VAT: the little history of the value added tax, which celebrates its 70th anniversary this Wednesday

“If I had a VAT royalty, (...) I would be richer than Bill Gates.” Beyond the witticism, Maurice Lauré, inventor of the “value added tax”, the famous VAT, was undoubtedly not far from reality. Came into force in France 70 years ago, on April 10, 1954, the largest French tax on final household consumption quickly spread across the globe. Today, 172 states apply VAT worldwide - with the notable exception of the United States - representing 95% of the world's population.

Before 1954, “this idea was already known by economists, to avoid cascading taxes, which sales taxes do not avoid,” recalls Alain Trannoy, professor at the Aix-Marseille School of Economics. . It is therefore to Maurice Lauré, a young polytechnician and 37-year-old finance inspector - then deputy director of the General Directorate of Taxes - who is responsible for the tax technique specific to VAT: "Instead of asking the last seller to pay the State the entirety of this consumption tax, he provided that each entrepreneur involved in the production and then distribution circuit (industrialists, wholesalers, retailers, etc.) would pay the tax on the value he would add to the product,” explained Guy Delorme, Inspector General of Finance, in 2004.

Concretely, “the company calculates the amount of tax on the price of the products it has sold, and it deducts from this figure all the taxes it itself has paid on its purchases. It only pays the difference to the Treasury. Hence the name “value added tax”, because it is calculated on the value added by the company to its product. A “very ingenious” system, observes Alain Trannoy, which Maurice Lauré exposed in 1952 in a book soberly entitled Value Added Tax. But we have to wait two more years and various “political-administrative adventures”, as the inventor of VAT recounted in 2001, for VAT to finally see the light of day.

After the vote of both parliamentary chambers, the law abolishing the production tax which existed until then to replace it with a value added tax was promulgated by the President of the Republic René Coty on April 10, 1954. "If the law passed, this owes a lot to the political support of Pierre Mendès France, then president of the Finance Commission of the National Assembly, who then became president of the Council,” underlines Alain Trannoy. The economist also places this new tax in the context of France during the Fourth Republic, which “did not hesitate to innovate on the economic level”.

Initially, VAT only concerned 300,000 large manufacturers and wholesalers, or less than 15% of companies registered with the tax authorities. “It gradually expanded,” relates Alain Trannoy. In 1968, VAT was generalized to all traders, craftsmen and service providers, as well as to certain agricultural operators. Enough to arouse the anger of small traders, in the context of the revolt led by Pierre Poujade, instigator of the Poujadist movement. Its opponents will nickname it “tax of the voracious administration” or “everything will increase”.

Author of the book TVA, French invention, world revolution (Éditions Eyrolles, 2012), Denys Brunel does not hesitate to affirm that “VAT was one of the driving forces of the Thirty Glorious Years”. “VAT favored exports, because it disappears as soon as a product crosses borders. It has also encouraged investment since companies that acquire property can deduct VAT,” he responded to La Croix in 2014.

This Franco-French tax was quickly exported outside the borders of France, first spreading across the whole of Europe. Since 1967, its implementation has been harmonized at European level by two directives. In 1972, VAT even became an obligation for countries applying for membership in the EU. “It constitutes one of the pillars of the single market,” notes Alain Trannoy. In 2022, a report from the Council on Compulsory Deductions (CPO) noted that VAT today constituted “one of the main public resources in the world and particularly in the European Union (EU) where it represents on average between 1/ 5th and 1/6th of the compulsory levies of the Member States. In France, it is the main tax revenue for the state budget, generating more than 200 billion euros in revenue last year, twice as much as income tax.

Although the 1954 law already provided for two VAT rates depending on the products concerned, they have since been the subject of numerous reforms. The “normal” VAT rate, applied to the majority of sales of goods and services, was for example initially set at 16.8%. It has since been increased and then lowered several times, today standing at 20%. There are also two reduced rates today: one at 5.5% on products considered essential, and another, set at 10% today and created in 2012, which concerns hotels, catering or even transport. Finally, a “super-reduced” rate was created in 1982, which today stands at 2.1%, particularly on reimbursed medicines and the press. “These rates are very regulated. The ranges of products covered by each rate are regulated by the European Commission,” underlines Alain Trannoy.

Even today, VAT continues to be at the heart of political debates. Like the sea serpent of “social VAT”, recently brought out by the Minister of the Economy Bruno Le Maire, or the proposals for lowering VAT brandished by Marine Le Pen (RN) and Jean-Luc Mélenchon (LFI) during the 2022 presidential campaign. Even at 70 years old, TVA has not finished making headlines.