What effects can be expected from the conversion of the CICE into reductions in employer contributions?

The Tax Credit for Competitiveness and Employment (CICE) is a tax credit on profits equal to 6 per cent of wages below 2.5 times the minimum wage. Its conversion into a reduction in employer contributions is a key measure of the 2019 budget. This will lead to a temporary increase of 0.8 percentage points of GDP in the public deficit in 2019, the year in which the State must fund the CICE based on 2018 wages, in addition to the reduction in contributions calculated on 2019 wages.
However, the measure has implications beyond the additional cost to public finances in 2019. The reduction in social security contributions benefits the non-profit sector more than the tax credits it replaces. The switch also leads to an increase in corporation tax (IS) and income tax (IR): a one-euro reduction in social security contributions results in one euro of profit for profitable firms, profits which are then taxed. As this additional CT and IR depends on firms’ profitability, the net effect of the shift is more favourable to young people and small firms. Finally, the reallocation of part of the additional corporation tax revenue towards an extra 4-point reduction in social security contributions at the minimum wage level amounts to a refocusing of expenditure on low-wage-intensive sectors.
Evaluations of the CICE’s impact have been rather mixed, with positive effects on firm profit margins, but modest effects on employment, and virtually no effect on investment. Several potentially contradictory explanations are consistent with these results: a lack of impact from policies to reduce labour costs; longer transmission channels than anticipated; and poor targeting of the CICE. The explanation that seems to us to be most consistent with the empirical results currently available is the fact that the CICE was largely perceived as a reduction in corporation tax, rather than as a reduction in labour costs. According to this interpretation, the shift in the CICE could have a significant effect on employment, via an impact on firms’ cash flow and on the clarity of the reduction in labour costs, an effect reinforced by the refocusing of the measure on labour-intensive sectors with low wages.