Thursday, June 29, 2017

Piketty: Will Macron’s Marchers take power? [feedly]

Will Macron's Marchers take power?
http://economistsview.typepad.com/economistsview/2017/06/will-macrons-marchers-take-power.html

With over 350 seats, the MPs elected on the « La république en marche » (LREM) ticket will have an overwhelming majority in the Assemblée Nationale (Parliament). Will they use it to be in the forefront of reform and renewal of French politics? Or will they simply play a passive role, rubber stamping and obediently voting the texts that the government sends them?

It happens that they will shortly be faced with their first real-life test with the question of deduction of income tax at source. The government wishes to postpone the implementation until 2019, perhaps forever, for reasons which are totally opportunist and unjustified. This big step backwards is bad news for the alleged intention to reform and modernise the French fiscal and social system proclaimed by the new government (a general intention that is unfortunately rather vague once we enter into the details: see What reforms for France), and leads us to fear the worst for what is to come. Now, contrary to what has been stated, the government cannot take this sort of decision without a vote in Parliament which should therefore take place in the coming days or weeks.

There are two possibilities. Either the LREM MP's force the government to maintain this crucial reform and its application as from January 2018, as was already voted by the outgoing Parliament in the autumn of 2016 in the context of the 2017 Finance Act. It will then be clear that the new MP's are ready to play their role fully in future reforms and oppose the executive when necessary. The other option is to follow in the steps of the conservatism of the government, which, unfortunately, seems to be the most likely outcome. This would alert us to the fact that with this new majority and this new authority we are dealing with reformers who are mere paper tigers.

Tax deduction at source and the social contract

What are we talking about? The deduction of income tax at source was implemented in 1920 in Germany and Sweden, during World War Two in the United States, the United Kingdom and the Netherlands, and in the 1960s-1970s in Italy and Spain. France is the only developed country which has not introduced this. This is one of the most archaic aspects of our tax system and our administration. In this respect, we are between 50 and 100 years behind all other countries.

This is all the more regrettable as tax deduction at source would enable a considerable gain in efficiency for all the parties concerned. In the first instance, for taxpayers, who in the present system find themselves paying their taxes one year after receiving the income, when their professional and financial system may well have completely changed. On the contrary, the new system would enable tax payment to be adjusted in real time to the situation of each individual.

In matters of tax administration, this would enable tax officials to focus on more important tasks, in particular on tax inspection and combating tax evasion.

Finally, for businesses: some business leaders, noted for their conservatism, claim that this reform will mean more work for them (the same line of argument has always been used in all the countries in which this reform has been implemented over the past century). The truth is that deduction at source has already been established in France since 1945 for social contributions. In total, income deducted at source amounts to more than 20% of GDP, if one includes all social contributions (including CSG), whereas income tax represents less than 4% of GDP. The extension to deduction at source of income tax will be a source of simplification for our tax system which will ultimately be to the advantage of businesses and all social and economic stakeholders.

In fact, the constant postponement of this reform has led to bureaucratic nonsense of an incredible complexity. A blatant example is the employment allowance (PPE), recently renamed activity bonus (PRIME D'ACTIVITE). At the moment, after deduction at source of social contributions, the wages of a full-time worker earning the statutory minimum wage (SMIC) are reduced by approximately 300 euros per month (1,450 Euros before tax to 1,150 Euro net). Then, if he or she applies for it, several months later the employee will receive the equivalent of 130 euros per month as an activity bonus from the family allowance benefits fund (caisses d'allocations familiales). It would obviously be preferable to deduct less at source, to ensure that each worker receives a higher net wage on his or her monthly payslip and thus be able to organise their lives in function of resources of which he or she is assured, instead of wasting time in uncertain procedures which are random and stigmatizing. Why have we ended up with such an absurd system? Because income tax is not deducted at source. The result is that it has never been possible to pay the PPE (the employment allowance) – which was part of income tax when it was introduced – automatically on the pay slip. This is one of the many concrete situations which could be cleared up if the reform was implemented.

Over and above these practical aspects, which are essential, there is a much broader democratic, political and philosophical dimension at stake in the establishment of tax deduction at source. It is one of the key elements in the clarification of the relation between the State and the tax-paying citizen. It enables the question of taxes and that of transfer payments, the issue of fiscal justice and of social justice, the question of a fair income and that of a fair wage to be considered at one and the same time.

Generally speaking, it would be a grave error to deal with these questions of taxation and mode of deduction as purely technical questions. In the absence of a fair and accepted system of deduction, without consent to taxation there can be no collective capacity to act. Fiscal revolutions are central to all the major political revolutions. Without deduction at source, the social security system could not have been established. Just imagine each wage-earner writing a cheque to the social security fund one year late, for sums amounting to over 20% of GNP? The fact that deduction at source has never been extended to the State taxes conveys a distinct limit to our collective capacity to construct a relationship of trust between the tax-payer citizen and the central State in France. This is an issue which involves our social contract in its totality.

François Hollande's last five-pin billiards shot –

Unfortunately, the issue of generalising deduction at source has been a subject for discussion for decades now in France. On each occasion this reform has been rejected. In 1999, confronted with the protests of part of the tax officials and businesses, the Jospin government finally decided to sacrifice M. Sautter, the Minister who introduced the reform. At the time, it was postponed for one year. That was 18 years ago.

