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Nicolas Sarkozy and the Great 2010 Tax Swindle

by Bernard Mon Feb 9th, 2009 at 07:03:48 AM EST

Last Thursday night, our fearless president invited himself on three -- count them, three -- national TV channels for one hour and a half prime time interview by four journalists from these three most widely viewed TV channels: France 2, the public channel whose top boss will be now directly appointed by Sarkozy himself  (a recently voted law), TF1 and M6, whose owners, Martin Bouygues and Vincent Bolloré, happen to be Saroky's BFF, just like pretty much everyone who counts in the clubby world of French capitalism.

Satirical weekly, Le Canard Enchainé, wrote this snarky headline: "Sarkozy had sworn: No commercials after 8 PM". Rules just apply to the common men, I guess.

promoted by afew

So, our president spoke for over an hour. What were the salient points? Reform!

Sarkozy vowed to continue the reforms he engaged when taking office about two years ago, neolib reforms of course: more flexibility on the work market, drastic cuts in the number of civil servants, reduced health insurance coverage and overall "starve the beast" policies in the health, public education and public television sectors, tax cuts for the rich, alignment on the US foreign policies and its Westernist Islamophobic stance, with our soldiers in Afghanistan and France soon to be back in the NATO's integrated command.

Reform. no matter what Jerome and afew say. Even if the neolib policies have put the world into a hole, our president's plan: keep digging!

The major announcements though had to do with tax policies: Sarkozy decided to abolish a local business tax ("taxe professionnelle") in 2010 and also to suppress the lowest income tax bracket.

Yes, Ronald Reagan is not dead: tax cuts as the universal cure for our ailments is the official religion in Sarkozia.

On the business tax: it's been known for years that this tax is highly problematic (late president Mitterand reportedly called it "the imbecile tax"): it is paid by businesses to the municipality where there are based. Cities that have the good fortune of having large businesses within their boundaries can enjoy a tax windfall while their neighbors can only count on increased property taxes on individual home owners to make both ends meets. Case in point: the La Defense business district where a very large number of French large companies have their corporate HQ. This district is spread over two municipalities, Puteaux and Courbevoie who get most of the tax revenue. I said most because over the years, reforms have tried to alleviate the most unfair aspects by spreading the local business tax revenue over all the municipalities in the same district to try to correct the unequal treatment.

Anyway, the business owners hated this tax and wanted it gone: this will be done next year. Conveniently enough, since the Socialist (PS) is now mostly reduced to local governments, to whom the business tax is a major income, this tax cut conveniently doubles up as a torpedo to his opponents who will have no choice than increasing the taxes on individuals (like property tax) to compensate for this source of income removed by the state. UMP mayors who are collateral victims of this cunning plan are worried, but not too openly (yet).

Income tax: remember that shortly after taking office in 2007, Sarkozy had the parliament enacting a "fiscal shield" limiting the total amount of taxes paid by France's wealthiest tax payers. Now, as pointed out by Pascal Riché at Rue89, Sarkozy is going after the lower bracket of the income tax. Riché suggest this is a move in order to try to get back the lower tier of the middle class, whose progressive impoverishment -- thanks, in part, to Sarkozy's neolib reforms -- is driving them away from the right.

The peculiarity of the French tax system is that hardly half of the households actually pays income tax at all: the other half is exempted because their income is too low -- under the threshold. Income tax is progressive though: the richest pay a proportionally higher share than the poorest -- to everyone according to one's means.

But income tax is so limited in France that it represent only a very limited share of the total state tax income. What's making for the remainder? Several taxes, such as fuel taxes but largely VAT. VAT has the obvious advantage of being invisible (unlike the US, in Europe, prices are displayed with "all taxes" included) and even the half of French households who don't earn enough to pay income tax do actually pay VAT: they have to eat and buy clothing and other necessities -- thus paying VAT. One can even argue that the poorer households pay more VAT that the richest ones -- proportionally, they certainly do.

So a progressive tax reform would aim at increasing the (progressive) income tax base and revenue while decreasing flat taxes like VAT.

