Note –
Summary:
· President François Hollande announced a reduction in income tax for 2016, which will take effect in 2017, the year of the new presidential election;
· In four out of nine elections in the Fifth Republic, a reduction in income tax has been observed in the year of the election;
· Each change in the Presidency of the Republic has been accompanied by stagnation or an increase in taxes in the year of the election;
· A reduction in taxes in the year of the election has systematically been accompanied by the victory of the political party already in power.
In the summer of 2016, President François Hollande announced a reduction in income tax for 2017. During September, the outline of this measure was gradually drawn up. The government is planning a tax cut of €1 billion in the form of a rebate on 2016 income. This measure is intended to benefit mainly low-income households and the middle class. The effects of this reduction will be felt by the French during 2017, a period that also includes new presidential elections.
For some of the opposition, this is an electoral ploy ahead of the 2017 presidential elections, directly inspired by Public Choice’s electoral cycle theories.
The use of historical data allows us to take a step back from the measure and fuel the debate with facts. Is it common for the head of state to make a « tax gift » in a presidential election year? Does this measure have an impact on the election results? This article offers some answers by focusing on what has happened during the Fifth Republic.
Is there a change in taxation around the time of a presidential election?
The graph below shows the evolution of the income tax/GDP ratio and the results of presidential elections under the Fifth Republic. The income tax/GDP ratio indicates how taxation evolves in relation to the nation’s wealth. An increase in the ratio means that the tax burden becomes relatively more important in relation to the country’s wealth. A decrease in the ratio indicates a relative decline in the importance of taxation. The tax referred to in the article includes income tax, but also the General Social Contribution (CSG) and the Social Debt Repayment Contribution (CRDS)[1]. By cross-referencing historical data on the tax-to-GDP ratio with the results of presidential elections, it is possible to study how taxes evolve before, during, and after the election.
Changes in income tax (as a percentage of GDP), the proportion of taxable households, and the incumbent president
Source: Author’s calculations based on M. André and M. Guillot (2014), 1914-2014: Cent ans d’impôt sur le revenu(1914-2014: A hundred years of income tax), Les notes de l’IPP, no. 12.
A decrease in the relative weight of taxation in the election year can be observed in four out of nine elections (1969, 1988, 2002, and 2007). Thus, a tax cut in the election year remains a minority event, even if this phenomenon seems to be accelerating over time. A tax cut in the year prior to the election was only observed in 1987, 2001, and 2006. Regularly promised by candidates for the Élysée, a tax cut in the year following the election was observed in four out of nine elections (1966, 1970, 1982, and 1996).
Looking at the change in the proportion of taxable households gives a different picture from that of the tax ratio. A decrease in this proportion in the year of a presidential election or the previous year is found in three out of nine cases (1988, 1995, and 2002). A decline in the proportion of taxable households in the year following the election was observed in 1969, 1981, and 1988.
Is there a link between election results and tax cuts?
It is striking to note that each political change, when the president switched from a right-wing party to a left-wing party or vice versa, was accompanied by stagnation or an increase in the tax-to-GDP ratio compared to the year preceding the presidential election. This was the case in the 1981 elections when François Mitterrand became president, but also in the 1995 elections, won by Jacques Chirac, and in 2012 with François Hollande. During the 1981 and 2012 elections, taxes increased by 0.2 percentage points of GDP. The pattern is slightly different for the 1995 election, as taxes remained stable that year and the period 1993-1995 was characterized by cohabitation.
On the contrary, a decrease in the relative weight of taxes in a presidential election year has systematically been accompanied by a victory for the political party already in power. This was the case in the 1969 election with the success of Georges Pompidou, who took over from Charles de Gaulle. That year, taxes were reduced by 0.2 percentage points of GDP. The process was repeated with the victories of F. Mitterrand in 1988 (-0.1 percentage points of GDP), J. Chirac in 2002 (-0.4 percentage points of GDP), and N. Sarkozy in 2007 (-0.4 percentage points of GDP). It should be noted, however, that the 1988 and 2002 elections were preceded by two and five years of cohabitation, respectively.
Only two elections are exceptions to the pattern outlined above: the election of Charles de Gaulle in 1965 and the victory of Valéry Giscard d’Estaing in 1974. In both cases, the tax-to-GDP ratio increased by 0.1 percentage points of GDP in the year of the election. However, these two elections appear to be unique for the period studied. The 1965 election was the first to be held by universal suffrage. As for the 1974 election, it was the closest of all the others in terms of the final result. That year, V. Giscard d’Estaing won the election with only 50.81% of the vote.
It is more difficult to draw a parallel between the proportion of taxable households and political change. There does not appear to be any correlation between the evolution of this proportion and the election results.
Conclusion
At 7.9% of GDP in 2015, taxation appears historically high and a reduction seems justifiable as long as it is offset by another source of revenue or does not lead to a budget deficit. However, the government has not yet explained how it intends to finance this €1 billion measure. It should be noted that, according to the latest OECD projections, the public deficit is expected to stand at 3.4% of GDP in 2016 (3.0% for the OECD as a whole) and 3.0% in 2017 (2.4% for the OECD).
Based on the results presented here, it appears that a tax cut in an election year is conducive to maintaining the political party in power. Of course, a multitude of other factors come into play when electing a president, and focusing solely on tax changes is simplistic. However, it seems that this factor is not insignificant in increasing the chances of re-election.
