Project topics and materials
Get Complete Project Material File(s) Now! »
Tax revenue and labour income taxation in France
Tax revenue as a share of GDP is a usual measure aiming at comparing different tax-and-benefit system in time and across country. Figure 2 presents the evolution of the composition of tax revenue in France since 1949. If indirect taxation was the main source of tax revenue in 1949 (50%), its contribution decreased up to 25% of tax revenue in 2016. This was offset by an increase in the share of social security contributions and payroll taxes that grew from 30% in 1949 to more than 40% in 2016. The third element by importance in terms of tax revenue is the (labour and capital) income taxes, which amount today to about 20% of tax revenue. Yet, the creation of a flat income tax in 1991 fundamentally modified the structure of taxation by introducing a new way to fund social protection in France.
There are three main types of taxes on earnings in France in 2018. The first one are the social security contributions (SSCs), divided into employer and employee SSCs. In that cat-egory I also include other payroll taxes that are not affected to the funding of the social security because they share the same tax base2 . On figure 2, they correspond to the “SSCs and payroll taxes” category. Second, wages are subject to the standard progressive income tax on a tax base less inclu-sive than the gross wage. Indeed, fiscal households can deduce business expenses (itemized or flat-rate allowance) as well as other deductions to the income tax base. Third, a flat in-come tax (contribution sociale généralisée, CSG) was introduced in 1991. The coexistence of a both a flat and a progressive income tax had been the norm ever since the creation of the income tax in 1914 and until 1959 when the flat part of the schedule was dropped. Thus, with the CSG, a flat tax is reintroduced but it is much less salient than the income tax is, as it is directly levied from the payroll), and does not suffer from the many tax loopholes of the progressive income tax. As a result, the CSG tax revenue progressively increased and is today almost equal to the income tax revenue.
Social security since 1945: creation and evolutions
Social security contributions constitute the major component of labour income taxation and have undergone large evolutions. The social security system is characterized by the exis-tence of several regimes and many different types of contributions. Workers contribute to the regime that is specific to the sector of their firm. When the main regime was created in 1945, it was intended to incorporate all workers in a unified framework. When extended to the farming sector and to the self-employed it did not result in a unique and compre-hensive regime but rather in a constellation of different regimes. Overall, the tax schedule depends on tax rates applied to tax brackets whose thresholds are multiple of the “social se-curity threshold” (SST). The tax base is the gross wage (or posted wage). The contributive part of SSCs gives rights to incomes differed in time, such as unemployment and old age pensions, of which amount depends on the amount contributed. The non contributive part of SSCs funds benefits that do not depend on the amount contributed, such as family and health contributions.
Since the 1970s, wage taxation in France underwent a series of reforms that increased the progressivity of SSCs and decreased the weight of the progressive income taxes. First, employer social security rates, which applied under the part of the gross wage inferior to the SST, were progressively applied to the totality of the wage. Second, some non-contributive employee social security contributions were transformed into a new flat income tax, whose tax base is larger than wages and encompasses labour and capital income. This constituted a first step toward changing the paradigm of 1945 on which stands social security. Indeed, social security from then was not to be financed anymore only by labour incomes. Third, starting in 1993, a series of reductions of employer SSCs applied on low incomes, simultane-ously with an increase of minimum wage. These reforms increased the net wage at the level of the minimum wage without increasing the labour cost. They also had a redistributive pur-pose by increasing the progressivity of the SSCs schedule. The reductions were financed by public spending, decreasing again the share of social security spending financed by labour income.
At the origin, the French social security system was designed according to the principles of the bismarckian model of social protection system. Yet, the system relies more and more on fundings from the income taxes, which gives it a beveridgian component as well. This dual affiliation to canonical models of social insurance attests the peculiarity of the French social security system.
Literature review
Whereas income inequality increased during the last thirty years in the United States, it stayed relatively stable in Europe (Alvaredo et al., 2018). This differential evolution questions the determinants of inequality. Many other factors can affect inequality trends, among which technology or globalisation. After documenting recent evolutions of inequality, I present the literature aiming to explain these evolutions. I then turn to questions more specifically linked to taxation.
