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Unique French test limits of taxation

Tuesday, September 18 07:24:49

The French consider themselves an exceptional lot. With much of the world's finest food, wine, landscape, architecture, literature and arts, it's hardly surprising. But the French economic exception faces a reality check almost three years into the euro zone's sovereign debt crisis. France's enduring ability to defy economic gravity - adding new taxes on top of one of the highest fiscal burdens in Europe, preserving short working hours, job protection, early retirement and generous welfare benefits - is about to be tested.

President Francois Hollande has promised to bring the deficit down to 3 percent of gross domestic product in next week's 2013 budget from a forecast 4.5 percent this year. Unlike many European peers, he plans to achieve two-thirds of the adjustment by raising extra revenue, despite a virtually flat economy, and less than a third by freezing public spending in nominal terms. Public spending accounts for 56 percent of French GDP, the highest level in Europe except for Denmark.

The French are bipartisan big spenders. The debt and deficit rose most under conservative presidents Jacques Chirac and Nicolas Sarkozy. From Germany to China, leaders are fretting over France's inability or unwillingness to embrace reforms widely implemented elsewhere to make its economy more competitive. Where others are slimming down the public sector and selling off state assets, Hollande aims to keep the size of the five-million-strong civil service constant, hiring more teachers and policemen but whittling down the armed forces.

"Soak the rich" is the order of the day for the "Mr Normal" Socialist who defeated Sarkozy in May, declaring "my main enemy is the world of finance" and opposing austerity in the name of growth. Hollande may water down his flagship confiscatory 75 percent tax on income over 1 million euros ($1.31 million) a year to spare performing artists, "creators" and sports stars. But he is determined to increase the tax take on top salaries, investment income, big corporations, bonuses and stock options to fulfil his campaign promises of social justice and a fair sharing of sacrifices.

Yet higher taxation of businesses runs counter to his goal of reviving growth and may raise relatively little revenue. Hollande risks killing the cow he is trying to milk. With unemployment rising above 10 percent as companies from automaker Peugeot to steelmaker ArcelorMittal cut jobs and reduce production in France, he acknowledged last week the country had a problem of competitiveness.

All indicators of competitiveness - from unit labour costs to the quality of education and training - show a growing gap with Germany, France's biggest economic partner, highlighted by Paris' trade deficit, which reached 70 billion euros in 2011. Hollande wants to reduce labour costs by transferring social charges to a broad levy on income, and to make permanent job contracts more flexible. He is seeking the consent of trade unions, most of whom are hostile to loosening labour laws. ( C) Reuters