For once, the final statement of Aix Economic Forum – bringing together hundreds of business leaders, economists and journalists from July 3 to July 5 – sparked controversy. Point n°6 recommended to essentially cut taxes on the wages that are lower than 1.6 times the minimum wage while the measures announced by the government with the CICE in 2014 and the “Responsibility Pact” apply to wages up to 3.5 times the SMIC. One could also include in this debate the Research Tax Refund (CIR) that also has a very wide base and whose tax incentive covers salary expenditures that are well above the threshold of 1.6 SMIC recommended by economists in Aix.
Industry participants - first and foremost Louis Gallois, one of the instigators of CICE –strongly opposed this proposal. Indeed, they argued that international competition relies obviously on the ability of engineers, technicians and businessmen to innovate in order to improve the quality of their products and to sale them in order to gain market shares. But these highly skilled employees are all paid well above the threshold of 1.6 SMIC. It is therefore counterproductive to prevent them from benefiting from tax cuts. Who is right in this debate that is actually about the optimal use every year of over EUR 20 billion, funded, as everyone knows, by the public debt?
The economists’ reasoning is known: facing mass unemployment, one must direct public incentives to the unskilled or low-skilled workers it primarily affects. Politicians support this analysis as they believe in redistribution and feel it is better to primarily support disadvantaged social strata. In such situation, there is clearly a “conflict of objectives”. It is rare indeed that a measure can serve two purposes at once. One must choose. Either you support the job market or you make social redistribution. This situation does not support employment.
The state has set up incentives for promoting energy efficiency and reducing pollutant emissions from vehicles. But these incentives are contingent upon economic resources in order to promote – which is praiseworthy – redistribution. Consequently, these incentives are not widely used because they do not target energy intensive consumers or major polluters who are not eligible to this plan. As for those who meet the criteria, they have other priorities. Often in debt because they purchased their houses, they are not going to engage in construction work and if they own an old polluting vehicle, it is because they do not have the means to acquire a new one. This is obviously the case of retired people or the situation of those who could not even afford buying a used car.
We are faced with the same contradiction when it comes to employment measures. They help feed speeches but they do not translate into reality and they do not bring results. As for economists, their reasoning is skewed by their insufficient knowledge of the way companies work. The reductions will first be a great windfall for employers. But in the end they will not incite them to hire new employees as you only recruit a supermarket cashier or a delivery driver when you have customers to serve. Unskilled jobs are not created in order to boost the economic recovery. They will result from it.
Unemployment trends since 2003 and “Fillon tax reductions" have shown it unambiguously. Between January 2003 and January 2006 the number of jobseekers in category A remains remarkably stable at 2.7 million. So these reductions had no impact. The unemployment rate then falls to 1.8 million in June 2008 due to the acceleration of the global economic recovery, just before the crisis. It goes back to 2.8 million during the crisis and remained stable at this level between 2010 and May 2012. And it has continued to grow since then, despite the new tax reductions that have been granted. The conclusion is clear: government incentives do not lower the unemployment rate of unskilled workers and economic growth will not result from such decrease. Quite the opposite: employment requires economic growth.
The situation is different for highly skilled jobs. Of course, they also depend on orders, but not only. They can often result from a deliberate decision made by the company that wants to recruit executives in order to strengthen its sales, engineers and technicians teams to develop new products and innovative services. In this domain, those who want to reduce taxes on skilled jobs are right, as it is precisely where the competition is most fierce and where we strongly battle with our competitors in order to recruit the best people. Then, to the false macroeconomic reasoning of economists, one must oppose the right microeconomic analysis made by industry leaders. Yet they all ignore the cost of such plans and their financing. If France were not subject to financial constraints, due to its deficits and its high debt, the question would not be raised. But these cuts must be compensated by tax increases or budget cuts. And that's problematic. Reviewing the budget implementation for the year 2015 gives us an important clue.
Since the beginning of the year the products of taxation of households (IR, VAT, wealth tax and other) increased by 5 billion while proceeds from corporate taxation fell by 5.5 billion mainly because of CICE. In five months only, this transfer amounts to more than 10 billion euros. Who can think that this does not impact growth? If we remove the effect reconstructions of stock in the first quarter; growth is equal to zero since the beginning of the year. Business investment and hiring, despite the massive aid granted, have stalled, which resulted in a further sharp rise in unemployment.
Everything, in fact, is a matter of timing. Increasing household taxation when activity stagnates to grant benefits to companies without compensation stops recovery. It is therefore a mistake. When the activity restarts, the state will collect tax benefits from growth and then will be able to usefully redistribute these revenues in order to reduce employment costs and starts off a virtuous circle.
The debate on non-targeted tax reductions meets the one that compares the virtues of supply-side policies vs demand support policies. It is clear that companies are faced with insufficient demand, because they are penalized by tax increases on households rendered necessary to finance the relief granted to some businesses. Therefore, employers continue to wait for better times to invest and hire. This is the real debate behind the disagreement that occurred as a result of the economic Forum of Aix and that it would have been wise to open.