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Perverse Effects of Tax Credit for Competitiveness and Employment

Translated Thursday 14 November 2013, by Gene Zbikowski

The defects of the Tax Credit for Competitiveness and Employment (CICE) set up by the government are known. Let’s remember that the measure was intended to reduce the “cost of labor” of workers, which was thought to be too high and a handicap for French companies that compete on the international market. The CICE amounts to 4% of the total wages paid at a rate of less than 2.5 times the minimum wage, for wages paid in 2013. Beginning in 2014, it will increase to 6%.

The first defect is, in a certain sense, congenital. The CICE is a formidable incentive to keep wages down. The set eligibility threshold to benefit from it will push the bosses to do everything so that the wages paid to as many workers as possible fall below the 2.5-times-the-minimum-wage ceiling. At present, 65.7% of the wages paid by all companies falls into that category. Let’s bet that this percentage will increase.

Moreover, the data from the follow-up committee confirm that the CICE is an anti-wage increase machine. Indeed, it is the low-wage economic sectors that benefit most from it. Thus, 90% of the wages paid to workers in the hotel and restaurant industry are eligible for the measure, and 80.6% of the wages paid in the building trades.

Moreover, they’re beginning to calculate that the real impact of the CICE doesn’t have much to do with its official goal. The first pieces of information published by the follow-up committee thus reveal that it is not companies that face international competition – companies that export – that benefit most from the CICE. Retail companies, whose state of health is linked instead to domestic consumption, and which are inundating the market with Bangladeshi and Chinese textiles, taking advantage of the low wages paid in retailing, will, in the long run, grab close to 18% of the 20 billion euros that the CICE will cost the French government – i.e. 3.6 billion euros.

The hotels and restaurants, which are not at all threatened by the restaurant operators in Munich, Amsterdam, or Abidjan, will for their part receive a little over a billion euros. Remember that Nicolas Sarkozy lowered value added tax in the restaurant trade. The measure cost the public finances 3.2 billion euros a year, whereas according to the Cour des comptes [the French equivalent of the UK controller and auditor general or the US general accounting office], it had “a limited impact on employment.”

At this point, elected officials, trade unions and political organizations can already begin demanding an accounting of the use of the public monies that have been paid out and demand that they serve to train staff, to increase skills, and to invest to obtain markets and create jobs, rather than to boost profit margins and to inflate even more the gigantic soufflé that is the mass of dividends paid out to shareholders.

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