A final go for pay-as-you-go

At long last, after years of on-and-off preparation, months of testing and weeks of doubt in high places, France is finally to introduce a pay-as-you-go system for income tax on January 1^st, 2019. The inception of this project goes back to the Sarkozy presidency and has been called off or postponed twice, making France look as if it were incapable of introducing a modern income tax collection system that all of its European neighbours have had for many years, in Germany’s case for many decades. Emmanuel Macron would undoubtedly have lost more of his already tarnished sheen as a reformer had he postponed it once again.  The reasons for his ultimate hesitations however reveal a lot about French attitudes to change in general and taxation in particular.

The French tax system as a whole has been designed to raise a huge amount of revenue by stealth. VAT, mostly levied at a rate of 20%, is so embedded in prices that it is practically invisible, levied as it is at the same rate for everyone, of whatever wealth or income. The same is broadly true of CSG, a supercharged contribution to France’s generous welfare system, levied at a flat rate of 8,3% since the beginning of 2018, on a very large base. As a salary deduction, it hardly raises an eyebrow, as most people only look at the net salary remitted to their bank account and pay little heed to this and the many other deductions detailed on their pay slip. Income tax on the other hand, in its present guise at least, has the major drawback of being both progressive and visible – inasmuch as it is paid in specific monthly or quarterly instalments. This is surely one of the reasons why almost 60% of French people don’t pay it all and why its revenue is less than half of that raised from VAT. Pay-as-you-go will make its progressivity more apparent and its visibility, temporarily at least, even greater.

Income tax, like many things in France that have been forged in the fertile imagination of the administration, is more complex than in many other countries, probably more than it needs to be. Over the years, it has been used for multiple purposes, either as a tool of social policy or in the form of incentives to soothe the sting of its progressivity, often both at the same time.  For instance, to promote a high birth rate, families have always been granted generous tax allowances for each child, with very little modualtion for household income; to persuade home owners to pay social contributions for their home-helps and occasional gardeners (and lift them out of the grey economy), half of their total cost is tax deductible; to stimulate the construction industry at a low ebb in the business cycle, investment in build-for-rent housing is periodically subsidised through the tax system; to encourage investment in France’s far flung overseas territories, tax deductions are allowed for investment in real estate,  plant and machinery. And so it goes on. An additional complication for pay-as-you-go is that members of a household are not taxed individually, as in other countries, but together. Thus, if the household rate is communicated to employers, they will have a clear idea of whether a husband earns more than his wife or vice-versa as well as any other income the household may enjoy. To avoid what is considered an unwelcome intrusion by employers into the private lives of their employees, the government has proposed the option of an individual rate of tax.

As in any pay-as-you-go system, the task of collecting income tax will henceforth be largely delegated to companies. So far they have been complaining loudly, especially smaller ones, about this “extra administrative burden”, and the fact that their employees will not only be unhappy that they will be able to guess how much each household earns but also that they will be the first port of call when something goes wrong. While the French are renowned for finding some reason to complain about any reform proposed by their government, this particular complaint sounds very hollow when one considers that businesses have been collecting both VAT and multiple social contributions on behalf of the state for many years and that collecting income tax will probably require no more than an extra line in their software packages. The owner of a flower shop, interviewed on TV a few nights ago was grumbling precisely about this extra “burden”, making it sound as if he would have to burn the midnight oil to make out horribly complex new pay slips, whereas not only has he been collecting other taxes for years but that all of his accounting is probably outsourced to an accountant anyway. Over and above the inevitable glitches that will be recorded in the first few months, it seems safe to assume that businesses will adapt quickly to the new system. Large companies with well-staffed HR departments appear to have done so already.

The much trumpeted psychological effect of lower take home pay is the most difficult to understand from a people priding themselves on their sense of logic and rationality. The lament that “purchasing power will be reduced” by having tax deducted at source is ubiquitous and strongly relayed by most media as well as the opposition parties, clearly keen to strike a blow at Macron and his reforms. In the midst of this collective psychosis the simple answer, “….but you will no longer have to pay income tax in separate monthly or quarterly instalments” seems to have been totally ignored. Speaking on prime time news on the day the final go-ahead was announced, the Prime Minister was at pains to point out that employees would in fact see a better balance in their income tax payments by paying twelve times a year at the end of the month rather than in monthly or quarterly instalments in the middle of the month. His message seems to have made little impact. And yet his “logic” is impossible to fault.

I suspect that, unless there is a serious IT problem, once the system has been in force for a few months, the media frenzy has died down and the opposition has found fresh political arguments, the French will indeed conclude that the new system makes little difference and will probably end up echoing the sentiments of a German employee, interviewed by French television the other night, who said quite simply: “the good thing about our system is that you always know exactly how much you can spend”.

 And from the French government’s point of view, taxation by stealth will have taken another step forward!