IPP Policy brief n°36 - October 2018

What effects to expect from the conversion of the competitiveness and employment tax credit (CICE) into employer contribution reductions?

IPP Policy brief n°36

October 2018

Authors : Antoine Bozio, Sophie Cottet and Clément Malgouyres

Contacts : sophie.cottet@ipp.eu; clement.malgouyres@ipp.eu

…………………………

logo-pdf-minWhat effects to expect from the conversion of the competitiveness and employment tax credit (CICE) into employer contribution reductions?

 

…………………………

Summary :

The competitiveness and employment tax credit (CICE) is a corporate tax credit of 6% on salaries that are lower than 2.5 times the minimum wage (Smic). Its conversion into an additional reduction in employer contributions is a key measure in the 2019 budget. It will give rise to a temporary increase in the public deficit amounting to 0.8% of GDP in 2019, the year during which the State must finance the CICE tax credit applicable to 2018 salaries as well as the reduction in employer contributions calculated on the basis of 2019 salaries.

The measure does, however, have effects beyond the additional cost to public finances in 2019. The reduction in social contributions benefits the not-for-profit sector more than the tax credits that it is replacing. The shift also generates an increase in corporate tax (CT) and income tax (IT): a one-euro reduction in social contributions will give rise to one euro of taxable profit for profit-making companies. As this additional CT and IT is dependent on company profitability, the net effect of the shift is more beneficial to young and small companies. Lastly, converting part of the additional CT into an additional 4% reduction in Social Security contributions at the level of the minimum wage amounts to a refocussing of expenditure on low wage-intensive sectors.

Impact assessments of the CICE have produced mixed results, pointing to positive effects on the profit margins of companies, but modest effects on employment, and virtually no effects on investment. Several potentially contradictory explanations could justify these results: ineffectiveness of labour cost reduction policies; longer transmission channels than anticipated; poor targeting of the CICE. The explanation that seems to tally most with the empirical results available today is the fact that the CICE has primarily been seen as a CT reduction rather than a reduction in the cost of labour. Based on this interpretation, the conversion of the CICE could have a significant effect on employment through the effect it has on the cash flow situation of companies and on the salience of the labour cost reduction, an effect that is heightened by targeting the measure at low-wage intensive sectors.

Key points :

  • The effect of the conversion of the CICE into a reduction in employer Social Security contributions will give rise to a temporary increase in the public deficit of 0.8 percent of GDP in 2019, which mirrors the temporary gains in the public finances recorded in 2013 and 2014.
  • The conversion will give rise to an increase in corporate tax revenue of 3.3 billion euro in 2019.
  • The conversion will have redistributive effects that are particularly favourable to the not-for-profit sector and to young and small companies, which will benefit to the full from the reduction in contributions, while being penalised only a little by the increase in CT and IT, which will effect more profitable companies.
  • The economic impact of the conversion on competitiveness and employment is not yet known, but the cash flow effect, the salience of the labour cost mechanism and the refocusing of the measure on low salaries are likely to have positive effects on employment.

Etude commandée par l’Assemblée nationale dans le cadre de l’examen du projet de loi de finances pour 2019. Les résultats et opinions émises dans cette note n’engagent que leurs auteurs.

Revue de presse