Documenting the increase in inequality
Starting with Kuznets and Jenks (1953), a strand of literature aiming at describing the long term evolution of income inequality emerged. The field experienced a rebirth with Piketty (2001) and rapidly grew up to reaching a new step with the WID.world project (World Wealth and Income Database) and its companion website (http://wid.world) with time series on pre-tax income shares by country. This literature is based on a main inequality measure, the share of income accruing to a specific group among the total amount of income. The under-lying income concepts, the pre-tax income, is both consistent with national income from the national accounts and with the income distribution as observed in fiscal documents.
Evolution of income inequality
In a survey of the literature on the long term evolution of inequality in the 20th century, Atkinson et al. (2011) compare the evolution of top income shares across countries. They show that most countries experience a common decrease in income inequality during the first half of the century due to major historical events such as the two world wars and to the depression of 1929.
The dynamics evolution of income inequality haved diverged across countries starting in the 1960s. It increased in English-speaking countries (Piketty and Saez, 2003) but remained roughly stable in European countries (excluding the United Kingdom). In France, Piketty (2001) documents the evolution and dynamics of income inequality, showing how the pro-gressivity of the French fiscal system prevented the rise in capital income inequality. Garbinti et al. (2017) build on this previous work, improving the methodology, and show that income growth has been three times larger in the very top percentiles of the income distribution (3%) than in the rest of the income distribution since 1983.
The underlying methodology relies on the use of aggregate and individual tax returns data and national accounts. It consists in computing time series of income shares accruing to certain groups of individuals, based on incomes consistent with national accounts’ concepts.
Inequality at the top
The top of the income distribution has received substantial academic attention. Of course, the fact that top earners bring a large share of tax revenue justifies this interest. This renewed interest is also explained by the fact that top income shares started to increase again in the United States in the 1980s, as underlined by Alvaredo et al. (2013). Top income shares are the main measures of the evolution of inequality.
The relative importance of capital or labour income contribution to inequality evolved over time. If capital income was overwhelmingly important in explaining total inequality at the beginning of the 20th century, the capital destruction caused by the two World Wars and the high level of taxation undermined the importance of capital in the total income of the richest for a long time (Piketty and Saez, 2003). Yet, this trend seems to have turned (Piketty, 2013), with a coming back from capital income.
In the meantime, labour income contributed significantly to the recent increase in in-equality. Piketty and Saez (2003) show that wages played a major role in the increase of the top 1% share observed since the 1980s. They emphasize the role of what they call the “work-ing rich”3, a population of individuals earning such high wages that they reach the top of the wealth distribution with no other sources of incomes. Godechot (2007) (updated by Gode-chot (2017)) studies an example of a “working rich” population, the financial industry. He provides both an extensive fieldwork and a quantitative analysis on the wage setting and bonus attribution processes. Growing availability of administrative data allows him to study more precisely the factors at play in the increase in income inequality. For example, he uses payroll tax data to study the role of the financial sector in the evolution of wage inequality (Godechot, 2012), showing that the financial sector contributed to 48% and to 57% of the rise of the top 0.1% and top 0.01% income shares between 1996 and 2007.
Explaining the increase in wage inequality
The increase in wage inequality observed in many OECD countries since the seventies gave rise to a strand of the labour economic literature dedicated its causes. I decompose the ex-planations according to the part of the labour income distribution they target. I present first the theories addressing the increase in inequality of the whole income distribution. I focus then on the arguments specifically addressing the inequality increase at the top of the labour income distribution.
Inequality among the bottom 99%
Two main families of explanations for the increase of income inequality on the labour market are traditionally opposed.
