Antoine Bozio is an economist, lecturer at EHESS and director of the Institute of Public Policies. He received the prize for best young economist in 2017.
Can France reduce its public finance deficit?
We must move away from the sterile debate between those in favor of reducing spending and those in favor of increasing revenue. There is room for maneuver on both sides, and the real debate is which expenditures can be reduced and which taxes can be increased. There is no need for a general reduction or general increase in levies, which would not allow discrimination between more or less effective expenditure or levies.
On what criteria should such choices be made?
Generally speaking, it is better to collect downstream of production than upstream: it is more efficient and fair to redistribute what is earned than to tax the factors of production. We already have higher levels of production taxes and social contributions than our neighbors, it would not be wise to increase them. On the other hand, we have relatively lower levels of VAT, income tax and property tax – taxes which have less negative effects on production, and allow us to better target the level of household income. But if taxing the input has negative effects on economic activity, taxing the downstream reduces the net income of households in a very visible way.
The natural tendency of a government, whatever it may be, is to increase what brings in the most, namely broad-based taxes such as VAT or CSG, or less visible levies, upstream of production. For example, increasing VAT by 1 point brings in 12 billion! But it is a tax with little redistribution, because consumption represents a greater share of the income of poor households. Increasing the intermediate VAT rate can, however, be considered, because it is slightly progressive, and affects the consumption of higher incomes more. But increasing VAT currently is not without risk for inflation, because we are only just emerging from a phase of sharp price increases.
Increasing the CSG would also bring in a lot, but it would reduce household income, already affected by inflation, at a time when the government and trade union organizations are worried about the weak dynamic of wages.
Should we then tax the richest?
If we want to bring progressivity into play, income tax is the natural instrument to mobilize. But we must realize that income tax itself has limits, to the extent that the highest incomes appear partly in the form of corporate profits, and not as taxable income. We could therefore conclude that it is more on the side of corporate tax [IS] that action should be taken. But be careful, here again, of substitution effects in a context of strong international tax competition. For example, we have seen that the recent drop in corporate tax resulted in higher revenues for the State, with certain profits being repatriated and taxed in France. Conversely, the abolition of the single flat-rate levy [PFU] in 2013 caused revenues to plummet, as companies responded by cutting dividends and hoarding cash. However, we can think that a slight increase in the PFU, currently 30%, could be effective.
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