well. Overtime remained payable at an increased rate as before (time and a quarter or time and a half depending on the number of hours and when the hours are worked). In the good economic years of the Sarkozy presidency (in practice a mere four months…) , the promise was that increased work would speed the economy ahead. When the crunch came and in many industries overtime dried up, the measure looked increasingly anachronistic. Some employers used the mechanism to save on their tax bill for existing hours worked as overtime (the transport industry, perennially reliant on large amounts of overtime by its employees has been one of the largest beneficiaries). It is hard to tell whether any jobs were created or saved by the measure.
A strict fiscal conservative would call the measure an unacceptable distortion (it would, and probably has, encouraged employers to offer shorter-hours contracts and claim the additional time as overtime in some cases). Hollande claimed that it cannibalised new job creation, which, whilst it probably did have an impact on the demand for temporary workers, is probably overblown. In any event, it cost 4.5 billion euros a year – money the government cannot afford to spend on a measure whose economic value is so questionable.
The UMP unleashed a barrage of criticism over the government’s decision to remove the tax break, but not perhaps the criticism one would have expected. Initially designed to encourage longer working hours, and as a first step in the dismantling of the 35 hour working week, much of the criticism has focused on the financial loss to employees who benefited from regular overtime hours who now have to pay tax (again). This new “middle-class stealth tax” (to adopt the talking points that had clearly been doing the rounds) was yet another example of Socialist profligacy.
Whilst it is always unwise to repeal and not replace measures that both have a dramatic impact on take-home pay, and are emblematic of a political era, is this the first step on the road to a new, simpler, more efficient tax policy? The government has announced the end of the popular tax reduction schemes for rental accommodation, but suggests it will replace it with something targeted at the poorest households. Tax breaks for household employees look like they are here to stay. Apart from a new, eye-watering marginal rate of 75% on income tax, it is not clear what the government plans to do.
A longtime goal of the Socialist Party has been to combine income tax with the CSG – a payroll tax which is much less progressive, and to shift to a system where tax is withheld at source by employers (income tax is currently paid in September of the following calendar year, following a tax return being completed by all those who earned anything). This would make the system much more efficient at collecting money and cost a lot less (for the government, at least) to run. The shift would however be costly to implement, probably require the tax authorities to skip a year in assessing everyone’s tax, and raises concerns about employers having access to the personal tax circumstances of their employees. It does not seem to be on the table at the moment. Instead the government has shifted its focus to reducing the cost of employment for business, as I blogged here.
The 2013 budget, which is designed to set out the stall for Hollande’s tax policy (his campaign having made little specific pledges in this respect), needs to have some big ideas and not just big rates. If Hollande’s presidency is going to be remembered for something other than hiking rates, it needs to present a plan for simplification. This need not be regressive (the rich benefit massively from deductions and so clipping them should increase the real rates they paid) provided that tough decisions are made about what deductions should be kept and what should be removed. The 0% rate is extended, as it has been so successfully in the UK, to take the very poor out of income tax altogether. The capping of deductions, mooted at 10,000 euros per individual, is also a good start. Ultimately rates should be simplified, reduced from 5 rates to 4 or 3, with a bottom rate of around 10%, an intermediary rate and a top rate of no more than 50%. The 75% rate is a chimera and the government should find a way of abandoning it quickly.
The UMP never came up with a coherent overall tax policy in its 10 years in power. Whilst they will snipe at the choices made by the government so far, they still have no answer to the fiscal crunch that France finds itself in (and indeed bear a chunk of responsibility for having lavished now partially-reversed tax cuts on the rich in 2007). A window of opportunity exists here for the government to laid out a vision of the French tax system for 2013 and beyond. If it is squandered, it may not reappear. Mere tinkering with obscure articles of Social Security legislation does not create that vision.