The CSG: tax reform or social insurance reform?

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In September 1997, the French Government presented a bill on social security funding, proposing a major rise in the rate of the CSG"universal social contribution", which is levied on all income, from 1998, accompanied by a cut in employees' sickness insurance contributions. This move has attracted mixed reactions - with some trade unions claiming that it will have a negative effect on pay negotiations - and raised the question of whether it constitutes a reform of taxation or of social security contributions.

The bill on social security funding presented by the French Government on 24 September 1997 (FR9709164N) proposes a rise in the rate of the CSG"universal social contribution" from 3.4% to 7.5% as of 1 January 1998. As a compensatory measure, the employee's sickness insurance contribution will be lowered from 5.5% to 0.75% of pay.

Like social security contributions, the CSG (contribution sociale généralisée) is a "proportional" contribution - ie, the proportion of income deducted does not vary with the level of income - as opposed to a "progressive" contribution - ie, whereby the proportion of income deducted rises with income. The CSG is paid into the social security schemes and deducted, theoretically, from all income - which includes not only pay but also other forms of income like unemployment benefits or pensions, and property-derived income. This change in the way social insurance is funded will thus result in a broadening of the tax base, to the benefit of employees. Even if the new measures provide for exempting the lowest benefit-derived income and some property-derived income (the most popular savings schemes, for instance), the implemented switch should, with an equivalent income, entail an increase in employees' purchasing power of around 1%.

Since the establishment of the CSG in 1991, by Michel Rocard's Government, the tax has been raised three times. The conditions in which it was created and raised have varied according to the government of the day. The establishment of the CSG in 1991 thus put in place a corrective mechanism, designed to favour those on low pay, the details of which have not, however, been readjusted since. Edouard Balladur's Government simply raised the CSG without a corresponding reduction in social security contributions - the simple addition of a proportional contribution has thus reduced the progressive character of the whole system of contributions. Finally, the CSG increase decided on by Alain Juppé's Government was carried out with the same conditions as those provided for by the current administration.

With this new increase in the CSG, whose rate will more than double next January, the revenue raised by the tax will exceed that of income tax. Crossing this symbolic threshold, especially in France, where income tax is not deducted at source (unlike other OECD countries), reflects the very low level of this tax in France compared with other countries. Income tax thus accounts for less than 12% of all social and tax contributions in France, compared to more than double that, on average, in the other EU nations. The rise in the CSG has been interpreted in some quarters as a covert tax reform.

Trade union reactions

Some trade unions have expressed their opposition to this government decision, both on principle and for reasons linked to the current difficult economic situation. For the CGT and the CGT-FO, the announcement of this reform on the eve of the 10 October conference on job creation, wages and the working week (FR9710169F) is inopportune. "The meagre benefit to employees, in terms of purchasing power, that this measure will bring ... will immediately be exploited by employers as a bargaining chip in wage negotiations", claimed Louis Viannet of CGT. Similarly, Marc Blondel of FO said that the transfer envisaged "will actually lead to deadlock in wage negotiations".

In addition, the CGT and the FO have always expressed their disagreement with the CSG, on principle. FO interprets it as a reform of social security funding, and is opposed to such a reform, which entails the introduction of taxation into social insurance, and may jeopardise union participation in the jointly-run authorities managing social security schemes. As for the CGT, it criticises the way in which the tax system is being redrawn. The planned reform is dangerous because "the rise in CSG to this level would sanction the establishment of a direct proportional tax deducted at source from all income." The union considers that "such a measure fundamentally threatens the principles and mechanisms of solidarity upon which income tax is based." The CGT also thinks that this measure is "inefficient" and suggests "levying a specific contribution on income derived from capital, whose rate would be equivalent to that paid by employees on their pay".

The CFDT union confederation has always supported the CSG in principle, and had lobbied the government for a "significant" increase in it, finding it unjustifiable that only income derived from work should fund benefits available to everyone, which should be the case when the universal sickness insurance system decided on by the previous Government is set up. Child benefits were already available to all residents. For the CFDT, the change in funding methods does not challenge the legitimacy of the social partners in the management of social security schemes, but the union considers that total separation of contributions derived from taxation and those derived from social security funding is necessary to preserve this legitimacy.

Commentary

The various protagonists' different interpretations of the CSG depend strictly on the way in which they characterise what is, in the French context, a qualitative change of great importance. If the emphasis is placed on the reform of the tax system introduced by the creation of, and the increase in, the CSG, the question is raised of whether the setting up of a proportional tax threatens the progressive principle, said to be an intrinsic element of the Constitution, according to the analysis made in an official report made public in 1995 (Rapport de la commission d'études des prélévements fiscaux et sociaux pesant sur les ménages, or the "Dumanin report"), 1995). When the CSG was established, this question was referred to the Constitutional Council, which rejected the argument that the CSG threatened progressive taxation, basing its decision not on reasons of principle (thus implicitly recognising the constitutional nature of this progressive tax system), but on the ground that the conditions under which the CSG was instituted at the time did not threaten this notion. It could be asked whether successive modifications to the CSG have changed its nature, and whether the maintenance of proportional taxation on this scale is not an obstacle to the progressive principle. In this case, the institution of a flat-rate reduction - consequently introducing a dose of "progressiveness" - should be on the agenda. Moreover, such a proposal was included in the present governing coalition's electoral platform.

If the effects of the CSG are essentially perceived in relation to the modifications in the way social insurance is funded, and institutional changes they may bring about, then the problem of redefining the respective roles of parliament and the social partners is raised. On the issue of the part played by the latter, it is particularly useful to recall that the 1967 social security reform modified the respective size of employers' and unions' representation within social security institutions by granting equal weight to each side. Previously, the unions were in the majority. It could be asked whether the introduction of the CSG should not lead to this "balance" being re-examined, and unions being given back a greater, or even dominant, role in the running of the social security funds. Such reasoning is probably an invitation for the reconsideration of the legal terminology pertaining to the employers' social security contribution, by recognising that in reality it is a tax on paid work. (Pierre Concialdi, IRES)