In France, the purchasing power of an average household is reduced by 4300 euros per year by regulations and taxation
Paris, December 13, 2022 – The Institut économique Molinari publishes a study dissecting structural factors fueling tensions around purchasing power in France. It analyses four families of regulations reducing the purchasing power of households by at least 4,300 euros per year.
It proposes structural reforms that would enable a response to the legitimate concerns of households, by freeing up their purchasing power, by improving the quality/price ratio of their individual and collective consumption.
TOO MANY REGULATIONS AND TAXES HARM THE PURCHASING POWER
This study shows that laws that are too rigid, too much taxation and the underdevelopment of collective capitalizations significantly harm purchasing power in France.
Special regulations increase the price of housing, which is now the main item of household expenditure (annual additional cost of 1,100 euros per average household).
Special taxes increase the price of certain goods (annual additional cost of 600 euros per average household).
The excessive use of production taxes reduces wages by a significant proportion (loss of 900 euros for an average employee).
Finally, the lack of diversification of pensions in a context of low birth rate weighs on net wages (loss of 1,700 euros for an average employee).
For a household with an employee, these additional costs related to regulation or overtaxation represent 4,300 euros per year. For a household with two employees, the additional cost rises to 6,900 euros.
HOUSING
An annual cost of 1,100 euros per household compared to the European Union (EU)
The share of housing costs in the household budget has increased from 11% in 1959 to nearly 28% in 2021. If the increase in the cost of housing is a global phenomenon, it weighs more widely on French households. Housing costs 2.6% more as a portion of income in France compared to the EU average, i.e. an additional annual cost of 1,100 euros per household.
Buying a home should be 20 to 40% cheaper in France
Regulation – and in particular restrictions on the use of land – increase the cost of housing. If the price of housing would have evolved in France the same way it did in the US states with the most flexible property rights, home ownership would be 20 to 40% cheaper. Buyers would have saved €61 billion in 2019 and tenants would have benefited from this effect indirectly.
A more flexible land law, as experienced by our German neighbours, would reduce material and property inequalities between households. It would also allow tenants to access cheaper housing. In times of inflation, it is a lever to restore purchasing power.
Two axes to reduce the housing budget
- Unleashing the constructability of land by changing the philosophy of Local Urban Plans (PLU)
Reverse the philosophy of PLU by declaring any land free of use (therefore constructible) by default, as long as it is serviced, and allow limitations only under the obligation to compensate owners penalized by the blocking of constructability. The compensation will take the form of a discount on local taxation or the payment of rent to compensate for the loss of partial enjoyment of the right of ownership. This obligation of financial compensation will create an incentive to reduce protected territories to what is strictly necessary.
Provide that land servicing costs cannot be borne by the community, which will encourage a preference for construction by contiguity with existing neighbourhoods.
Relax building rules in neighbourhoods without historical character, and in particular remove the brakes on high-rise construction in neighbourhoods of large cities where there is a market for this type of housing.
- Create a right of petition for the benefit of owners blocked by the Local Urban Plan
Any owner who considers that the zoning of his land imposes unjustified restrictions on him will be able to exercise a right of reasoned petition requesting a new zoning. The municipality will have to respond within 3 to 6 months, depending on the size of the land and the nature of the petitioner’s project. The absence of a response will be equal to the acceptance by the local authorities. This new right will make it possible to release the land without waiting for a process of revision of the PLU, which is very slow by design.
PRODUCT TAXATION
An annual cost of 600 euros per household compared to the EU
Consumption taxes are higher in France (12.3% of GDP in 2021) than in the EU (11.3 %). The average additional cost is 600 euros per year for a household. This is linked to taxes on products other than VAT. They make energy, real estate, insurance and tobacco more expensive. They account for 4.9% of GDP in France, compared to 3.9% in the EU.
A particularly high cost for motorists and smokers
Fuel taxes are higher than they are in the rest of the EU. They represent on average 610 euros per year for a motorist, including 420 euros of TICPE and 80 euros of VAT on the TICPE.
The cost of tobacco taxation represents 2,050 euros per year for an average smoker consuming 13 cigarettes per day, including 1,640 euros of tobacco duty (DCT), 330 euros of VAT on DCT.
Two axes to free up purchasing power
- Establish a moratorium on taxes on products other than VAT
Stop the introduction of new product taxes (excluding VAT) and rate increases. Government revenues must be increased by broadening pre-existing tax bases, to avoid tax sprawl and the multiplication of special taxes.
- Stop taxing taxes
Stop the stacking of taxes. The imposition of VAT on certain taxes on products is an anomaly. VAT is supposed to tax value added and not other taxes that do not create any added value.
PRODUCTION TAXATION
A shortfall of 900 euros in purchasing power per employee compared to the EU average
There were on average 2,675 euros in production taxes per employee in the market sector in 2021. This level remains abnormally high vis-à-vis the EU (78% excess) or Germany (145% excess), despite the decline initiated in 2021 as part of the France Recovery Plan.
