Wednesday, 24 May 2017

The sideshow of pay-as-you-go

Only about 50% of French households pay income tax and 80% of them, like myself, pay in ten monthly instalments that are calculated on the basis of the previous year’s tax liability. These monthly payments can be adjusted once a year by taxpayers themselves, if they calculate that their tax bill will be higher or lower than that of the previous year. The tax administration’s website is a little forbidding at first, but once you have got used to it, works well and doesn’t crash. Last year, more than 40% of income tax payers used it to file their tax returns.

If all that sounds fairly straightforward, by French standards it is! I have therefore never understood why the previous government decided to shift to a pay-as-you-go system for income tax from 2018 onwards. After all, the simplest way of generating tax revenue from income, more or less as it is earned, would be to make monthly instalments compulsory, a change that would be simple to legislate, fairly painless to introduce and unlikely to trigger massive protests.

The new government has clearly been thinking along these lines as one of the first announcements by the new budget minister, Gérald Darmanin, was that the scheme would be postponed. Many consider that it will be abandoned altogether. There appear to be a number of reasons, both economic and political, for this change of heart.

Many businesses and their representative organisations have complained that they have better things to do than to act as the government’s tax collector. While it is true that pay-as-you-go income tax is standard practice in many other countries, businesses in France are clearly afraid that the finance ministry, faced with a simple or a complicated way of doing things, will go for a complicated one. In a country where the Labour Code and its appendices is a weighty tome that could knock a man unconscious at 20 paces, their fears are not unfounded. And it would not simplify matters for the taxpayer either, who would still have to fill in a tax form every year, both to report income that cannot be taxed at source and as a justification for a possible rebate.

But there are also some more overtly political reasons that go to the very heart of the French “social model”, as it is generally described. Broadly speaking, a system based on aspirations to equality and inter-generational solidarity, managed by the state. As health care and pension contributions are both compulsory and tied to employment, they have always been deducted at source, as well as unemployment and work-related accident insurance premiums and so on. There is therefore a fairly big difference between gross salary and take-home pay. Most people, not unnaturally, look only at the amount credited to their bank account every month, oblivious to the true cost of their health care and pension provision, of which their employers pay a far larger proportion. The self-employed are treated differently of course, and they know only too well how much their health care and pension provision costs them, especially as they are also required to chip in a portion of the “employers” contribution. And all this in a country, it should be noted in passing, which, according to Eurostat’s figures for 2014, is one of only two countries in the EU that spends more than 11% of its GDP on health care and where the amounts that patients have to pay out of their own pockets are extremely low. So much so in fact that it is now rare for patients to have to open their wallets at all when they consult a doctor, undergo surgery or pick up €100 worth of prescription drugs at a pharmacy.

This is where the obvious political challenge arises. Governments in general, and French governments in particular, prefer to give people the impression that the money they earn is “theirs” and that “the state” will take care of them in sickness or old age, rather than launch into complicated and politically loaded explanations about the funding of their heath care and pensions, always designed to appear as painless as possible. Emmanuel Macron has so far been no exception. In his presidential programme, he promised that employees’payroll contributions would be substantially reduced, entailing an automatic increase in purchasing power without a concomitant increase in salary. If however the pay-as-you-go income tax levy were to be introduced in January 2018, the beneficial effect of payroll tax reductions would be cancelled out by the perception of an overall loss of purchasing power, as the difference between gross and net salary would become bigger rather than smaller. Opposition politicians, particularly of the populist variety, would be quick to exploit the situation by claiming that working people were worse off than before and that the President had not delivered on the promises of his campaign.

But even that is not the whole story. The pay-as-you-go project is, in reality, little more than a sideshow, especially as revenue from personal income tax represents only about 20% of the total tax revenue raised by the French state. Behind it, there are clearly some fairly radical ideas, as yet not fully fleshed out by the new President and his government, about the future funding of an increasingly costly health care and pension system, as people live longer and require proportionally more health and social care as they get older. For France’s social model to remain viable, more money will have to be raised from somewhere. Despite recent reductions in their contributions, businesses have been claiming for years that they pay too much and must contribute less if they are to remain competitive.  The speed with which the new President and his government are trying to reform France’s rigid labour market is dictated, among other considerations, by the desperate need to raise employment levels and therefore the overall level of payroll contributions, as well as generate more consumer spending and, by extension, more VAT, by far the biggest contributor to overall tax revenue. Discussion of a promised increase in the CSG, a broad-based tax on all income that also finances the health care system, has so far been muted but will undoubtedly re-appear. Macron has promised radical pension reform but has also gone on record as saying that it will take the whole of his five-year term to put in place. Judging by previous, and less ambitious, attempts to reform France’s pension system, that may be optimistic. All these issues and their massive financial impact will only emerge more clearly as the future government comes to terms, as all its predecessors have had to, with greater or lesser degrees of success, with the competing requirements of reducing unemployment, cutting public spending, reducing a mountain of debt that is close to 100% of GDP while allowing working people to keep more of the money they earn.

Whatever spin a skilful President and government try to put on future developments, it will be a fiendishly difficult circle to square. My monthly income tax payments may vary slightly, upwards or downwards, in the years ahead, but I am a lot less sure about the prospects for a quick fall in the overall tax burden. And preparing to pay more from my own pocket!

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