French President FranÇois Hollande seems to be feeding competing interests of late. On one hand, the Socialist Party leader campaigned on a platform of strict budget cuts, tax increases and protecting labor. On the other hand, he finds himself inheriting an economy that’s been stagnating the last three quarters—especially with regard to unemployment gains and economic competitiveness. And those competing interests exemplify the French government’s seemingly at-odds moves recently.
Early last month, Hollande released a new budget—including a 75% tax on incomes over €1 million—seeking to reduce the country’s budget deficit to 3% of GDP by 2013. Which could make him among the most popular French leaders ever in Britain and Belgium. The tax raised the ire of France’s high earners and business leaders, with many threatening to leave the country for these friendlier tax locales. (Reportedly, about 300,000 French live in London already.) So a 75% income haircut on France’s business people, entrepreneurs, job creators and high earners might be London’s or Brussels’ gain.
But Tuesday, French Prime Minister Jean-Marc Ayrault announced a €20 billion tax break for companies in an effort to boost businesses’ capital investment and foster greater job creation. The tax break was recommended by Louis Gallois, a former private-sector CEO, in a government-commissioned report on France’s flagging economic competitiveness. The report actually recommended a much steeper tax credit combined with around 35 other measures, including a heavy reduction in social welfare charges levied on employers. However, the French government has avoided sweeping changes to the burdensome welfare state thus far—choosing instead to delay real decision-making on one of the country’s greatest labor-competiveness burdens until “sometime next year.”
This all begs the question ... what’s the point? On one hand, France raises the ire of its business leaders, high earners and job creators by raising taxes and dis-incentivizing their earning, likely leading many to vote with their feet and leave. On the other hand, the country cuts corporate taxes to incentivize job creation and labor competiveness but refrains from making real changes that could boost competitiveness. Seems to us one step forward, one back and one horizontal. All the while, other European countries (PIIGS included) are making progress by rapidly reforming their labor markets to increase economic competitiveness and dramatically cutting corporate taxes to lure corporations to their shores. At this rate, Hollande may just find next year brings a far tougher economic competiveness hill to climb.
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