A Cautious Cheer for French Tax Cut Package

President Sarkozy’s Finance Minister has unveiled a set of tax cuts. Some of the tax cuts, such as lower death taxes and reducing the income tax so that it never exceeds 50 percent, are well designed. But the pacakge also contains gimmicky proposals such as eliminating tax on overtime (one wonders whether every French worker will seek to work 80 hours one week and zero hours the following week, though the government will probably have a plethora of rules restricting the definition of overtime). The government also wants a tax preference for some mortgages, a silly policy that will probably undermine long-term growth by misallocating capital. While Sarkozy’s package leaves something to be desired, the fact that the French government is seeking to cut taxes rather than the other way around is worth applauding. But before popping champagne corks, the Tax-news.com story includes a worrisome mention that these tax cuts may be accompanied by offsetting tax hikes:

French Finance Minister Christine Lagarde has presented an EUR13.6 billion package of tax cuts to the national assembly… The measures, which will cost up to EUR11 billion in 2008 alone, include the removal of taxes on overtime, reducing taxes on inheritances, capping income tax at 50% and the introduction of tax deductibility on some mortgages. …The package places much emphasis on reducing taxes on the wealthy, a measure sure to spark debate that the government is putting the interests of the rich before looking after its more vulnerable citizens. Lagarde however, argued that such measures are vital if France is to be a place of wealth creation. “All you have to do is go to Gare du Nord on Friday night to Eurostar and Thalys arrivals to understand that these French bankers, who have gone to work in the City, those tax exiles in Belgium, want one thing, to come back to France,” she told lawmakers. …However, it remains unclear from the government’s plans whether some or all of the cost of the tax cuts will be recouped with tax increases or spending cuts elsewhere.