France to Cut Income Taxes by Further 1 Billion Euros in 2017

(Bloomberg) -- French President Francois Hollande’s government promised households a 1 billion-euro ($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 Friday on France Info radio. “We’re doing it because it’s both fair and necessary.“

France and Belgium are tied for the biggest tax take in Europe. Both countries collected the equivalent of 47.9 percent 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 percent of GDP in 2014 to 44.5 percent 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 percent of GDP this year from 4.8 percent in 2012. It currently forecasts a deficit of 2.7 percent 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 percent 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 euros since 2014.

75% Tax

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

Even so, it was Hollande’s 75 percent marginal tax rate on salaries of more than 1 million euros 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 euros and Sapin promised again today that the government aims to bring the French corporate tax rate down to the European average of 28 percent from 33.3 percent 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.

German Finance Minister Wolfgang Schaeuble said this week that he plans to cut taxes by 15 billion euros next year when his country will also hold an election. But with French growth still lagging that of neighbors such as Spain and Germany, no government in Paris is going to have significant room to maneuver.