Government introduces negative taxation on low wages

Printer-friendly version

Download article in original language : FR0102125NFR.DOC

In early 2001, the French government took the decision to introduce an "employment bonus", subsidising the pay of workers on low wages - a form of tax credit or "negative taxation" system. The social partners are divided over the measure.

In early 2001, the French government announced a new scheme to subsidise the wages of low-paid workers. The new subsidy applies proportionally to wages of between 30% and 100% of the SMIC national minimum wage, and then decreases on a sliding scale for wages up to 40% above the SMIC. The new scheme also provides for a "financial boost" in the form of a single-wage bonus, which is paid to single-wage households, and a family bonus, which varies according to the number of children and the circumstances of the family. The scheme aims to meet objections from the Constitutional Council (Conseil constitutionnel), which had condemned the "gradual cut in the universal social security contribution" (Contribution sociale généralisée, CSG) on low-paid workers planned by the government in autumn 2001 (FR0011104F). The initial plan exempted low-wage earners from part of the CSG levy and introduced some degree of progressivity into this currently fixed-percentage taxation system (FR9710170F).

Around 10 million workers (in employment and self-employed) should be eligible for the new "employment bonus". The low-wage subsidy is fixed at 2.2% in 2001 and is set to rise to 6.6% in 2003. It is estimated that the cost of the scheme will be FRF 9 billion in 2001, reaching FRF 25 billion when it is in full swing in 2003.

Even if recent events have pressured the government into setting up its new scheme, numerous official reports have, over the past few years, put forward the idea of such "negative taxation" for the low-paid. In December 2000, just as the Constitutional Council was publishing its opinion cancelling the cut in CSG contributions, the Economic Analysis Council (Conseil d'analyse économique) issued a report on "full employment," in which it presented negative taxation as a way of tackling the growing number of low-wage jobs and of "working poor" (FR0012111F).

Debate on this new scheme has been vigorous, with many criticisms being levelled at it. Some claim that, although it is aimed at getting unemployed people back to work, it will have only a very limited or even no impact on the labour market and will penalise women in double-income households, since they will be encouraged to give up their jobs completely or work part time. In making low wages more bearable for those concerned, the new scheme is likely to foster the growth of this type of employment, according to critics. A wider-ranging agenda is emerging from this debate: a major shake-up of the whole social protection system, as already suggested by some proponents of negative taxation.

Although the MEDEF employers' confederation, which has long advocated such a subsidy scheme, stated that it was "obviously satisfied" with the government's decision, the ruling left-wing political parties and the trade unions are equally divided. The CFDT union confederation welcomed the new scheme for two reasons: first, it does not challenge the "universal taxation principle" of the CSG, to which CFDT is firmly committed; and second, it clarifies the jurisdictions of the various parties - the state is responsible for redistribution policy, while the social partners control wage policy. The desire to separate taxation and wage policy is shared by CFTC. The other unions, however, are against the employment bonus. CGT claimed that the new scheme obscures employers' responsibility for low pay and would only serve to consolidate the employers' policy of providing low wages and precarious employment. CGT-FO shares this view, adding that the tax credit formula is based on a support-based rationale inherent in economic liberalism, which serves to remove all sense of tax responsibility from the population. Both these trade union confederations, together with CFE-CGC, are demanding higher wages, especially a rise in the SMIC. This would boost purchasing power among low-wage earners and bolster contributions funding the social security system.

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment

Click to share this page to Facebook securely

Click to share this page to Twitter securely

Click to share this page to Google+ securely

Click to share this page to LinkedIn securely