Monday, January 24, 2011

Explaining France

. Monday, January 24, 2011

There's been some interesting discussion of the similarities and differences between the French and American economies. Krugman touched on it:

In the 90s, with US employment surging while France (and much of Europe) was having trouble creating jobs, there was a lot of talk about the European employment problem. By the eve of the current crisis, however, the European job picture had changed a lot for the better, while even a business-cycle recovery didn’t seem to do much for US jobs.

Many Americans, even those who imagine themselves well-informed, don’t realize that there has been a big change here; my sense is that the US elite picture of Europe is stuck in a sort of time warp, in which it’s always 1997, and we have the Internet and they don’t. But things have moved on a lot since then.

Indeed they have. Now French employment -- measured as percentage of the working-age population currently employed -- is higher than the U.S.'s, and has been for most of the past decade. French wages are lower, but they retire earlier, get more vacation time, and hourly-earners have a shorter work week. But it's not only that. As Daniel Little notes, the French tax structure is actually less progressive than America's:

In a word, these experts conclude that the existing tax structure in France is seriously unjust because it is anti-progressive at the very high end of the income distribution -- the top 1 percent decline steeply in the percentage of their income that is collected in the form of the several tax vehicles. Only 20% of the state' revenues derive from taxes that are truly progressive...

[T]he total tax burden of the top 1 percent of income earners declines sharply from 48% to about 32%. And the reason for this is the portion of the French tax system devoted to funding social services (Cotisations sociales et taxes sur les salaires). This assessment is roughly flat from the 30th percentile to the 99th percentile, and then it declines rapidly. (The other components of taxes represented here include the income tax, a tax on returns on capital, and taxes on consumption including the TVA.)

France has a value-added tax (VAT) of nearly 20%. This is the sort of broad-based, flat(ish) tax that many on the American right seem to prefer. Overall, France's tax revenues are much higher than the U.S.'s as a percentage of GDP, but the tax code itself is not very progressive. Despite that, or perhaps because labor is not taxed prohibitively, French productivity is very high. Consider this anecdote:

Paris is the only city we know of where there are two rush hours, not one. From 4 to 6, you have civil servants getting home. From 7 to 9, you have people who work in the private sector.

France also has high labor mobility, and has benefited greatly from European integration and its previous colonies. It has exported its large corporations to Europe's periphery and to Asia, so even though it is not the manufacturing colossus that Germany is, it benefits from the global expansion of retail and services to emerging markets. Its large investment into nuclear energy has cushioned it from commodity volatility. They obviously benefit from exporting culture and history, in the form of tourism, as well.

All in all it may be fair to say that France has done better than it rightfully should have. Less-developed countries would not necessarily do well by following their lead, and it's doubtful that the U.S. would benefit from adopting a more French-like bureaucracy (although shifting to a VAT or consumption-based tax structure wouldn't hurt, as it would likely encourage more domestic savings and investment). It is not an especially innovative country, although it does develop a lot of pharmaceuticals. But despite all that France is doing pretty well. Much to the surprise (and chagrin?) of plenty of Americans.


Anonymous said...

i, and probably krugman, would be happy with a VAT and less of a progressive tax system if it would guarantee less inequality, and thus a larger welfare state. inequality is a bigger threat than a less progressive tax system.

Explaining France
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