2023-09-30 12:44:41
Among the measures envisaged to support the purchasing power of the French is the reduction in the VAT rate, particularly in terms of energy. While other countries, such as Spain and Italy, have already adopted it, the Council of Obligatory Deductions (CPO) considers that this measure is ineffective and would present too high a cost for public finances.
In a note published on Thursday, September 28, the Council for Compulsory Deductions, an organization attached to the Court of Auditors, affirms that the reduction in VAT will not have concrete effects on prices: “A reduction in the VAT rate appears as a tool that is neither effective nor equitable to support the purchasing power of households. The organization also recalls that previous experiences with rate cuts show that their cost is high for public finances and that their effect on consumer prices is uncertain. On the other hand, a large part of the declines are captured by businesses.
You should know that the CPO had already expressed its reservations on this issue in February 2022. At the time, the organization had highlighted the limits of this proposal by specifying that reducing VAT, particularly on food products, was less effective for improve the purchasing power of low-income households than monetary transfers. This comes down to uncertainty about the impact of the approach on prices and the impossibility of targeting certain categories of households through a reduction in VAT.
Value added tax, a direct tax imposed on the purchase of goods and services, was first introduced by France after World War II and has since been adopted globally. In 2022, the General Directorate of Public Finances reported that VAT generated 184 billion euros in revenue. The standard VAT rate is set at 20%, but there are also reduced rates of 10%, 5.5% and 2.1% which apply in specific situations determined by law.
Some members of the opposition are calling for a reduction in the standard tax rate. Marine Le Pen (RN) therefore proposes to raise the price of fuel to 5.5%. For its part, the National Rally even proposed 0% VAT. Its number 2, Sébastien Chenu, declared, at the beginning of September, that this tax was unfair and had a greater impact on households in difficulty.
Alternatives to lowering VAT proposed by the CPO
The CPO argues against this proposal by highlighting the regressive nature of VAT, which means that its impact on the disposable income of households decreases as their standard of living increases. Furthermore, he emphasizes that reduced VAT rates have only a marginal effect on this regression. The organization also highlights the role of VAT in financing social transfers, which largely compensates for the regressive nature of this tax. He therefore insists on the need to preserve VAT yield to guarantee the viability of our social model.
And the CPO determined that, to combat rising energy costs, targeted strategies, such as fuel or energy assessments, are more effective and less costly to public finances than a reduction in the VAT rate . However, the CPO emphasizes that it is also crucial to implement measures that encourage households to reduce their greenhouse gas emissions and energy consumption. The French have already implemented a “call for sobriety” this winter, which resulted in a drop in electricity consumption of -9% from October 2022 to February 2023, compared to the 2014-2019 average. .
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