Abstract
This paper documents the effect on wages of one of the most far-reaching French economic reforms of the past decade. The reform, implemented between 2013 and 2018, provided a corporate tax credit proportional to the payroll for those employees paid no more than 2.5 times the French minimum legal wage. The aim of the reform was to increase competitiveness and employment by reducing labor costs through a corporate tax credit. It is shown here that a significant part of the tax credit paid to firms actually increased wages, missing the reform’s initial target. Insofar as almost all companies were affected by the reform, an innovative evaluation method is used here to simulate a counterfactual scenario for wages using branch data from France’s national accounts. This method successfully estimates the specific impact of the reform on wages and it is robust to several checks, such as placebo estimates. The present contribution to the literature is threefold. First, we propose a novel methodology of policy evaluation specially designed for the absence of a counterfactual. Second, and unlike most public policy evaluation studies, national accounts data are used instead of firm-data. Third, the partial equilibrium results presented in the article are particularly relevant for calibrating a macroeconomic model accounting for general equilibrium effects. Indeed, the reform amounted to a cut in corporate taxes equivalent to 1% of GDP, therefore constituting a sizable macroeconomic shock.
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Notes
For instance, capital and labor levels move to a new equilibrium in response to a change in the corporate tax rate. Then, wages are adjusted according to the new equilibrium.
For instance, an increase in wages resulting from the reform is likely to increase household demand, which then affects other variables such as employment.
For a presentation of the model, see Reynès et al. (2021)
Suppose that prices have been affected by the reform in a given branch. Prices may have been affected in other branches as well through changes in intermediate consumption prices.
Therefore, we do not present the general equilibrium results derived from the ThreeME macroeconomic model but partial equilibrium results only.
CICE stands for “Competitiveness and Employment Tax Credit" (in French Crédit d’impôt compétitivité-emploi).
As explained before, the present article focuses on the estimation of reduce-form effects only.
In national accounts, the concept of “branch" is different from the concept of “sector". The French National Institute of Statistics says: “Branch groups together homogeneous production units, that is, units which manufacture products (or produce services) that belong to the same item in the economic activity classification considered. Conversely, a sector groups together companies classified according to their principal activity." The present article follows the national accounts classification by using the concept of branch.
The new government elected in 2017 transformed the CICE into an equivalent reduction in employment contributions.
Extract from François Hollande’s speech, December 31, 2012 (author’s translation). The full script is available (in French) at https://www.vie-publique.fr/discours/186743-declaration-de-m-francois-hollande-president-de-la-republique-sur-les
In 2013, the French minimum wage was €9.43 (gross) per hour.
The government asked firms not to use the tax credit as a way to increase company executives’ remuneration or to pay out dividends. However, this request was not a legal constraint and the fiscal administration did not check how the tax credit was used.
Therefore, even if the CICE was launched in 2013, corporate taxation started to decrease effectively only from 2014 onward.
The one-year gap was confusing because firms did not benefit immediately from the tax credit, although they were aware that they would receive it the next year.
The published version ( Carbonnier et al. (2022)) does not include these interviews.
In that case, the CICE leads to increased margins.
In French: Institut national de la statistique et des études économiques.
All the data used in this article may be retrieved and downloaded from the following URL: https://www.insee.fr/en/statistiques/5390105?sommaire=5364233
Carbonnier et al. (2022)’s results support this hypothesis.
Other available measures in national accounts are total compensation and gross wages.
Two exceptions are agriculture, forestry and fishing (AZ) and real estate activities (LZ). These two branches receive huge amounts of subsidies that vary significantly over time. For this reason, the CICE they benefited from cannot be identified. AZ and LZ are omitted from the sample.
At that time, the CICE rate was 4%.
Moreover, Ducoudré et al. (2017) imposed restrictions on the estimated coefficients of the structural model, such that all coefficients were equal across branches.
From an accounting point of view, the reform had an impact only on the “bottom line" of the cash flow statement.
Another approach of the problem consists in simulating all exogenous variables of the structural model as well. I argue this leads to a useless complication of the method because the exogenous variables of the structural model have not been directly affected by the reform.
Alternatively, a quadratic linear trend could be added to the long-run relationship without affecting the results.
There is no i index for unemployment, the consumption deflator and the minimum legal wage because these variables are given for the whole economy (and not by branch).
The results of ADF and KPSS tests are interpreted at the 5% level.
An adjustment parameter equal to −1 means that equilibrium is instantaneously restored. This should therefore give \(-1<\gamma <0\).
The equality constraint ensures that for each equation \(-1<\gamma <0\).
Results for the short-run coefficients are available in Appendices 3 and 4.
All four points correspond to the “other services" branch (RU).
Values for 2012, that is, the year before the reform came into effect, are taken to define the weighting variables.
Results available upon request.
Although the tax credit is calculated over an eligible payroll (i.e., jobs that paid no more than 2.5 times the minimum legal wage), the benefits of the tax credit could be employed for any use.
Prime Minister Edouard Philippe announced in July 2017 that the CICE would be transformed into an equivalent employment contributions reduction starting in 2019.
Gilles et al. (2018) estimated the effect of the reform on wages, but the results vary significantly across specifications.
For the results obtained with the WS model, the upper band of the pass-through is between 46% and 50% (depending on the specification considered) while the range is 64%–69% for results from the Phillips model.
Placebo estimates are also satisfactory using weighting regressions. Results are available upon request.
Only two minor branches are removed from the sample here due to data availability, as described in Sect. 3.
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Acknowledgements
This work was supported by France Stratégie (Convention Number 2201143712). I would like to thank the editor and two anonymous referees for their comments. I also thank Éric Heyer, Xavier Timbeau, Bruno Ducoudré, Viola Lamani, Pauline Lectard, Mathieu Plane and Raul Sampognaro for valuable discussions. The usual disclaimer applies.
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Appendices
Appendix 1
See Table 12.
Appendix 2
See Table 13.
Appendix 3
See Table 14.
Appendix 4
See Table 15.
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Yol, N. How a French corporate tax reform raised wages: evidence from an innovative method. Int Tax Public Finance (2024). https://doi.org/10.1007/s10797-024-09846-9
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DOI: https://doi.org/10.1007/s10797-024-09846-9