Wharton Economist Identifies Strategic Shift in French Taxation Approach

Paris, France – Sylvain Catherine, an Assistant Professor of Finance at the Wharton School of the University of Pennsylvania, recently highlighted a nuanced approach to taxation, suggesting that French policy may be engaging in an "administrative management" of the Laffer effect. In a recent social media post, Catherine observed a strategy focused on increasing the quantity of labor administratively, rather than directly raising labor taxes, to boost incremental production and subsequently tax it.

"En fait c’est une forme de gestion administrative de l’effet Laffer. Plutôt que de dire « on augmente l’imposition du travail » qui aurait pour effet d’en diminuer la quantité, on dit « on augmente la quantité de travail administrativement et on prélève la production incrémentale," Catherine stated in his tweet. This translates to: "In fact, it's a form of administrative management of the Laffer effect. Rather than saying 'we are increasing labor taxation,' which would have the effect of decreasing its quantity, we say 'we are administratively increasing the quantity of labor and collecting the incremental production."

The Laffer Curve posits that beyond a certain point, increasing tax rates can lead to a decrease in total tax revenue due to disincentives for economic activity. Catherine’s commentary suggests that instead of risking the negative supply-side effects of higher tax rates, the focus shifts to expanding the tax base itself by increasing the overall amount of work performed.

This observation aligns with recent French government efforts to reform its labor market. Notably, the 2023 pension reform, which raised the legal retirement age from 62 to 64, aimed to increase the number of years individuals contribute to the workforce. Similarly, ongoing discussions around unemployment benefit reforms seek to incentivize a quicker return to employment, thereby administratively increasing the labor supply.

Catherine characterized this strategy as a "gamble" on the nation's social and legal rigidities. > "C’est parier que les rigidités sociales et juridiques permettent d’augmenter les impôts sans réduire leur base," he added, implying that policymakers are betting these inherent rigidities will prevent a significant reduction in the tax base despite the increased administrative pressure on labor. His previous work, including challenging certain methodologies on French tax progressivity, underscores his deep engagement with the complexities of the French fiscal system.

As an economist specializing in public finance, Catherine’s insights contribute to the ongoing debate about effective fiscal policy in France. The strategy he describes attempts to navigate the delicate balance between generating sufficient tax revenue and maintaining economic dynamism, relying on structural factors to absorb the impact of increased labor participation without diminishing the overall tax base.