The study shows that this over taxation penalizes an average employee by 900 euros per year, if we compare France with the EU. Vis-à-vis Germany, the impact is even more significant, with a loss of 1,700 euros in purchasing power per year.
In an open economy, companies are rarely able to pass on this tax to their customers or shareholders. Also, production taxation is largely passed on to employees with less attractive wages, less hiring and more job destruction.
The negative impact on purchasing power was calculated with 1 euro of production tax reduced by 0.87 euros, a ratio obtained from an analysis of the economic literature attesting to the negative impact of corporate taxes on wages.
Two axes to free up purchasing power
- Aligning French production taxes with the EU average
Amplify the movement to reduce production taxes, going beyond the announced trajectory, in order to align with the European average over a 5-year horizon.
- Compensate for the loss of revenue for local authorities through a sharing of traditional taxes
Establish a sharing of corporate tax (IS) between the State and local authorities. Allocating part of the corporate tax to local authorities will create a strong link with wealth creation in their territories.
Better involvement of local authorities in VAT revenues will make it possible to secure the financing of local authorities, the base of this taxation being broad and benefiting from significant inertia.
PENSION
An annual additional cost of 1,700 euros compared with a mixed system
Employees are particularly penalized when it comes to pensions. They are financed by significant contributions (11,000 euros per year for an average employee) and their purchasing power in retirement will fall in view of low birth rates.
Employees are worse off than professionals that have systematized collective capitalization which improve pensions (civil servants with the ERAFP, pharmacists with the CAVP) or even finance them entirely (Bank of France, Senate).
The study shows that a mixed pension system – with 2/3 pay-as-you-go and 1/3 funded pension – would make it possible to distribute the same pensions by reducing contributions from 28% to 22% of gross wages. The current situation represents an implicit tax of around 6% of gross salaries, i.e. a cost of 1,700 euros net of tax for an average employee. Initially, a mixed system would make it possible, for equal contributions, to distribute 29% more pensions.
Three axes to unleash purchasing power
- Set up collective capitalization for all private sector employees, on the model of the ERAFP for civil servants
Each private sector employee will have a personal account, funded monthly by employer (1% of gross salary) and employee (1% of gross salary) contributions.
These sums will be paid to an additional retirement establishment for private sector employees (ERASP). Copied on the model of the Establishment of Additional Retirement of the Public Service (ERAFP), it will be hosted by Agirc-Arrco, which will allow to benefit from the advantages of parity governance within a pension fund with strong legitimacy.
This reform will be carried out according to a principle of « neutrality for the pay slip ». The creation of ERASP will be done concomitantly with the reduction of taxes on the pay slip that do not create rights (CSG-CRDS, etc.) to avoid any deterioration in competitiveness or purchasing power.
- Making pay-as-you-go or tax-financed pensions more reliable
Start provisioning the pensions of new civil servants within the FRR, in order to save public money through the gains generated by investments as do the Bank of France or the Senate.
Reform the CNAV so that it has reserves to cushion shocks, as exists in all well-managed pay-as-you-go schemes in France (Agirc-Arrco…) or abroad (Sweden).
Put an end to the process of placing under supervision well-managed private law funds (Agirc-Arrco…) that have no reason to have the management of their contributions or reserves divested.
- Improving the retirement savings component of the PACTE law
Abolish the social lump sum on all payments made by companies in PACTE products, to increase the amounts credited to savers’ accounts.
Neutralize the calculation of capital gains on all retirement or long-term savings products, to avoid calculating (fictitious) capital gains on inflation.
Improve the taxation of capital outflows, by reversing all the degradations made as part of the process of harmonization between products existing before the PACTE law.
THE STUDY
The study “In Search of Lost Purchasing Power, When Public Policies Harm Purchasing Power” (56 pages) was written by Cécile Philippe, Vincent Bénard and Nicolas Marques. It is available in French https://www.institutmolinari.org/wp-content/uploads/2022/12/etude-pouvoir-achat-perdu-fr.pdf and English https://www.institutmolinari.org/wp-content/uploads/2022/12/study-lost-purchase-power-en.pdf
ABOUT THE IEM
The Institut économique Molinari (IEM) is a research and education organisation with the mission of promoting individual freedom and responsibility. The Institute aims to facilitate change by spurring debate around preconceived ideas that engender the status quo. It seeks to stimulate the emergence of new consensus positions by offering an economic analysis of public policy, demonstrating the value of dialogue and indicating the benefits of more lenient regulation and taxation. The IEM is a non-profit organisation financed by voluntary contributions from its members: individuals, foundations and businesses. Putting intellectual independence foremost, it accepts no public subsidies.
FOR INFORMATION OR INTERVIEWS, CONTACT
Nicolas Marques, Managing Director, Institut économique Molinari
nicolas@institutmolinari.org
+33 6 64 94 80 61
Or Cécile Philippe, President, Institut économique Molinari
cecile@institutmolinari.org
+33 6 78 86 98 58
