January 28, 2014 / 7:06 AM / 6 years ago

French succumb to temptation of cash as taxes climb

PARIS (Reuters) - French handyman Bruno works full-time doing repair work on homes around Paris. But he says the real reward comes after all paperwork has been signed and customers ask for more work - off the books.

“The client and I are in the same position: we both need to save money, so cash works for everyone,” said Bruno, 27, who asked not to be identified because of the tax-dodging that is helping to swell his monthly wages by 25 to 50 percent.

Working for cash in hand is commonplace in many countries, including some of France’s euro zone neighbors.

Now the French are starting to catch up, undermining President Francois Hollande’s efforts to boost official employment numbers and threatening the tax receipts he needs to bring the public deficit within European Union limits.

A cultural preference for using checks over cash and France’s highly-developed tax collection system, employing 115,000 staff, have kept its undeclared economy less developed than those of some of its neighbors.

But rises in value-added taxes and the scrapping of subsidies for services ranging from baby-sitting to gardening have spurred the first expansion in the ‘shadow’ part of France’s economy for more than a decade.

Friedrich Schneider, shadow economy specialist at Austria’s Linz University, said such activity in France last year amounted to a further 10.2 percent of output - compared with 21 percent in Italy and 19 percent in Spain.

Now Schneider, one of the world’s most widely-cited experts on shadow economies, forecasts the French figure will rise to 11.4 percent in 2014. He gauges economies’ “invisible” output using clues such as total cash demand.

In a French survey by the Markit Audit pollster in November, one in three people admitted to having worked off the books - against just 13 percent in 2008.

In domestic service alone, consultancy Oliver Wyman estimates that 41,000 jobs moved from the formal to the informal economy between 2010 and 2012, meaning shadow labor accounted for about 35 percent of the sector in 2012 and will hit 46 percent by 2016 if no action is taken.

Hollande’s government has acknowledged a need to reduce labor charges on companies, but only by the end of his mandate in 2017.


There is a ready pool of job-seekers. The unemployment rate is 11 percent, four of every five new hires last year were on vulnerable short-term contracts and nearly a quarter of people aged 18 to 25 are out of work.

VAT rises on household services - from 5.5 to 7 percent in 2011, then to 10 percent this January and up to 19.6 percent for some services - have raised temptation, too.

The introduction in 1993 of a system of French state subsidies for domestic work had encouraged workers and clients to declare such labor.

But the scrapping of such discounted rates from January last year has prompted many households to declare fewer hours or switch to full cash payment.

“Ill-thought-out taxes, from VAT sales tax to heavier social fees, push people toward the informal economy,” wrote Samuel-Frederic Serviere of the IFRAP think tank last year, as data showed France falling 2.7 billion euros short of its expected tax take.

“There is much at stake in terms of revenue for the tax system and social charges,” he added.

France remains Europe’s champion of checks, a form of payment easily traceable by tax authorities, with 3.3 billion issued in 2009, according to the Bank of France. But check usage has been dropping 4 percent per year since 2002.

Providers of services like housecleaning and tutoring blame Hollande for spurring a rush to cash.


His government does not see the issue as a priority. National statistics office INSEE, which uses a different methodology to that of Schneider, says the shadow economy is worth only 3.7 percent of Gross Domestic Product.

Charles Dauman, CEO of the Shiva housecleaning firm, told Reuters that overall demand for domestic services had shrunk 11 percent since 2011 as Hollande and the previous government of Nicolas Sarkozy rolled back incentives.

“These measures are completely counter-productive,” he said. “We are providing stable jobs in a difficult economy ... The government is making it harder for middle-class families to pay for this sort of service legally.”

Dauman is also critical of job web sites like Frizbiz.fr, Youpijob and Leboncoin.fr.

Auguste Verlinde, who launched Frizbiz last year, rejects any suggestion that his site encourages illegal work.

“We rely on the good faith of people who hire individual service-providers to declare their revenue, and we encourage them to do so,” he said, noting the web site allows users to download a tax declaration form.

Bertrand Tournier, co-founder of peer-to-peer website Youpijob.fr, says it provides a form for people to declare their work. “I’m here to help people find work,” he said.

“Can I guarantee that zero percent is done off the books? No, but we should look at the larger problem, which is why they can’t find work.” ($1 = 0.7315 euros)

Editing by Mark John/Ruth Pitchford

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