Purchasing power: reducing VAT is “neither effective nor fair” to support households, according to a study

Eighteen months after the presidential election, a new study enriches the debate on VAT. While many candidates recommended, in 2022, modulating the rate of this tax to restore purchasing power to households crushed by inflation, the Council for Compulsory Deductions (CPO) estimates, in a note published this Thursday, that “targeted subsidies appear more relevant than a reduction in VAT to mitigate the effects of rising energy prices and support the energy transition.”

Last February, the CPO had already concluded that “lowering VAT” was an unsuitable approach “to respond to the consequences of current crises and long-term economic and social issues”. Almost six months later, the body attached to the Court of Auditors confirms its analysis, insisting that “a reduction in VAT rates appears to be a tool which is neither effective nor equitable to support purchasing power Household".

For the CPO, lowering VAT benefits first and foremost the wealthiest, who consume more, and therefore pay more of this indirect tax. “Consumption in euros increases with income”, he indicates: “This tax represents 12.5% ​​of the disposable income of households belonging to the first decile of standard of living, compared to 4.7% for the last decile” . A reduction in VAT is therefore likely to mainly benefit the wealthiest, even though they already have little impact on VAT, which is less of a burden on their budget.

Furthermore, a reduction in VAT on certain products tends to benefit more the richest, who consume more. With the exception of rates of 5.5%, “the rate of 10% benefits in particular expenditure on catering, accommodation or transport, i.e. services over-represented in the consumption of wealthy households”, recalls the CPO. The gains associated with the reduced rates thus stand at 712 euros per household, for the first decile, 1151 euros for the middle classes and up to 2089 euros for the last decile.

VAT, which should bring in one hundred billion euros next year according to the 2024 budget, is also essential to finance other social measures, the document also recalls. “Previous experiences with rate cuts show that their cost is high for public finances, their effect on consumer prices is uncertain, and a large part of the cuts are captured by businesses,” list the authors, for whom this indirect tax “also contributes to the progressivity of the socio-fiscal system by financing social transfers and national and local public services”.

For the CPO, lowering VAT therefore risks costing the State extremely dearly, while missing its target - the most modest. The organization instead advocates for specific measures. “For an identical budgetary cost, an individual bonus of 250 euros allocated to all individuals with an income of less than 2,000 euros per month confers an advantage greater than the abolition of VAT on food products to households in the first eight deciles,” notes -he.

Ditto on energy prices: if some, like in the RN, call for lowering VAT on electricity or fuel to limit the surge in bills, “the establishment of a reduced VAT rate of 10% on gas and electricity would result in an increasing gain depending on the decile of standard of living,” calculates the council. The allocation of an energy check is preferred. For example, a 10% VAT on gas and electricity would bring in 100 euros for the first decile, and 158 for the last, for a total cost of 3.3 billion euros. For comparison, the exceptional energy check at the end of 2022 gave 200 euros for the first two deciles, and 100 euros for the next two, for 1.8 billion euros. A cost halved, for a more targeted and effective result.

The note also recalls the importance of the “price signal” sent by VAT, which helps divert consumers from fossil fuels. It is therefore better, at the same time, to support households to enable them to “decarbonize their lifestyle”. Finally, if it is easy to lower VAT rates, even temporarily, subsequently raising them will be, politically, an obstacle course... An argument that those in power have in mind.