The measure considered to be one of the most emblematic of the promises of François Hollande on tax, the famous 75% rate for people on incomes of over €1 million, was rejected Saturday, December 29 by France’s Constitutional Council. The “Wise Men”of the council, to be clear, were simply rejecting a poorly written text: French tax law does not recognize “people”, but “households”, and introducing a distinction between these two categories would undermine the equality of all on tax matters. So this was not political censorship, as French politicians of both right and left would have us believe. But this case is still very significant for understanding the way in which decisions are taken – or not taken – by the government of prime minister Jean-Marc Ayrault.
A chain of incompetence
Let’s recall the facts. In the campaign for the first round of the presidential election, Francois Hollande, feeling under pressure from the popular Left Front candidate, Jean-Luc Mélenchon, sought a symbolic measure to anchor his candidacy to the Left. Hence the idea of the 75% tax rate on the rich, which was announced on TV February 27, 2012, without discussion with Hollande’s entourage. It is a largely symbolic measure, the expected tax revenue for the French Tresury is limited. But precisely because of its symbolic dimension, it became emblematic of the programme of a candidate who claims to want more tax justice in the face of “finance”.
François Hollande, elected president, then has to introduce the measure. And this is where things get complicated … Normally, the Minister of Economy and Finance (or, failing that, the Minister for the Budget), is responsible for such a measure. So he passes it to his chief of staff, who in turn passes to one of his civil servants to write the text. But it turns out that he ignores the very principles of French tax law and drafts a text that is inadmissible in terms of form, but nevertheless overcomes the legal verifications and ends up in the finance bill. The outrageous thing, in this case, is not the censure of the Constitutional Council, but the chain of incompetence that allowed the text to be tabled in this state.
Appearances and substance
This sad story illustrates the refusal of François Hollande to engage in a major tax reform restoring some sense in a system that has been built by successive measures that are sometimes contradictory.
Two years ago, in January 2011, Thomas Piketty and colleagues Camille Landais and Emmanuel Saez published For a Tax Revolution. We can discuss the thesis of this book, and I am not convinced by all the assertions of my colleague from EHESS. But we cannot deny that this study is an effort to rethink the French tax system in its entirety. François Hollande, had he wanted to introduce this reform – which is now increasingly necessary – had at his disposal a well developed piece of research on the matter. But he has been careful not to pursue this.
There is a minor reason for this: Piketty, although on the Left, is not loved among supporters of Hollande. He was attacked, among other things, for his support for socialist candidate Ségolène Royal in the Presidential race of 2007. But there is another, more important reason: to conduct a deep reform of the tax system implies challenging many privileges and rent-seeking. Clearly, such courage is not currenlty forthcoming.
When you consider the importance given by Hollande, as Presidential candidate, and now the President, to achieve a balanced budget, the urgency of such a reform should be obvious. It would imply closing various tax loopholes [tax exemptions mostly directed at companies] that have developed over the last fifteen years. However, this raises the question of direct cost of the euro for the French economy. These tax breaks, it should be recalled, cost the nation about €70 billion per year, or 3.5% of gross national product (GDP). Of this amount, €50 billion is directly related to business support measures to compensate the loss of competitiveness of the French economy suffered, both inside and outside the euro area, because of the single currency. As long as France remains in the eurozone, these tax loopholes are unfortunately necessary. It would be very different if France exited the euro.
Leaving aside the need for fundamental fiscal reform, in some respects the issue of taxation is actually quite straight forward. In the Finance Act 2013, the French government intends to make €30 billion in tax revenue gains: €20 billion of new taxes and €10 billion in spending cuts. This effort, in itself considerable, will stall growth in 2013. Only the most fanatical of “Hollande” supporters pretend that France will grow 0.8% this year. And yet this €30 billion represents only 60% of what the French treasury could save if France was out of the euro zone, and if it had devalued to restore its competitiveness.
This is the reality. And to avoid facing up to it, the government is focussed on one measure: the 75% tax, which the Minister of Economy and Finance, Pierre Moscovici, admits would yield only €400-500 million at best. 1% of what could be gained by removing a large portion of tax loopholes.
Thus we find ourselves immersed in the world of appearances. The Constitutional Council’s decision is less about a particular measure than a policy of pretence and amateurism. We find other examples of this pretence in the banking bill, which reflects a shameful capitulation to the finance lobby, and the Prime Minister’s refusal to meet trade unionist Edward Martin, [who represents workers of the steelworks in Florange - owned by mulitnational ArcelorMittal - that is threatened with closure.]
The optimism displayed François Hollande, particularly during his New Year speech, shows a striking contrast with the warnings issued by Angela Merkel, who recognizes that the euro crisis is far from over. It would not be surprising if the Chancellor is preparing her people to radical decisions on this subject. Anyway, it is not by denying reality that you change it. On the contrary, by accepting it, we can implement real change.
In a world where national interests assert themselves with increasing force, the stubbornness of the French Government, that is presented to us – there should be no doubt – as “courage”, whether on the issue of the euro or that protectionism, borders on suicide. The Japanese government has understood this well, rejecting criticism of its monetary policy from other G20 countries, and preparing to massively devalue the yen in the coming weeks.
The year 2013 will be crucial. More than ever, the economic, but also social and political, future of France is heavily determined by its membership of the eurozone. Today, 62% of French regret the disappearance of the Franc, a proportion that reaches 77% among workers and employees, which is perfectly normal because they have been hit hardest by the single currency. As long as nothing changes on this point the country can only sink further into recession or depression. Policy pretenses and appearances will end, but this risks having tragic consequences. A little courage is needed today to avoid having to demonstrate rather more courage in the near future.
This article was originally published in French at Memoires des Luttes, and has been translated by Tom Gill.