By lifting the two highest value-added tax rates in 2014, Hollande is revisiting a policy he campaigned against in his successful bid to unseat predecessor Nicolas Sarkozy earlier this year.
Hollande is setting out his plan in a week where France is coming under pressure from the International Monetary Fund and the European Commission to improve its competitiveness as Europe’s sovereign debt crisis prompts neighboring Spain and Italy to overhaul their economies. The IMF said yesterday that France needs “serious structural reform” and the commission is slated to issue another report tomorrow.
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France’s main sales-tax rate will increase in January 2014 to 20 percent from 19.6 percent, while the second band on home renovations and restaurants will rise to 10 percent from 7 percent currently. A third rate that applies to food and energy will be cut to 5 percent from 5.5 percent in an effort to support the spending power of France’s poorest households, French Prime Minister Jean-Marc Ayrault said today.
The government will also seek to cut spending by an additional 10 billion euros ($12.8 billion).
In return, companies will receive a tax credit for all salaries between the minimum wage of 1,425.67 euros and 3,564.18 euros a month. While the credit will be in place starting next year, companies will only see the benefit on the tax bill they will pay the following year. In total, the reduction in charges to companies will be 20 billion euros and equate to a 6 percent cut in wage costs, Ayrault said.
I endorsed the Sarkozy plan earlier in the year. I was disappointed to see Hollande campaign against it, but pleased to see that he now understands the need for supply-side reforms. Note that he is rejecting the Krugman/Eggertsson model, which claims that reductions in labor costs can be deflationary and contractionary when at the zero bound. Too bad the payroll tax cuts were capped at such a low figure.
PS. I’m running way behind today, but will eventually read all the back comments.
PPS. I see gay marriage won in three state referenda. Just two days ago someone in the comment section mocked my “wisdom of crowds” argument, pointing to the failure of all of the gay marriage referenda. People need some patience. Just 30 years ago even progressives regarded the idea as far-fetched. The younger generation is much more utilitarian. Last night on Fox News they were horrified by polls showing a rising number of non-religious Americans.