The first set of theories considers that the demand-side of the labour market is the main driver of the increase in inequality. The central factor at play is technological change. The skill-biased technological change assumption, which has it that technology affects the or-ganisation of labour and increases the need for skilled labour relative to unskilled labour, constitutes a first interpretation of this explanation. This assumption has now been tested several times (Katz and Murphy, 1992; Card and Lemieux, 2001) and for several countries: Autor et al. (2008) for the United States, Dustmann et al. (2009) for Germany, Lindley and Machin (2011) for the United Kingdom. Recently, another explanation emerged from the same trend: technological changes would cause a job polarization (Autor et al., 2006; Hunt and Nunn, 2017), with fewer jobs in the middle of the distribution relative to the low-wage low-skilled and high-wage high skilled jobs.
A second strand of explanations has it that institutional factors such as the minimum wage (Card and DiNardo, 2002) and unions (Fortin and Lemieux, 1997) played an important role in the increase in inequality. With Autor et al. (2008), a consensus toward demand-side explanations emerged in the literature.
Focus on the role of top wage earners
If the previous factors influence the evolution of the whole labour income inequality, top earners recently drove the increase in inequality. The explanations for the wage increase of top earners can also be classified into two main categories, opposing market-based and institutional-based arguments.
A first set of explanations develop arguments relying on the determinants of the supply-and-demand for top wage earners. Gabaix and Landier (2008) proposes a model of the com-petitive labour market of CEOs where the firm size explains the large differences in pay. In that context, the increase in firm sizes caused by increases in market capitalization would explain the increase in CEOs’ pays. The same technological argument than before applies to top wage earners. Kaplan and Rauh (2013) provide evidence in line with the skill-biased technological change, showing that higher returns to skills were particularly important for top wage earners.
A second set of arguments highlight the role of institutional factors. According to Bertrand and Mullainathan (2001), firm’s governance plays an important role as CEOs would be more able to capture profit unrelated to their actions in poorly governed firms. The level of tax-ation can also be considered as an important institutional factor affecting the wage setting process of top wage earners. Piketty et al. (2014) show that lower top tax rates increase the bargaining power of top wage earners.
The rapidly expanding documentation of the evolution of inequality brought back on the re-search agenda the controversy on the economic factors affecting labour income distribution. Yet, one classic explanation in the public finance literature is too often set aside by the labour economics literature. Indeed, taxation on the labour market is a potential driving force of the evolution of wage inequality. The next section is dedicated to presenting the questions and problematics from the taxation literature relevant for the study of the wage distribution.
The impact of wage taxation
The extent to which taxes and benefits policies succeed in reducing post-tax income inequal-ity is an empirical question. The direct effect of a policy might be counteracted by its impact of the behaviour of agents (individual and firms for example). Moreover, some political tools might be more effective than others for attaining a same level of redistribution. As an illustra-tion, Doerrenberg and Peichl (2014) show using a cross-country analysis that social expen-diture policies are more effective at reducing inequality than progressive taxation because of behavioural responses. Evaluating the impact of wage taxation relies on complex models and numerous assumptions. I first expose a methodology used for assessing the redistributive impact of taxes and benefits. I then present the findings of the literature regarding the two main assumptions underlying the previous methodology, tax incidence and the behavioural responses to taxes.
The redistributive impact of taxes and benefits
Assessing the redistributive impacts of taxes requires first to describe the taxes paid depend-ing on the income amount, the income type and on some demographic characteristics. This is commonly achieved by micro-simulation models.
Invented by Orcutt (1957), micro-simulation is a method aiming to empirically look at the theoretical impact of change on a given population. Typically, micro-simulation meth-ods are used to study ex-ante the impact of a tax change on the distribution of individual income. Models are static when there is only one period and dynamic when encompassing several time periods. First order effects of policy changes are given by their direct impact on the individual disposable income. For that purpose, every model relies on incidence as-sumptions regarding the range of taxes and benefits implemented. Yet, reforms can also have second order effect when triggering changes in behaviour. Behavioural modules relying on behavioural assumptions can be incorporated to micro-simulation models in order to en-compass these side effects. The underlying assumptions ruling the tax incidence and the behavioural responses are of major importance. They must be clearly stated and discussed.
