Tax policy is the most effective and visible weapon of any government in a liberal democracy (the army being the weapon of choice of less democratic regimes). This week the fiscal tanks rolled in to the French economy, with President Hollande’s government unveiling its draft budget for 2013.
Whilst the budget contains no big surprises, two changes in particular have led to outcries and backpedaling by the government within the first few days of its publication. Now the government is playing catch-up, looking accident-prone as well as punitive. Is the pillorying of Finance Minister Pierre Moscovici, and the Prime Minister Jean-Marc Ayrault by the press fair?The 2013 budget confirms the introduction of two major changes that were key manifesto promises of François Hollande, and credit must be given for their early application a new marginal income tax rate of 45%, and a new special super-tax of 75% for earnings over 1 million €. The 45% tax rate has been received without much fuss (the marginal rate will remain slightly higher than that in competing EU countries like the UK and Germany when other payroll taxes are included, but it will only apply to very high incomes of over 150,000 €), but the 75% rate had been something of a headache for the President ever since he announced on live television the measure, seemingly without telling his embarrassed economic adviser (and now Minister for the Budget) who appeared on a different channel an hour later and confessed not to have been aware of the policy. Now with a little mathematical trickery the supertax will apply at 75% including all other payroll taxes and social contributions, and employees receiving one off payments will be able to smooth them over several tax years to stay below the trigger. It will also only apply for two years. Dark rumblings about rich “job creators” leaving France en masse have filled the press since the beginning of the year, particularly in response to this policy. Tax advisers have claimed for months that they have seen a larger than normal number of clients inquiring about their options; the emblematic Bernard Arnault, boss of LVMH, has also recently applied for Belgian nationality. The media suspects it is not to better enjoy waffles and beer, but part of a longer term transfer of his affairs to a state that has become something of a tax haven for entrepreneurs, although he has denied any suggestion of this being motivated by tax matters.
Those very same entrepreneurs, both large and small, this week have been revolting against two more changes intended by the government. Firstly, the growing community of independent contractors, working under a regime called auto-entrepreneurs, which are largely the unemployed or under-employed who work independently for a few hours a week, have revolted against what they perceived to be a persistent attack from the Minister for Small Business, Sylvia Pinel. Pinel, a career political adviser and MP whose background wouldn’t suggest someone who has the experience of totting up the P and L at the end of the month, has defended merchants and skilled tradesmen (a powerful lobby) against what she sees is a cheaper set of social contributions paid by the auto-entrepreneurs who are unfairly competing with traditional sole traders. After claiming that the difference in their social contributions would be removed (given that sole traders pay on the basis of profit and auto-entrepreneurs on the basis of turnover, it’s not clear how this could be done), Pinel now suggests that their contributions will increase by three percentage points (in reality an increase of around 15% based on the figures from the FedAE representing auto-entrepreneurs – largely on those individuals who are already at the bottom of income scales). Full disclosure: I work for part of my time as an auto-entrepreneur and would be happy to pay a little more, however I don’t think I should pay the same effective rate as an auto-entrepreneur who is earning less than the minimum wage…
At the other end of the income scale, those who launch start-ups and sell them on, whether after a short period of time or a lifetime of work, have reacted with fury at the possibility that they could be taxed up to 60% on the capital gain they realise. Branding themselves the pigeons (the “mugs”), they launched a campaign to stop capital gains being taxed as if it were salary. Whilst the 60% rate was only theoretical, the principle was quietly revolutionary – that capital gains from the sale of a business should be treated like pay and subject to income tax. Moscovici has decided to review the position however the suggestion is that income would not be taxed if it is reinvested. The principle, largely unopposed by the now-opposition, from the campaign will remain however: that investments should be taxed the same as pay. This is an overly simplistic and potentially dangerous principle that does not take account of the element of risk involved in investments which justify their differentiated tax treatment. The government would do better to go after investment schemes denuded of risk that are in fact pay (carried interest being the most famous and egregious example of this form of tax evasion).
An old political adage, much over-used and abused, but deliciously succinct nonetheless, goes that to u-turn once is a misfortune, but twice looks like carelessness. The 2013 Budget has been put together largely on the basis of carefully laid plans and well thought out calculations. These two u-turns indicate however that a small chunk of the budget was missing when the government boffins began to look at the detail at the beginning of last month and there has been a last minute search for extra revenue to make up the difference (the governmental version of hunting down the back of the sofa for loose change). The government is dealing with an economic situation worse that it thought it would face, but it is disheartening that its reflex reaction is to raise revenue rather than make careful cuts to public services. The UMP in recent weeks has found a new clarion call against the government: the absence of savings on public spending. The government risks making the case for them unless it can be demonstrated that the extra revenue measures can work without stemming growth.
In any event, the budget has so far proved to be a movable feast with the government on the defensive.