A Futile Economics Lesson for France’s Politicians

I realize this is about as productive as talking to a brick wall, but I’m going to explain some basic economics to statist French policymakers (oops, pardon the redundancy).

This heroic – albeit surely futile – impulse is triggered by a recent proposal from President Sarkozy to supposedly boost job creation by lowering payroll taxes and raising the value-added tax

Here’s how the Wall Street Journal described the proposal.

The proposal…calls for reducing the amount companies contribute to the state-run health-care and pension systems. To make up for the lost income, the center-right government would raise France’s value-added tax—a levy similar to sales taxes in the U.S.—which is currently as high as 19.6%. …Mr. Sarkozy is expected to discuss the VAT proposal together with other job measures at a meeting with unions and business leaders on Jan. 18.

At first glance, this seems to make sense. After all, won’t it help to shift the tax burden from jobs to consumption?

If we look only at direct effects, the answer is yes. But if we channel our inner Bastiat and look at both the seen and the unseen, the answer changes.

The key thing to understand is that people prefer leisure to work. The reason they get jobs, by and large, is to obtain the income needed to consume and enjoy life.

As such, anything that expands the “tax wedge” between pre-tax income and post-tax consumption is going to impose similar levels of economic harm.

Here’s a simple example. If I earn $100, does it matter to me if the government takes $25 as I earn that income (either with a payroll tax or income tax) or as I spend that income (either with a sales tax or value-added tax)?

Is there any reason that my incentives to earn and produce will be altered by shifting from one approach to the other?

To be sure, there are probably some short-run effects when government reshuffles the tax burden in the way Sarkozy is proposing. People don’t react instantaneously when policy changes. That’s presumably even more true when some taxes are disguised, which is definitely the case with both the VAT and payroll taxes that are collected at the business level.

But transitory effects won’t solve France’s problems.

The bottom line is that Sarkozy shouldn’t expect any permanent boost in employment if all he does is shift the collection point for a small portion of a large tax burden.

If he really wants to improve the French economy, he should copy the Baltic nations and dramatically reduce the burden of government spending, while also replacing a punitive tax system with a simple and fair flat tax.

But don’t hold your breath waiting for this to happen. The French people occasionally show signs of intelligence, but the political elite have no incentive to change a system that gives them wealth and power.

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