Impact of Presidential/Legislative Elections on French Tax Policy and EU Own Resources

Accounting News

The second round of voting in the French presidential election will be 24 April between incumbent Emmanuel Macron and National Rally candidate Marine Le Pen. Although tax policy has not been a central theme of the campaign due to the war in Ukraine, immigration debates, and cost of living issues, the winner’s policy preferences over a five-year mandate could have a significant impact on French tax policy and the future of EU own resources.

During his first mandate, Macron’s administration incrementally reduced the corporate tax rate from 33 percent in 2017 to 25 percent in 2022, transformed a solidarity wealth tax into a real estate wealth tax to boost investment, reduced social charges for employers, and attempted to implement a carbon tax before changing course after the Yellow Vests protests.

With a debt to GDP ratio of 115 percent in 2021, and an expected ratio of 116 percent by 2024, Macron has made the case that France needs to spur growth through investment. This requires, in his opinion, a loosening of the French labor market and a pro-growth tax code to make France more competitive.

Macron has pledged to continue to implement pro-growth tax reforms in France during a second mandate. He announced he would increase the retirement age from 62 to 65, reduce taxes by 15 billion euros per year, make some benefits conditional on community work, and reform unemployment insurance to encourage people to return to work. This would be in addition to more subsidies for single mothers and inheritance tax breaks for those leaving money to their grandchildren or nieces and nephews.

Furthermore, Macron has made it clear that he wants France to be one of the first countries to stop using fossil fuels and believes in building a European metaverse to compete with U.S. tech companies. It is unclear what role a carbon tax or a digital services tax would play in these pursuits.

At the EU level, Macron has traditionally been in favor of new own resources for the EU budget. As president of the Council, France has pushed for adoption of Pillar 2 of the OECD agreement, the Carbon Border Adjustment Mechanism (CBAM), and reforms to the Emissions Trading System (ETS). The OECD package, CBAM, and ETS reform would all provide the EU with new own resources.

Le Pen’s tax policies for France vary significantly from Macron’s. For example, she proposes no income tax for those under the age of 30, reducing the VAT on energy from 20 percent to 5.5 percent, implementing a 0 percent VAT for essential products if inflation is 1 percent higher than growth, eliminating employer contributions on pay rises of up to 10 percent, and eliminating an inheritance tax for middle- and low-income families.

These distortive policies would narrow the French tax base and likely not improve investment conditions for businesses. Furthermore, with a debt to GDP ratio near 116 percent, additional destabilization to government revenue streams could cause significant problems for budget sustainability over the medium term.

Le Pen does, however, agree with Macron on one key issue. She has proposed taking on the American tech companies in France through various policy proposals. An expanded digital services tax on these companies appears likely.

Le Pen has not made many direct comments about the EU own resources. However, she has pledged to leave the European energy market and create a “European Alliance of Nations” to replace the EU. By leaving the energy market and believing the EU currently has too much power over national sovereignty, it likely means that Le Pen would not be interested in reforming the EU ETS or allowing revenues to go to the EU budget as a new own resource. CBAM would also likely not be a priority for her government at the EU level.

On the OECD global tax agreement, Le Pen has not made many comments, but she has repeatedly stated she is an anti-globalist. This could mean she would not  prioritize a global tax agreement at the OECD or EU levels.

One unknown factor for the EU under a Le Pen presidency could be the war in Ukraine. Given her friendly relations with President Putin in the past, it is unknown how willing she would be at the EU level to agree to new defense spending to support Ukraine. As tax and most spending policies in the EU require unanimous support from Member States, Le Pen could effectively veto any attempts to raise money for this cause.

However, in the background, there are two unusual, yet related dynamics in the French political system that could alter the winner’s ability to pursue their tax agenda in Paris and Brussels.

After Macron’s En Marche centrist party, the next three most popular parties based on the first-round voting results, including Le Pen’s National Rally, are either considered far-left or far-right.

The traditional center-left and center-right candidates (Socialists and Republicans) each garnered less than 5 percent of the vote in the first round. This means that the state will not reimburse most of their campaign costs.

This will make it challenging for those parties to run effective campaigns in the National Assembly election in June. More than 130 seats in the National Assembly could be at risk of changing parties. That is important for two reasons. One because the lower chamber approves tax proposals at the national level while having influence over policy strategies at the EU level. Two, if the President and the National Assembly majority are of different parties, the Prime Minister traditionally comes from the majority party in the Assembly. This is called cohabitation and seldom happens in French politics. In essence, this legislative dynamic turns over most agenda setting power to the Prime Minister and leaves the President to primarily deal with foreign affairs and defense.

If both the Socialists and Republicans lose National Assembly seats, it will be up to Macron’s party to preserve a legislative majority that does not include the far-left or far-right. While En Marche currently has the majority in the National Assembly, it is unclear whether this majority will be repeatable after five years in power.

If Macron wins but En Marche does not keep a legislative majority, it is possible that a coalition of extreme parties could make up the majority in the Assembly. This is primarily because En Marche would not have enough Socialists or Republicans to create a majority coalition.

On the other hand, if Le Pen were to win the Presidency, it is unlikely that her party would win an outright majority in the Assembly. Most major parties have stated they will not partner with the National Rally under any circumstance.

Regardless of who wins the presidency, due to the financial situations of the Socialist and Republican parties, cohabitation has become increasingly possible. This could significantly hamper the winner’s ability to carry out their national tax policy agenda or take clear positions on EU own resources.

If the winner avoids a cohabitation government, it is more likely that the president will be able to pursue an agenda closer to their campaign proposals without significant compromises.

A second-term President Macron will likely continue the status quo of pro-growth tax reforms in France and continue to advocate for EU own resources such as CBAM, the OECD global tax package, and ETS reform.

A President Le Pen would likely destabilize French government revenue streams with narrow and distortive tax policies while blocking additional own resources to the EU budget.

In any case, the impacts of the 2022 French election cycle on tax and own resource policy are significant to the future of France and the EU alike.

Products You May Like

Articles You May Like

Everything parents need to know about student loan forgiveness
Massachusetts Society of CPAs announces 2022 Women to Watch Awards
Home purchase cancellations are above 15% for the second straight month. It’s important to know the financial repercussions
2022 Holiday Gift Ideas for Employees, Co-Workers, Clients and Your Boss
13 Printable Holiday Gift Tags

Leave a Reply

Your email address will not be published.