"Social VAT" is Not the Solution for French Social Security

Molinari Economic Institute
Issue CXXXV - December 19, 2007
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Paris, December 19, 2007 – While the Economic and Social Council has just qualified "social VAT" as “inflationary” in a draft opinion to be voted today, a new study from the Institut économique Molinari emphases that this new tax measure does not hold the key to the future financing of social protection in France.
 
For the current government, the social VAT offers also the hope of improving France's competitiveness by relying on consumption to carry a heavier share of compulsory levies.
 
As indicated by the new study from the Institut économique Molinari, this position is based on a number of erroneous ideas and fails to take account of the VAT's drawbacks.
 
Social VAT: a tax on income
 
The most blatant error on which the “social VAT” project is based has to do with the very nature of the VAT. It should be noted that the notion of consumption in the VAT context at most merely indicates the time when the tax is paid. The tax’s inherent effects in the end always relate to an exchange between income and a good or service. The VAT thus ends up hitting income just like any other tax.
 
In areas of the economy where labour plays a dominant role, precises the study, the VAT actually amounts to a particularly punitive tax on wages, given that the value added comes almost exclusively from labour.
 
And since areas of the economy typified by low wages are generally labour-intensive, the VAT, by directly raising labour costs, hits especially hard at job opportunities for the least qualified persons.
 
Social VAT penalises business
 
In the real world, apart from the economic difficulty of transferring the VAT to customers in competitive markets, many intermediary companies face, sometimes, a final VAT load. In addition, detailed formal requirements often result in tax retrievals that can no longer be recovered from customers. By the way, companies selling products excluded from the VAT cannot put in a claim for the VAT paid on their purchases. The result is that VAT is then a hidden, but not less real, tax on business investments.
 
It is often suggested that it would be easy to export the tax load abroad by hitting imports with the VAT. This is not so simple: French importers or their customers, namely consumers living in France, would face higher costs or prices. The “social VAT,” rather than improve competitiveness, would be entirely counter-productive for France.
 
The VAT: a bureaucratic albatross
 
Each industrial firm, whether a manufacturer, a wholesalers or a retailer, has to pay a tax on the value it added to the product, i.e. the VAT, with deduction of the VAT paid on its purchases. In this way, the VAT converts every firm into an implicit tax agent, obliging it to support the cost to recover it.
 
Given the complexity of this tax, it is not surprising that it has given birth to considerable tax evasion. In Germany for example a rise in VAT from 16% to 19% in early 2007 would be accompanied by an estimated increase in the underground economy by several billion euros, reaching almost 15% of GDP!
 
To favour French competitiveness, along with jobs and investment, it would be better to reduce tax pressures. With a view to greater prosperity, it is on this essential point that the government should move ahead quickly, concludes the IEM study.
 
Entitled, “Social VAT” is not the solution for greater competitiveness or for providing increased financing of French Social Security, the study is available at: http://www.institutmolinari.org/pubs/note20078en.pdf

Information and interview requests:
Pierre Bessard
Associate Researcher
Institut économique Molinari
Rue du Luxembourg 23, Boîte 1
1000 Bruxelles, Belgique
Tél. +41 (0) 79 634 45 26

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