After considerable hesitation, the socialist governments in power between 2012 and 2017 finally decided to introduce a very well thought out project which was voted by Parliament in the autumn of 2016, enabling the reform to be introduced in January 2018. It is of course regrettable that this new system was not implemented earlier, before the elections and not after, to ensure that the reform could no longer be challenged. Doubtless it can be considered a desperate attempt by François Hollande in support of his campaign for re-election and we all know how that ended.

The fact remains that it is a good reform, undoubtedly the most important for decades in the field of taxation. The system formally adopted by the MPs in Autumn 2016 in the context of the Finance Act for 2017 is a good system. In particular, it is based on modern, information technologies (which the German, Swedish, American and British reformers did not have in the inter-war years or World War Two) which enable the transmission in real time and anonymously of all the information required for businesses to apply the correct rate of deduction. All the relevant consultations with tax officials and businesses had taken place, there were no further challenges to the reform, everything was ready for its implementation in January 2018.

Following the productive discussion in Parliament in Autumn 2016, it had even been suggested that taxpayers who so desired could easily choose the application of a neutral rate (which would not take into account any other income they might have, or their family situation) or a customized rate (enabling the spouse who earns less, often the woman, to be deducted at a lower rate than that applied to the other). No other country in history has been able to provide as many guarantees and choices for the implementation of tax deduction at source (this is the advantage of later reforms: we have better technical supports).

When the head reformer buries the reform

In May 2017, along comes a new president, Emmanuel Macron, self-proclaimed 'head reformer' of the country. What did he announce in a press release dated 7thJune, a few days before the first round of the parliamentary elections?- that the implementation of deduction at source had been postponed indefinitely. True; an implementation in 2019 is mentioned. But given that the last postponement for one year dates back to 1999, concern is legitimate. The historical experience of these issues suggests that this type of reform must be implemented at the beginning of the five-year term (quinquennat) especially when they are already fully operational, otherwise there is a high risk of permanent postponement.

All this is particularly worrisome in that the official excuse – that it would place too great a burden on businesses and that the reform was not yet ready – is quite simply not credible.

The German, Swedish, American, British, Dutch, Spanish, Italian etc. businesses have been ready for a century, or half a century (depending on the country) to apply tax deduction at source at a time when information technology did not even exist, and we are being made to believe that French businesses would not be ready to implement this system in 2018? None of these countries has ever reversed this reform and we are still wondering whether France is ready to meet the challenge? The whole thing makes no sense.

The truth is that everyone knows that the real reasons for postponement are elsewhere. It is a question of pleasing the most conservative fringe of business leaders on one hand; but primarily it guarantees maximum visibility for the micro fiscal reform that Macron wishes to implement in January 2018. This is the rise of 1.7% in the CSG (generalized social contributions) enabling the financing of a reduction of 3% in regular social contributions for employees (at the expense of pensioners, in particular). This reform should result in a rise in net salary. Macron wishes this message to come over loud and clear. The implementation of tax deduction at source at the same time might confuse the issue, something which Macron wishes to avoid.

I want to be very clear: this is a particularly lame excuse. Firstly, because taxpayers are perfectly capable of understanding that these two reforms are separate, provided that an effort is made to explain this to them.

Then, because 'fiddling' with the CSG rate and social contributions is particularly untenable in substance. The fact is that retirement pensions of over 1,400 Euros per month are to be cut to raise the monthly salaries of 5,000 Euros, 10,000 Euros or 20,000 Euros. Good luck to the LREM MP's who have to explain the logic of this type of redistribution to their electors. I only hope that when the time comes they will have more common sense than the lead 'reformer'. In this situation, the correct solution would obviously be a reform based on progressive rates, that is lower for the low-income groups and higher for the higher ones, whether it be salaries or retirement pensions.

In any case, it is extremely alarming to see a President take the risk of permanently compromising a reform as structural as the implementation of tax deduction at source, simply to ensure more visibility to a very small tax reform (which, no matter what one might think about the content, is only a minor parametric reform: the rate of an existing tax is being raised, to lower that of another).

 

Lies and bad faith

The last totally dishonest excuse sometimes relayed by complacent or poorly informed media is that deduction at source would be impossible to implement in France due to the 'familialisation or family-based' aspect of income tax, that is the fact that income tax depends on the family situation (dependent children and spouse). In reality, the same applies in all countries. Throughout the world, in one way or another, income tax depends on the number of dependent children with different systems of taxable income or tax reductions. These systems are indeed different from the family quotient used in France, but the rate of deduction to be applied, in consequence, is also a function of the number of dependent children (sometimes in an even more specific way than in France, given that the family quotient is capped in France), and this in no way prevents tax deduction at source from being applied. It should also be borne in mind that in Germany and in the United States, the calculation of income tax depends also on the income of the spouse, in accordance with a system which is close to the marital quotient in France and, there again, this has in no way prevented the deduction at source from being applied for almost a century now. On all these questions, the French reform offers in reality much more flexibility and confidentiality than all similar reforms applied in other countries.

In conclusion: the government communiqué dated 7 June 2017 announced the postponement of the reform, as if everything had already been decided, discreetly specifying that 'appropriate legislative and regulatory measures would soon be taken to organise the postponement'. In fact, even if the new executive power would very much like to do without the checks and balances of parliamentary oversight, this is happily impossible under our current laws. The reform of tax deduction at source with a clear timetable for implementation was formally adopted by parliament (the Assemblée) in the autumn of 2016. This timetable can only be changed and the reform postponed by a new vote in the Assemblée. It is to be hoped that the LREM MPs will know how to seize this golden opportunity to assert their faith in the democratic renewal, the reform and the modernisation of our country.


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