Table of contents :
Main introduction
1 Overview of labour taxation in France
1.1 Tax revenue and labour income taxation in France
1.2 Social security since 1945: creation and evolutions
2 Literature review
2.1 Documenting the increase in inequality
2.2 Explaining the increase in wage inequality
2.3 The impact of wage taxation
3 General problematic
3.1 Pre-tax versus post-tax earnings concepts
3.2 Overall earnings distribution versus top earners
3.3 Administrative data
4 Outline of the thesis
4.1 Fiscal policy and redistribution in France
4.2 Primary inequality and taxation on the labourmarket
4.3 Data
I FISCAL POLICY AND REDISTRIBUTION IN FRANCE
1 L’analyse redistributive des prélèvements obligatoires par microsimulation : méthodologie,
usage et limites
1 Présentation du modèle TAXIPP
1.1 Constitution de la base de données source
1.2 La simulation du système socio-fiscal
2 Analyser l’incidence de l’ensemble des prélèvements obligatoires
2.1 La théorie de l’incidence fiscale
2.2 Les mesures empiriques de l’incidence fiscale
2.3 Hypothèses retenues par le modèle
3 Mesurer la distribution des taux d’effort
3.1 La distribution des taux moyens de prélèvements obligatoires en 2010 35
3.2 Étudier la fiscalité des hauts revenus
4 Une approche qui a pourtant des limites
4.1 Sensibilité aux hypothèses d’incidence
4.2 Conflits dans les sources de données agrégées
5 Conclusion et perspectives
2 French public finances through the financial crisis : a macro and a micro analysis
1 Impact of the financial crisis : the macro picture
1.1 National income
1.2 Labour markets
2 Public finance responses
2.1 Fiscal stance before the crisis
2.2 How did the crisis affect the public finances?
2.3 What was the fiscal response to the crisis ?
3 Policy responses : an opportunity for reform?
3.1 Changes to tax and benefits
3.2 Changes to public spending
3.3 Other structural reforms
4 Conclusion
II PRIMARY INEQUALITY, INCIDENCE AND BEHAVIOURAL RESPONSES ON THE LABOUR MARKET
3 Primary inequality of labour incomes: taxation and technological determinants
1 Labour cost inequalities in France
1.1 Labour cost and social security contributions
1.2 Data
1.3 Labour cost inequalities in France (1976-2010)
2 Revisiting demand-side explanations of inequalities using tax changes
2.1 Supply, demand and wage premiumfor skilled workers
2.2 The standard supply/demand model with taxes
2.3 Results
3 Impact of taxation on wage inequalities
3.1 Can we infer SSC incidence from SBTC?
3.2 Behavioral responses and the impact of taxes on wage inequality
4 Conclusive comments
Appendices
3.A Institutional details on social security contributions and income tax in France
3.A.1 Uncapping of the social security contributions
3.A.2 Reduction of employer social security contributions
3.B Data andmethods
3.B.1 Data and variables
3.B.2 Methodology
3.C Additional Figures
4 Who paid the 75% tax on millionaires? Optimisation of salary incomes and incidence in France
1 Literature
2 Context
2.1 Taxing Labour Income Earners in France
2.2 The 2013-2014 reform
3 Data and descriptive statistics
3.1 Linked employer-employee dataset
3.2 Income tax return data
3.3 Simulation of income and payroll taxes
3.4 Descriptive statistics and graphical evidence
4 Worker-level and firm-level effects on wage
4.1 Wage incidence
4.2 Wages and employment at the firmlevel
5 Optimisation behaviour of the individual
5.1 Conceptual Framework
5.2 Cell-based approach
5.3 Repeated cross-section approach
6 Conclusion
Appendices
4.A Panel regression approach
4.A.1 Building a panel data from administrative datasets
4.A.2 Estimation strategy
4.A.3 Estimation results
4.B Additional tables and figures
Main conclusion
References
