French government takes risky gamble with tax reform plan

Reuters News
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Posted: Nov 19, 2013 2:06 PM
French government takes risky gamble with tax reform plan

By Ingrid Melander

PARIS (Reuters) - France's embattled government has taken a gamble by announcing an overhaul of the country's complex tax system, a move it hopes will prevent popular anger from growing further but which could well backfire.

Violent protests over a green levy, fierce business criticism over their tax burden and record-low popularity dragged even lower by plans for more contributions in 2014, have pushed the government to announce a revamp of the tax system.

After back-pedaling on several occasions over the past few months over individual tax plans - including the green levy on trucks, now suspended - the government hopes the move can bring more clarity and reassure voters on an issue now at the top of concerns ahead of local and EU elections next year.

But by touching on an issue which has become very contentious amid raging unemployment and a stagnating economy, the already very unpopular government is taking a risk, analysts said.

"It's dangerous and it's bold," said Francois Miquet-Marty at Viavoice pollsters, pointing at huge and very varied expectations over the notoriously complex tax system.

"If people understand that this means their taxes will be cut this is very risky."

At 46 percent of economic output, France's tax burden is one of the highest in the world. While many in the euro zone's second-largest economy have long agreed high taxes were necessary to finance the generous welfare system and public services, the issue has now become highly controversial.

Prime Minister Jean-Marc Ayrault told lawmakers on Tuesday that his objective was to agree by next summer on a more fair tax system that would enter into force with the 2015 budget.

But he insisted that the overall tax burden, meant to help cut France's budget deficit, would stay the same and he would not scrap a sales tax increase set to kick in on January 1.

"The time has come ... to overhaul a tax system that has over the decades become complex, unreadable," he said, adding that talks with unions and business leaders on the tax reform would start in the coming days.

"SMOKE SCREEN"?

Ayrault did not spell out what changes he hoped to achieve, and business leaders and opposition politicians scorned the plan as too little too late, saying what was needed were tax cuts, not what the conservative party called a "technical reform".

"It's a smoke screen because it (the government) has neither the political nor financial means to carry out such a reform because it would require at least a small cut to the overall tax burden," said the conservative head of the lower house of parliament's finance committee, Gilles Carrez.

"This is meant to avert attention and I think it will create more uncertainty and instability."

The main employers group Medef said it would go to the first round of talks to discuss the tax reform but if it was just time-wasting that would leave the level of corporate tax unchanged it might not be worth going to more meetings.

The tax reform plan was announced as the lower house of parliament backed the 2014 budget bill at its first reading.

The overall tax burden will grow marginally to 46.1 percent of GDP in 2014 from 46.0 percent in 2013, after some 60 billion euro in tax hikes over the past two years.

Labor unions welcomed the perspective of a tax reform, as long as it does not lead to higher tax on households.

The government's plan to overhaul taxes came as France finds itself under increased pressure from its partners in the European Union and the OECD group of industrialized countries to do more to reform its economy and cut red tape.

EU Commissioner Michel Barnier welcomed the move, saying the French tax system should be streamlined, while ECB executive board member Joerg Asmussen told a German employers' federation conference that there was need for action on both the budget and competitiveness fronts.

"French taxes ... are too complex, unstable, unfair, and too high, way too high," Barnier told France Culture radio.

(Additional reporting by Jean-Baptiste Vey, Emmanuel Jarry and Paul Taylor in Paris and Annika Breidthardt in Berlin; editing by Ron Askew)