The Most Despised Tax-And-Retreat French President Sinks Deeper Into Economic Quagmire

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The French habitually appear to be on the verge of having had it. But the incidents have been getting denser, more frequent.

There were the protests in the Bretagne and elsewhere, followed by “operation snail” where 2,100 heavy trucks drove side by side down major expressways at a snail’s pace, with everyone behind them going nuts. Every day, there are protests organized by different organizations. Today, the farmers went to town, to Paris more specifically. They were getting there by driving their tractors on major highways, setting up roadblocks as they went, snarling traffic for miles.

They’re all protesting the relentless onslaught of new taxes. At first, buoyant from an election victory, President François Hollande and his government went after the rich then quickly hit even modest households, farmers, truckers, craftsmen, everyone who does or buys anything. Because it’s never enough. In January, the Value Added Tax hike will take effect. For the top tier of items, the VAT will only increase from 19.6% to 20%. But for some of the lower tier items, it will be jacked up massively. For example, for the equestrian industry, the VAT will jump from 7% to 20% – hence the protests the other day.

Today, the farmers have had it. While at it, they’re also protesting EU rules on how they should run their businesses and anti-pollution laws that would limit the use of tractors on some days. The word “insurrection” is showing up in the media, though it’s still more an exaggeration than a description. “Fiscal discontent” is better, but not broad enough.

After 18 months in office, Hollande’s ratings have plunged to the lowest levels of any president since 1958, according to an Ifop/JDD poll, the only poll going back this far. A mere 20% of the French were satisfied with him; 17% among workers and employees; 15% among merchants and craftsmen. Even his erstwhile supporters have abandoned him.

And 79% were dissatisfied. Cited were “social desperation” of the people affected by his policies, but also his leadership qualities, his apparent “inability to decide,” his “lack of discipline,” his tendency to make decisions and then, when the volume gets too loud, withdraw them. It leaves the country rudderless.

Who could do a better job? Maybe Santa Claus.

Because no one else seems to be able to, in the eyes of the French. Turns out, 74% think that any of the major figures of the UMP, the party of former President Sarkozy, would do worse or no better. And on the right-wing where Marine Le Pen reigns with her National Front (FN)? 79% of the respondents think she’d be worse or no better than Hollande. There simply is no savior in sight. Much less a solution.

Spending by the government accounts for more than 56% of GDP, the highest in the Eurozone. Even thinking about cutting these outlays would be political hara-kiri. To fund this public mastodon and bring the deficit down to 3% of GDP by 2015, and into compliance with EU stability criteria – it would require a miracle – taxes must be extracted from everyone and everything in the anemic private sector.

But the math just shot craps.

Despite the tax increases, the government just confessed that revenues would be about €11 billion less than expected. The shortfall was spread over VAT, income taxes, and corporate taxes. French pundits are now talking about “fiscal saturation,” the point where raising taxes will lead to lower tax revenues, as struggling households and businesses will jump through hoops to limit the taxes they pay. They might work off the record, cut back on purchases, or move business entities to other countries. One of many brutal disappointments for Hollande. Nothing seems to work. Squeezing the French has reached its limit.

French businesses already pay a total of 64.7% of their pre-tax income in taxes, according to the just released report by the World Bank and PwC (PDF). The report compared 189 countries and measured total taxes paid in 2012 – including income taxes, payroll taxes, employer paid “social” taxes for healthcare and retirement systems, real estate taxes, capital gains taxes, etc. – as a percent of pretax profit. France’s total was the second highest in the EU, after another economic star, Italy, and far above the EU average of 43.1% and the worldwide average of 41.1%.

In France, labor is taxed the most, with employers paying breath-taking 51.7% of their pretax profit in payroll taxes, the worst in the EU and possibly in the universe. Income taxes eat up only 8.7% in pretax profits. As anywhere, sagging profits and a myriad of deductions, loopholes, credits, and other devices allow most companies to get around high tax rates. “Other” taxes consumed another 4.3% of pretax profits.

Confiscatory payroll taxes do one thing very well: stop job creation in its tracks.

Companies are hurting. Of the 15,000 privately held companies that a recent study by accounting and audit association ATH analyzed, 20% lost money in 2012. Over the period between 2008 and 2012, revenues inched up a total of 7%, not even enough to keep up with inflation (8.8%). Net profits plunged 18% during that time. This “permanent degradation” is endangering the survival of many of these companies and is crimping “the investments necessary for the competitiveness and sustainability of these companies,” the report observed.

Driven to desperation by the morose economy, the abysmal poll numbers, the tax quagmire, and mounting anger on the street, Hollande’s government is going to attack the problem decisively and head on: another tax reform! This time, Prime Minister Jean-Marc Ayrault wants to start from scratch. A mega project would take up the remaining three and a half years of Hollande’s term. Hope? In the same breath, he said that it would be revenue neutral! They just don’t get it.

Revenue neutral isn’t going to help the economy. Households and smaller businesses need room to breathe. Yet, bad as it is, no one believes it. Because in France, taxes have the insidious habit of creeping up relentlessly.

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