Will lowering income tax help revive growth?

THE ECO SCAN/INTERVIEW – Tackling income tax seems to be the solution envisaged by the government to lower taxes, as François Hollande announced last week. Is this tax solution the most effective way to revive the zero growth of the second quarter? Explanations.

“We are working on the subject, the President of the Republic will make the arbitrations that will be necessary and, with the Prime Minister, we will work on the terms, but I think that the question of income tax is today the main question for the French”, declared Michel Sapin, this Wednesday, on RTL. The Minister of Finance has hinted that he preferred that the tax cut promised by François Hollande in 2016 concerns income tax. Michel Sapin at the same time promised to maintain the “serious budget” and that the planned savings would offset the tax cut of 2016. Is this tax track the most effective for reviving the second quarter? Is it possible to reduce expenses to finance the measure? Xavier Timbeau, economist at the French Observatory of Economic Conditions, delivers his analysis to the Figaro.

LE FIGARO. – A reduction in income tax seems to be the preferred route for the tax reduction promised by François Hollande. Is it relevant?

Xavier Timbeau. – The first part of the five-year term was marked by a massive tax increase: increase in indirect tax (VAT, tobacco), increase in income and corporate tax. It was essential to devote the second sequence to lowering taxes: this was done for businesses, it remained to be applied to households. Economically, is there really room for maneuver to afford it? Michel Sapin announced that the financing would not be a reduction in expenditure. The message is ambiguous because economies already have to finance a number of measures. It’s mysterious. Is it deficit financing? The economic situation in France would allow it, but the political context with Brussels would make the situation conflictual. You can’t demand extra effort from companies or use (zero) growth. In my opinion, the mode of financing is not completely arbitrated. But above all, the extent, or not, of the measure has not been specified.

Is this the right measure to revive growth?

The reduction in income tax makes it possible to increase consumption. It affects the middle class which supports the activity. This is, fiscally, the best way to boost growth in the short term. The purpose of this announcement is the 2016 finance bill and the preparation for 2017. The measure must therefore be effective very quickly. Structural measures such as the CICE (the reduction in charges for companies, editor’s note) and the Macron law have more diffuse and later effects on growth. I don’t think increasing long-term growth is François Hollande’s concern.

Which part of the population has been most affected by the increase in income tax since 2012?

Indirect tax increases have affected everyone, even the most modest households. On the other hand, tax measures have focused on the upper middle classes since 2012: increase in income tax, lowering of the family quotient ceiling, modulation of income according to income. Undeniably, these reforms are partly responsible for the poor growth figures of the previous quarter. Nevertheless, they have contributed to reducing the public deficit.

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