Source: Visual Capitalist
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This commentary originally appeared in IZA World of Labor on July 10, 2017.
Thomas Piketty
Yet another deferral! The government of Emmanuel Macron and Edouard Philippe had already announced the postponement of the deduction of income tax at source till 2019 for totally opportunist reasons. The risk is that this elementary reform in tax modernisation, awaited in France for decades, may finally never see the light of day, even though the scheme was all ready to come into operation in January 2018. The government has now announced the postponement until 2019 of the replacement of the CICE (Tax Credit for Competitiveness and Employment/ Crédit d'Impôt pour la Compétitivité et l'Emploi) by a long-term reduction in the employers' contributions. This is despite the promise of this reform during the electoral campaign – and the fact that it had also been promised by François Hollande since 2014.
Let me be clear: these two deferrals are extremely disturbing and demonstrate the lack of preparation of the new government in matters of reform in France; or perhaps instead they are an indication of extensive preparation for a cynical approach to government with no real desire for reform.
Let's go back for a moment. When Hollande came into power in 2012, he began by suppressing – wrongly – the reductions in the employers' contributions which his predecessor had just set up. Then, a few months later, he invented the notorious CICE, a complex scheme which aimed to refund to corporations one year later, part of the employers' contributions paid one year before. The new system was totally incomprehensible for companies, who in most instances found they were receiving cheques without understanding why. Furthermore, this type of scheme is always characterised by chronic instability and almost total unpredictability several years ahead, which does not augur well for long-term decisions, including for the best informed corporations.
In reality the CICE only added a layer of complexity to a fiscal-social system which already had far too many. Nevertheless, the whole of François Hollande's technostructure – headed at the time by the present President of the Republic – was quite determined. It was considered a brilliant idea because that enabled the budgetary cost to be deferred to 2014 (the tax credit is re-imbursed one year later, unlike the reductions in contributions which would have been imputed to the State budget as from 2013.) This meant the government could have its cake and eat it: the European deficits would fall immediately and jobs would be created. Unfortunately it was not their lucky day: we had neither one nor the other, partly because of this complex waste of public money.
As early as 2014, François Hollande therefore came to the obvious conclusion. The CICE should be abolished and there should be a return to the long-term simplification of employers' contributions. The only problem is that apparently neither he, nor Emmanuel Macron today, had the slightest idea of how to get rid of this blot on the fiscal landscape which they themselves had created and which, in the mean time, had assumed considerable proportions (over 20 billion Euros per annum). The problem is that what constituted the attraction of the CICE in the eyes of its creators (the deferment of its cost in time) has now become a millstone round their necks. The cost in the year when the scheme is ended (let's assume, in 2018) will be double since the contributions paid in 2017 will have to be reimbursed and those due in 2018 will be reduced. However the political courage to do this is long overdue – otherwise this complex system will go on forever.
The most worrying aspect is that Macron – like Hollande in 2014-2015 moreover – seems to wish the employers to carry the can for the status quo. He has made an offer to employers: the replacement of 100 Euros of CICE by a reduction of 100 Euros in social contributions, knowing full well that the operation will automatically lead to an extra 30 Euros extra corporation tax (because the reductions lead to a rise in the taxable profits, unlike the CICE). Faced with a choice of this sort, it is quite obvious that corporations will always choose to maintain the CICE. This pathetic comedy will have to stop if the government really wants to right past wrongs. The 100 Euros of CICE should be replaced by a reduction in contributions of 140 Euros. The budgetary cost to the State would remain the same (given the extra income from corporation tax).
The saddest thing is that all this fiddling about prevents us from advancing the fundamental debate, namely the reform in our system of financing social protection which is over-reliant on contributions. But we still need to clarify the alternative sources of income. Some people consider that a correct approach would be a social VAT. But the cost for more modest incomes would be high. The only real alternative is a progressive CSG (Contribution Sociale Généralisée – social security surcharge) tax: this should involve all incomes (salaries in the private sector, wages in the public sector, retirement pensions, income from property) using a progressive scale based on the level of total income. Instead of refusing, as a question of principle, any reduction in contributions, the rebels in the Socialist Party would have done well to take up this debate.
What conclusion can we draw from all this? In the first instance, it is not enough to declare oneself a reformer to really be one. Absolute power goes to the head and leads people to lose touch with reality. The French style of presidency with its courts and courtiers does not help. The next thing is that it would be easier for the left to oppose the right and the centre constructively if they began by making proposals. Finally, the time has come to say farewell to the present macromania and discuss fundamentals. This is the best contribution that could be made toward the success of the five-year mandate and the country.
From ProMarket:
How Market Power Leads to Corporate Political Influence, by Asher Schechter: Neoclassical economic theory assumes that firms have no power to influence the rules of the game. A new paper by Luigi Zingales argues: This is true only in competitive product markets. When firms have market power, they will seek and obtain political influence and vice versa.
In 2016, the advocacy group Global Justice Now published a report showing that 69 of the world's largest 100 economic entities are now corporations, not governments. With annual revenues of $485.9 billion, Walmart topped all but nine countries. As the world's corporations continue to grow bigger and more profitable, so does the power and influence they wield: multinational corporations employ vast armies of lobbyists, lawyers, and PR people across borders and continents, and they have more than enough resources to capture regulators and elected representatives the world over.
Yet, the prevailing economic definition views firms as merely "a nexus of contracts" with "no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between two people." How is it possible to reconcile these two views? A new paper by Luigi Zingales (Faculty Director of the Stigler Center and one of the editors of this blog) tries to bridge this gap.
The Medici vicious circle
The neoclassical model of the firm, notes Zingales, is a reasonable description of firms operating in highly competitive markets, where firms have little incentives and fewer resources to distort the rules of the game. Little incentives because in a neoclassical framework firms are relatively small, and thus the costs of these activities tend to exceed their share of the benefits. Fewer resources, because a competitive market does not provide firms with abnormal profits to spend in lobbying activities.
The opposite is true in concentrated markets, where firms enjoy sufficiently high profits to spend in lobbying activity. Some market power is particularly important to gain political influence when cash bribes are relatively rare, writes Zingales. In such an environment, firms gain political power through promises of future benefits. Only if firms have significant market power do they have rents to allocate. At the same time, firms' promises of future rents are credible only to the extent that firms are expected to be around in the future, a prospect greatly enhanced by the existence of some barrier to entry in the markets in which they operate. Thus, firms can gain political power only when they have significant market power. ...
