Sunday, June 24, 2007

On the Social VAT


The other day, in a comment to a post that can be read here, cjb wrote:

"AG writes that there is nothing necessarily anti-labour in the TVA sociale proposed by Sarkozy. But I think there is more to be said here. Sarkozy explicitly justifies this move as part of a plan to cut unemployment. By making it cheaper for employers to hire (reducing the 'charges' they have to pay), more jobs will be created. There is a strong class component to this approach. Sarkozy is pushing a version of the argument which blames high labour costs for unemployment levels. Traditionally, this was an argument which labour movements argued against, and an explicit tenet of Marxist theory is based around a critique of this argument about wages. So I think we need to situate the TVA sociale within the wider analysis the current government is making of the economic problems it faces, and to highlight the class bias many of its arguments rest upon."
I think the charge of class bias can be applied with greater accuracy to other tax reforms proposed by Sarkozy, such as the reduction of the ISF (the tax on large fortunes), the estate tax, and (with reservations I have already expressed elsewhere) the mortgage interest deduction. By contrast, the shift in welfare-state financing from payroll charges to VAT is not a gift to the already wealthy. Employers are not out-of-pocket for the payroll charges, which they simply pass on to the final consumer in the form of higher prices. Ultimately the consumer pays, whether in the form of a higher price with the current VAT or a lower price with a higher VAT.

If the choice is indifferent from the point of view of the consumer, however, it is not indifferent from the point of view of the social planner. Taxing in the form of payroll charges does increase the firm's labor bill and thus, under competitive conditions, induces a profit-maximizing firm to favor substitution of capital for labor. Hence it is plausible to argue that, other things equal, reduced charges might increase employment. The Marxian critique cited by cjb is irrelevant. What is relevant, however, are other factors that might affect firms' decisions, inflation, aggregate demand, and overall growth. In Sarkozy's interview with Claire Chazal and Patrick Poivre d'Arvor on TF1, which should be viewed in its entirety as a superb demonstration of the Sarkozyan style, he alludes to these complications and explicitly makes comparisons with the experiences of Denmark and Germany with a similar policy of VAT substitution for payroll taxes and mentions the advantage that the VAT scheme has in favoring consumption of domestic over foreign products, hence as a potential if modest weapon against outsourcing. Now, this is not surprising, because the subject was researched extensively by Eric Besson, as reported here. Since Besson was an advisor to Royal before becoming an advisor to Sarkozy, it is a good bet that the social VAT plan might well have figured among Socialist economic reforms had the election gone the other way. (For further discussion, see also here, here, and here).

Hence I disagree with cjb that this policy is a class-biased one. The choice among an array of tax instruments to finance the social wage is a complicated one, akin to the choice of present versus future consumption in, say, the Ramsey growth model. A challenge for the Socialist Party is how to present the implications of such technical choices to voters in ways that do not reduce to class-against-class metaphors, which I believe voters find increasingly alien to their comprehension of their social position.

2 comments:

Anonymous said...

Responding to Art, I think my point was specifically the connection between the 'social VAT' and unemployment. Art asserts that the Marxist critique is irrelevant. What I think it does is question the idea that employment ultimately depends upon a firm's labour bill. There are lots of examples of high employment and the existence of welfare provision financed through taxes paid by employers - like the Nordic countries and Switzerland. The more general point made by leftist if not Marxist economists like Andrew Glyn is that it is a wrong to assert that a country will grow and unemployment will fall only if labour markets are made more flexible and hiring and firing is made easier for employers. The empirical evidence for that is weak, or at least very mixed at best. The Sarkozy government certainly situates itself in that overall framework of connecting growth and employment to the degree of flexibility of the labour market. That's the point I think needs to be unpicked, as it ultimately favours capital over labour. As a last point, the fact that the Socialist Party would have probably brough in the TVA social had it been in power is hardly a proof of a policy not favouring the interests of capital! Art is right to say that class has little subjective purchase on people in France today, but an objective assessment of economic policy in these terms can be helpful. It's still capitalism after all!

Unknown said...

Yes, indeed, I quite agree with cjb that the labor bill is not the sole or ultimate determinant of the unemployment level. So does Sarkozy agree, and that is why he notes a few of the complicating factors. To say that, however, is not to say that a rejiggering of charges and VAT cannot yield some marginal improvement in unemployment and therefore be worth trying. The devil is in the details, as one of the cited sources says. In any case, the question of why unemployment persists is the great macroeconomic issue of the age, and "bourgeois" economists are no more in agreement about the answers than are Marxist economists.