More Taxes, Please: We’re French

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Claude Paris / AP

People hold trade union flags during a demonstration called by trades unions against the government's austerity policy, in Marseille, southern France, Dec. 13, 2011.

Europe may be agonizing amid the worst financial crisis since the Second World War, but that still isn’t forcing France to accept the logic of economic liberalism that dominates much of world. That largely “Anglo-Saxon” view has long criticized the cherished French welfare state as too expensive, untenable, uncompetitive, and increasingly indebted–and now sees it as virtually doomed by an inevitable starvation diet that reality has imposed. But as they are prone to do now and again, the French are begging to differ with the rest of the world—and are doing so by defending a social system that’s a deep source of national pride in ways many societies wouldn’t stand for.

True, Paris has responded to the debt crisis—and threat of losing its AAA credit rating—by unrolling not one, but two austerity plans to rein in deficit spending. And true, too, some of that involved painful cuts in French social protection programs. But in picking through the details of that French reaction, some observers are pointing out how France has again shown its penchant for bucking conventional wisdom by devising a debt reduction scheme that relies far less on entitlement reduction than it does on considerable tax increases—Welcome to austérité à la française. For now.

The weekend edition of French daily le Monde patches together analyses of recent deficit-cutting measures unveiled by the conservative government of President Nicolas Sarkozy, and  fleshes out an underlying Gallic logic of “when in doubt, raise taxes”. And — perhaps it’s because the sensation of the French government’s hand snaking into the private pocket is such a common one — Sarkozy’s option of raising taxes before cutting entitlements  is thus far provoking little in the way of public outcry .

As the linked Global Spin story above notes, savings over the first two years of the French plan represent around $26 billion–a total set to increase to $90 billion by 2016. That effort aims to reduce France’s 2010 budget deficit of $199 billion to an estimated $103 billion by 2012, and thereby begin paring back the nation’s sovereign debt of $1.7 trillion (representing a bit more than 86% of GDP) over the next couple of decades.  But in contrast to crisis-ravaged countries like Greece, Spain, and Ireland—which have dramatically slashed spending, frozen or cut public employee salaries, and shrunk payouts from state-funded unemployment and pension programs—French attempts to balance the country’s budget are primarily focusing on boosting revenue via tax hikes. In 2012, only 24% of the expected results from those measures will come from strictures in spending; the remaining 76% will be realized by increased state income from new taxes. The following year cuts in spending will represent 53% of reduced budget deficit—a portion rising to 64% in 2016 according to some readings of the package. Other analyses, however, estimate just over half of the anticipated deficit gains made over the next half decade will come from increased tax inflows—despite average annual growth forecasts of a mere 1% over the same period—with the remainder from actual cuts in spending. That’s not the kind of welfare state dismantling many market liberals abroad might have banked on.

The reason for that French strategy seems obvious. With general elections looming in April, May, and June, France’s ruling conservatives appear mindful that French voters of all political stripes generally hate the idea of pinching the country’s beloved welfare system and social programs more than they do finding their own pocketbooks squeezed with tax rises. Perhaps more than any other society on earth—even among European nations that tend to love their welfare states—the French will not only tolerate very high taxation of personal income to fund their social model, but will also unite across political lines to defend perceived attacks on it. Having weathered multiple, massive protests over reform, the unpopular Sarkozy is presumably aware of the perils of slashing away at programs as he nears an uphill re-election bid–even under pressure from the debt crisis.

The French leader is also presumably keeping in mind that governments in Greece, Spain, Ireland and elsewhere in the euro zone fell to public anger over increased taxes and slashed social programs both being imposed at once. That dire lesson of what one big stick and no carrot can bring about has no doubt shaped Sarkozy’s careful, two stage approach to cutting deficits. (France is not entirely alone in that cautious tack. Despite the initial prediction that Italy’s new government would take on its ballooning debt emergency by seeking both new tax revenues and undertaking deep cuts in entitlement programs, Italian Prime Minister Mario Monti unveiled a package that was mostly new taxation, and very little reform.)

But in cheating his deficit reduction effort with an early emphasis on tax hikes in deference to looming elections, Sarkozy may be setting France up for a future-shaping decision on whether to prolong that approach or not in mid-2012. The reason? Current polls suggest both Sarkozy and his ruling conservatives will be replaced by leftist rivals now running on pledges to revise the back-end of his deficit and debt reduction plans–and shift the target of his initial tax focus. Those opponents (and some independent analysts) decry the measures adopted by Sarkozy’s conservatives as unfairly weighing on the middle class and poorer households, while sparing the wealthy most pain. Were the left elected, it would not only be inclined to hit the rich with far more than the temporary 3% to 4% income tax hikes Sarkozy’s plan calls for, but to dig deep into the some 500 exemptions protecting various forms of personal revenue from taxation—most of which benefit France’s most affluent people. The money the state loses in tax receipts to those exceptions is worth around $90 billion per year—nearly the totality of France’s expected budget deficit in 2012. For that reason some voices–including those from the French center and right–are looking to country’s rich as de facto tax savings that would be of great use in the current debt crisis downpour.

French conservatives counter that raising taxes on the wealthy will simply provoke a capital flight to nations like Switzerland or Luxembourg–a move, rightists argue, that would see a ruling left raise taxes across the board to (partially) offset deficit spending. That’s an ideologically sound accusation, but an unlikely eventuality. With the overall level of taxation in France averaging 49.5% per household in 2010, even many unabashedly leftist economists say there’s a limited range of how much higher taxes can be raised before they seriously shackle purchasing power—and thereby undermine consumption and growth. (That may be true, but high taxes isn’t synonymous with economic or financial ruin. While France’s rate is 5% higher than the European union average, it’s considerably lower than robust economies like Sweden, Denmark, Finland and Norway.) By contrast, debate in France is very much open on untapped revenues now protected by exceptions and loopholes for the rich–and some businesses–with consensus rising among the 99% about the state getting more funding from its priviledged 1%. Meanwhile, there’s also talk in the event of a leftist victory next year about demolishing France’s complex and often opaque tax structure, and replacing it with a more streamlined, transparent, and equitable system that shifts greater financing responsibilities back to top earners.

All that’s not to suggest that there’s a rising and uniform consensus about protecting the welfare state through tax increase–and just where those hikes should hit hardest. There’s just as much debate in France as there is in the U.S. or U.K. about the justice, wisdom, or productivity of “soaking the rich” with higher taxes–and the clashes of opinion on that topic are just as frontal as they are elsewhere. By contrast, the topic of using taxes to redistribute wealth—and safeguard the country’s beloved welfare system in the process—is not only an accepted idea that more economically liberal nations like America would have a hard time understanding; it’s such a slam-dunk notion in France that few people have voiced much anger at seeing their income squeezed harder under Sarkozy’s plan as the crisis has tightened. Where economic neoliberals pronounce the welfare state dead because it can’t be financed, the French reply by pointing out higher taxes can do just that (at least to a point).  Mark that up to the French being the French again–and in a way it never fails to dismay and delight people elsewhere in equal  and opposing numbers.