I just got back from France last night. It is an amazing country, obvisouly, but boy, they still aren’t learning from their fiscal follies. They have a serious unemployment problem, massive deficits, and large debt issues across all their government accounts. Unfortunately, it looks like French politicians think that the only way to implement reforms is to raise taxes. While I was in the country, there were two issues at the center of the Left’s reform agenda: a new increase in the income tax and pension reform.
The income tax, first. As part of a fiscal-adjustment package adopted a few months ago, the French government decided to adjust (meaning increase) taxes for FY 2012 incomes. As a result, people would have to pay more than they had expected to pay for their 2012 taxes (whether they were paying their taxes on a monthly basis or not). A few weeks ago, newspapers were reporting that French taxpayers were about to receive a letter announcing the new amount of taxes they would have to pay, predicting that it would be painful. The “reforms” comprise lower deductions, increases of both income taxes and social-security taxes for hours above and beyond the 35-hour week, a new tax bracket of 45 percent that would hit incomes above $198,500, a higher rate for the wealth tax, and other increases. (If you read French, check out this article, which has a lot of data on the changes.)
In addition, the government wants to raise $8 billion more, on top of its current revenue for 2014, so taxes will continue to go up. Among the taxes expected to increase are the Value Added Tax, real-estate taxes and social-security taxes for both households and businesses. (See more here.)
As for pension reforms, it also boils down to more taxes for workers and businesses. As you may remember, after President Sarkozy raised the retirement age, President Hollande lowered it. That didn’t help the projected deficits, so something had to be done. The government unveiled its plan this week, which basically increases the employer’s contribution, the wealth tax, and taxes on retirees’ benefits. As for the special treatment of bureaucrats, firefighters, train drivers, nurses, and other professions, they will be maintained, meaning that these lucky Frenchmen will get to retire much earlier than most people — some as early as 50 — and with much higher benefits.
I will write more about this in the next few weeks as the story develops, but I can tell you that, considering the level of taxes already paid, the projected tax hikes planned by the government, and the nightmare stories I have heard during my trip from people I know who own businesses and employee people, I am stunned that the country does as well as it does (though it does quite poorly, I would expect things to be much worse) and amazed that people still bother working at all.