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France to Trim Income Tax

Francois Hollande (R) and Michel SapinFrancois Hollande (R) and Michel Sapin

French President Francois Hollande’s government promised households a €1 billion ($1.1 billion) tax cut next year to distance itself from the punishing revenue grabs that characterized the beginning of its mandate.

“This is not just fighting the tax revolt, no,” Finance Minister Michel Sapin said on France Info radio. “We’re doing it because it’s both fair and necessary,” Bloomberg reported.

France and Belgium are tied for the biggest tax take in Europe. Both countries collected the equivalent of 47.9% of gross domestic product to fund the state in 2014, according to the latest figures from Eurostat. The French finance ministry’s own estimate is that taxation and social charges have fallen from 44.9% of GDP in 2014 to 44.5% this year.

Hollande had little choice but to raise taxes after taking power in 2012 to meet European Union pressure to reduce the budget deficit. While his Socialist government missed deficit reduction targets along the way, it has cut the shortfall to 3.3% of GDP this year from 4.8% in 2012. It currently forecasts a deficit of 2.7% in 2017, a figure that will be updated when it presents a budget for next year on Sept. 28.

“The increases were necessary to save Europe,” Sapin said. “When we arrived we found a deficit of 5% of GDP. The level of public debt had exploded.”

Hollande’s government changed tack on the last day of 2013 when he proposed in his New Year’s Eve address that payroll taxes be cut in exchange for company promises to create jobs. The government says it’s cut income taxes by €6 billion since 2014.

The latest tax cuts will be aimed at single households making less than €1,900 a month and couples earning less than €3,800, the finance ministry said in a fact sheet. The average saving per household will be about €200 next year, it said.

Even so, it was Hollande’s 75% marginal tax rate on salaries of more than €1 million that cemented his reputation. While the tax itself was only ever planned as a short-term measure and sign of fairness—it expired in 2014—it has stuck in public consciousness in both France and elsewhere.

To shore up France’s sagging competitiveness, Hollande has slashed taxes on business by about €40 billion and Sapin promised again Saturday that the government aims to bring the French corporate tax rate down to the European average of 28% from 33.3% by 2020.

The question is whether he and Hollande will be around to deliver on that pledge. The next presidential election is barely eight months away and Hollande’s popularity remains near a record low. Sapin denied on France Info that the tax cuts are aimed at bolstering Hollande’s popularity before the vote.

Financialtribune.com