France challenges taboos as tax reform talks start

PARIS Mon Nov 25, 2013 11:35am EST

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PARIS Nov 25 (Reuters) - France's prime minister faced widespread scepticism as he began talks on Monday aimed at overhauling a notoriously complex national tax system, with labour unions flatly rejecting changes to one of its cornerstones.

The government, at record lows in opinion polls months before local elections, announced an overhaul of the tax system last week to try to stem growing anger against the tax burden and its own policy swings on the matter.

But an Ifop poll showed that two-thirds of French voters view Prime Minister Jean-Marc Ayrault as incapable of carrying out such a reform, while half those surveyed believe that if seen through, the plan would mean even more tax for them.

The surprise announcement of a tax overhaul, following violent protests over a road freight tax, challenges decades-old taboos in a country with one of the world's highest tax burdens - a full 46 percent of output according to government data.

One sensitive issue is deduction of income tax at source, on the pay cheque, which is customary in most developed economies but has been staunchly opposed by French labour unions.

In France, income tax is paid in the year that follows the earnings, usually in three cheques sent directly to the tax office through the year, meaning employers know nothing of any other income or tax loopholes taxpayers or their partners might benefit from.

Union leaders, who met Ayrault in the morning, again rejected any plan to move towards taxing income at source, saying it would give employers too much insight into their workers' personal affairs and non-wage income, and could hurt the financing of France's generous welfare system.

"In France, we're so used to things working like this that people are afraid (to change the system)," said economist Thomas Piketty, a professor close to the governing Socialist party who has long advocated switching to tax deduction at source.

"To understand this French specificity one has to be aware of the history of mistrust between labour unions and social security budgets on one side and parliament and the state budget on the other side," Piketty said.

RISK?

French income tax is progressive - the higher the income bracket, the higher the tax rate - while social security taxes have flat rates. The Socialist party has long advocated deducting income tax at source and merging it with some social security contributions, or CSG, saying that would be fairer.

Ayrault, who has strengthened his hold on his job with the tax reform announcement while sidelining Finance Minister Pierre Moscovici, has said that would be one option for a reform that he wants in place for the 2015 state budget.

But unions oppose deducting tax at source, even if they welcome the idea of making the tax system simpler and have agreed to discuss transferring some social security contributions to income tax.

However, the Ifop public opinion poll showed that just over half of those surveyed back deducting tax at source.

With employers' groups advocating fewer taxes on business, some unions calling for fewer tax rebates on companies and the government wary of any negative impact on the municipal election in March, analysts doubt that deep changes will take place.

Ayrault has said that at a time when the French economy is contracting and the government must cut the public deficit further, the tax reform will not change the overall tax burden, but he has not said who would lose out and who would win.

"It's a real risk," Francois Miquet-Marty, of Viavoice, said of the tax reform announcement. "It's very dangerous because it can create ... expectations to see one's financial situation improve, or that of an entire profession."

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