Sales tax plan dominates campaign

13th June 2007, Comments 0 comments

PARIS, June 13, 2007 (AFP) - A plan to switch the financing of health care from payroll charges to increased sales taxes to help businesses withstand competition has enlivened legislative elections in France with charges the poor will suffer.

PARIS, June 13, 2007 (AFP) - A plan to switch the financing of health care from payroll charges to increased sales taxes to help businesses withstand competition has enlivened legislative elections in France with charges the poor will suffer.

In calling for debate on the measure, right-wing Prime Minister Francois Fillon sparked an outcry from the left, with the Socialist Party accusing him of aiming to finance tax breaks for the rich with money from ordinary workers.

Fillon on Tuesday asked two members of his cabinet, Economy Minister Jean-Louis Borloo and Secretary of State for Prospects and Evaluation Eric Besson, to assess the chances of applying what is known here as a "social" sales tax.

The debate in France is likely to be followed with interest by countries throughout Europe facing deep problems in financing welfare, whatever their tax structure. Germany has begun using an increase in sales tax as part of a solution.

In France, all taxes and social charges account for 44.4 percent of gross domestic product, a figure considered high by international standards.

In France, all of the "social" budgets, managed separately, total about 295 billion euros (392 billion dollars) this year, even exceeding the total central government budget of 268.0 billion euros.

In France, various social charges falling mainly on employers but also on employees to finance health care and other benefits almost double the cost of employing someone compared with net take-home pay. This calculation does not include income tax.

Not all of these charges relate to the financing of health care. But the overall social charges weighing on business are now widely recognised to be seriously handicapping French firms.

In particular they are seen as a factor behind what is known here as "delocalisation," the shifting of production from France to low-cost countries, a hot and and emotive issue.

Under the sales tax proposal, companies would be relieved of some of the health-care charges, a move seen as boosing employment. The burden would be switched to households via an increased value-added sales tax on consumption.

The issue is expected to gain prominence in the run-up to this Sunday's second round of legislative elections following the mid-May presidential victory of right-winger Nicolas Sarkozy.

Senators Jean Arthuis and Philippe Marini maintain that increasing the sales tax by one point from its current level of 19.6 percent would earn the government seven billion euros a year.

But economist Marc Touati has argued that such a tax move would have a lopsided impact on the population, "since it is paid in the same manner by all consumers, regardless of their salaries."

He said: "Pensioners and the unemployed, who by definition would not be affected by lower social charges on businesses, would be at a heavy disadvantage."

Opposition political figures have also denounced the scheme.

"Families are going to pay for the breaks accorded the bosses," the French Communist Party charged, in a reference to tax cuts announced by the new government to encourage work and stimulate the economy while reforms are prepared.

Raising the sales tax "would be very unfair and economically very dangerous," defeated Socialist presidential candidate Segolene Royal said in a radio and television interview Wednesday, warning of the measure's inflationary potential.

Added centrist Francois Bayrou of the newly formed Democratic Movement party: "All French people, and especially the poor, will see their burdens increase and living standards decline."

Firing back, Labour Minister Xavier Bertrand charged that the left, which has argued that sales tax will be increased to pay for tax cuts for the well-off, was "trying to frighten" the electorate.

Fillon has insisted that his government does not intend to "increase the tax burden" nor to "raise the sales tax in order plug up holes" in the budget.

But he has suggested that the switch in the tax structure could raise sales tax, perhaps in 2009, by five percentage points to almost 25 percent, the level prevailing in Denmark and substanially higher than 19 percent in Germany.

Arthuis and Marini contend that the plan would boost taxes on foreign goods and thereby preserve the competitiveness of French industry while discouraging re-location abroad.

But economist Touati countered that there are "more and more products today that are no longer made in France, notably in the computer sector" and said the proposed "social" sales tax "would in no way halt an increase in imports."

In addition an increase in sales tax on imported products would be easily offset by lower prices on goods from emerging market countries "where labor costs can be 50 percent lower or more than in France."

Arthuis says the impact will depend on the scope of the increase.

Some opponents of the scheme fear the measure will have an inflationary effect in instances where companies do not pass on savings from lower social charges to the consumer through reduced prices.

"Companies will have to cooperate," conceded former budget minister Jean-Francois Cope.

Otherwise, French households could rein in spending, thereby threatening to cripple the principal driver of the national economy.

Laurence Parisot, who heads the employers' federation Medef, has taken a cautious approach to the plan, saying it "must be carefully studied" to ensure that it will benefit the economy.

The key question is whether reducing labor costs will create jobs and galvanize growth.

Different studies over the past year have yielded a range of projections on job creation, from 17,000 to as many as 500,000.

Copyright AFP

Subject: French news

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