Interestingly  Gordon Brown has chosen to decrease VAT in the UK: the opposite of Sarkozy's move. Obviously, Sarkozy could have done without the snide comments vis a vis Brown's policies, but like the scorpion and the fox, it looks like he couldn't help it: it's my nature.

So less taxes for the wealthy, more tax burden for the poorest, with the French state cutting local governments "air supply": this is the great 2010 tax swindle.

Well done, Bernard.  Thanks for this summary.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Sat Feb 7th, 2009 at 06:08:59 PM EST
Bernard, thanks for writing this, it needed to be done!

If I'd add anything, it's the amount of hype around this tax repeal (announcement). It was the big thing in Sarko's speech: I'll tell you what I'm going to do, wait for it, here it comes: Repeal the business tax!!! Ta-daa!!! And the media dutifully made it the central point of his TV show. When, in fact, the repeal of the business tax is an old chestnut of French politics: Mitterand, as you say, called it stupid, and Chirac promised to repeal it (something got in the way...). The notion that repealing it would be a Good Idea has been around for ages. Some shock!

Next, it comes in a context where the central state, thanks to neo-lib policies, has been offloading public services on to local authorities without transferring revenue or giving them competence to raise new taxes. Abolishing the business tax therefore doubly means pressure on public services, because finance can only come through rates and property taxes (see how popular that will make the opposition that holds the majority of local authorities). Starve the beast, you're dead right, that's the name of the game.

"The crisis" is a wonderful excuse for businesses to downsize and offshore production, and for Sarko and the neo-lib right in government to pursue its assault on the public sector while pressing on with the reduction of unit labour costs. Why this is possible is something I must write about soon.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 8th, 2009 at 03:12:26 AM EST
Well, this is why I wanted to highlight the "potshot at the Socialists" angle: the PS is now largely reduced to a party of local governments (municipalities, départements and regions).

For years, the state government has transfered more expensive burden to them while withholding the corresponding tax revenue. In that respect, Sarkozy is continuing Chirac's work. So this final act is a logical denouement, as you pointed out.

More intriguing is the attempt to get back at the lower income group of the middle class: those who earn enough to be in the 50% of the population who does actually pay income tax, but whose income has been actually decreasing thanks to the "reform" agenda. I suspect (gut feeling) that a large part is young college educated people, twenty and thirty something people who have borne the brunt of "structural adjustment" i.e. less income for them and more for their bosses.

There seems to be a growing awareness that this group is definitely breaking up with the right (good news for us, BTW), as evidenced by the election results sorted out by age groups.

Still Sarkozy can't help but continue carrying out the very same neolib policies that will further increase this impoverishment trend. This, coupled with the extraordinary brutal economic slump we're in, leads me to the inevitable conclusion that something's got to give at some point. Unfortunately, an authoritarian outcome, as suggested by E.Todd, is not a far fetched possibility...

by Bernard on Sun Feb 8th, 2009 at 06:43:47 AM EST
[ Parent ]
is that discussing time and again with educated people, they all "agree" that the problem is that France has been living above its means, and has too much debt - and that the solution to that is lower incomes and lower taxes...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 8th, 2009 at 07:46:43 AM EST
[ Parent ]
Worth mentioning here: Crise: le choc est à venir

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 8th, 2009 at 07:45:15 AM EST
Interesting. Too bad it doesn't seem to be available in English language.
by Bernard on Sun Feb 8th, 2009 at 09:02:32 AM EST
[ Parent ]
The pretense that this is a populist tax cut is aided by careful slicing of that salami. The Bush people love to point out that families in the lower brackets will see a greater reduction in their income taxes than those in the top brackets; they hope you won't notice that the main burden on such families is not the income tax but the payroll tax.

That's Krugman, in February 2001.

Time to start photoshopping together Sarko's and Bush's faces, methinks.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 8th, 2009 at 04:11:25 PM EST
Metaphorically, I've been doing that since 2006 at least -although to be strictly accurate, it would be a morphing of Bush and Cheney (I don't think that Sarkozy is Fillon's pupett) on Berlusconi's body.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Mon Feb 9th, 2009 at 12:18:33 AM EST
[ Parent ]

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