Four months before the presidential elections, Nicolas Sarkozy's government has taken the offensive in a bid to show its determination in defending jobs in France.
The project for a social VAT had been proposed years ago but been buried shortly after Sarkozy's electoral victory in May 2007. The idea is now back on the agenda and a formal proposal will be presented to the French parliament in February, Prime Minister François Fillon said today (5 January).
A tax against outsourcing?
The proposed tax would shift the burden of social and employment charges to consumption, with the aim of reducing labour costs. Proponents say this would make French exports more competitive.
The measure would lead to a general increase of prices but companies would be expected to reduce the price of products made in France. Certain members of the ruling centre-right party, the UMP, have gone so far as to call this an "anti-outsourcing" tax.
The drop in prices would not be automatic. The measure might only boost the profit margins of industries based in France while increasing the financial burden of the social system on household consumption.
Competition with European neighbours
The tax is unlikely to significantly improve French competitiveness with regard to emerging countries such as China and India because differences in labour costs are too great.
Eric Heyer, an economist at the French Observatory of Economic Situations (OFCE), said the social VAT would primarily mean increasing competitiveness relative to countries with comparable labour costs, notably other EU members.
"The effects of such a measure are close to those of a competitive devaluation of the currency, which is no longer possible with the euro. It reduces the cost of labour and creates inflation," Heyer said.
Such a tax is compatible with European and international trade rules. Two European countries have already put in place similar measures: Denmark at the end of the 1980s and Germany in 2007.
Heyer said the tax could have positive effects around nine months after its implementation. "However, if your primary competitors do the same thing, the positive effects disappear," he added.
Berlin's decision to implement a social VAT sparked debate in Italy and France. But no comparable tax reforms were undertaken in these countries.
Germany passed numerous other economic reforms at the time that may have also been the source of the country's economic success. "One has to keep things in perspective. It was not the only reform undertaken by Berlin. From 2001, the Schröder government took numerous measures to improve the country's competitiveness, reducing the cost of labour by the creation of mini-jobs or the freezing of salaries," Heyer said.
The economist added "In France, the benefits of a social VAT alone would be marginal."