How a French corporate tax reform raised wages: evidence from an innovative method

Abstract

This paper documents the effect on wages of one of the most far-reaching French economic reforms of the past decade. The reform, implemented between 2013 and 2018, provided a corporate tax credit proportional to the payroll for those employees paid no more than 2.5 times the French minimum legal wage. The aim of the reform was to increase competitiveness and employment by reducing labor costs through a corporate tax credit. It is shown here that a significant part of the tax credit paid to firms actually increased wages, missing the reform’s initial target. Insofar as almost all companies were affected by the reform, an innovative evaluation method is used here to simulate a counterfactual scenario for wages using branch data from France’s national accounts. This method successfully estimates the specific impact of the reform on wages and it is robust to several checks, such as placebo estimates. The present contribution to the literature is threefold. First, we propose a novel methodology of policy evaluation specially designed for the absence of a counterfactual. Second, and unlike most public policy evaluation studies, national accounts data are used instead of firm-data. Third, the partial equilibrium results presented in the article are particularly relevant for calibrating a macroeconomic model accounting for general equilibrium effects. Indeed, the reform amounted to a cut in corporate taxes equivalent to 1% of GDP, therefore constituting a sizable macroeconomic shock.