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Exempting Overtime from Taxation: an Assessment of the French Experiment

The first IPP Policy Brief measures the impact on actual working hours of the tax reductions for overtime hours, introduced in 2007.

The 2007 TEPA law reduced taxation on overtime, at an estimated cost of 4,5 billion euros in lost tax revenue. The policy has resulted in an increase in the number of overtime hours declared by employees, but has had no significant effect on the number of hours actually worked. For the authors, Pierre Cahuc and Stéphane Carcillo, it confirms the importance of selecting tax bases that are easily measured and audited by tax authorities.

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Exempting Overtime from Taxation: an Assessment of the French Experiment

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de la présentation du 2 avril 2012

Résumé de l’étude

The TEPA law of 1 October 2007 considerably reduced taxation on overtime. Its aim was to reduce labour costs in order to increase the number of hours worked and salaries earned.

This study evaluates the impact of the reform by comparing the change, since the law’s introduction, in the number of hours worked by employees who work across the border, with those who live near the border but work in France. The first were not affected by the reform while the second were. The results indicate that exempting overtime from taxation did not fully achieve its objective: while the employees concerned benefitted from increased earnings that did not come from working longer hours.

The reform had no significant impact at all on the number of hours worked. It did, however, result in an increase in the overtime declared by skilled employees seeking to maximize the tax benefits it offered without actually working more hours