Social VAT

Social VAT is a tool Fiscal consisting in financing whole or part of the Social protection by an increase in the Taxe on the added-value (VAT). The idea is of touching all the products marketed on the national territory, including the imported products , whereas the financing of social protection by a taking away on the Salaire S, by means of the National insurance contributions, touches only the national Production and the labor incomes. It is not a question to increase the Taxes and social security deduction, but to change the distribution it.

Having for goal to improve competitiveness of the national companies, this measurement is likely however to involve a revival of the Inflation. There exists a debate on its impact short-term on the Purchasing power and long-term on the Emploi and the Investissement.

This tool was implemented as from 1987 at the Denmark, and in January 2007 in Germany (a point of rise of VAT to the title of social VAT , within a total rise of 3 points of the VAT). Measurement is considered in France, where the very high level of the National insurance contributions, financing the Social security in France, weighs on the Labor costs and thus the economic Compétitivité.

Problems

The countries where the Labor costs is weak have a Competitive advantage on those where labor is more expensive. An element of this Labor costs, put aside the net salaries, is the financing of the Social protection (Santé, retirement, Assurance unemployment, etc), which is traditionally financed by National insurance contributions, paid by the Employeur and the Salarié on each Salaire. To lower the National insurance contributions will make it possible to reinforce the economic Compétitivité, in particular the Competitiveness-price.

Social protection, in the developed countries, benefits today many categories of population, including the inactive . It can appear unjustified to make it finance only by the world of the work, by the means of the national insurance contributions, from where a tendency generalized with the taxation of the social protection, whose social VAT would be an element. In France, the taxation of social protection was initiated with CSG, installation on a low level as from 1991 then regularly increased: the Tax S and Taxe S represent 28 thus; % of the resources of the general scheme of the Social security in 2007, against 5 % only in 1991, and in proportion of the income , they weigh more on the low incomes, which consume most of their incomes). These detractors think that a taxation by other modes of taking away, even if they present other disadvantages or are unrealistic (CSG, Cotisation added-value ), would be less uneven.

The economists favorable to this measurement compare the installation of social VAT with a form of competitive Dévaluation, since it penalizes the products imported with the advantage of the products manufactured in the country. The effect on the imports would be important for certain, negligible enough for others which propose the immense difference of Production costs between the developed countries and the emergent countries.

Effects of the social VAT

Social VAT aims at changing the way of financing of social protection, by increasing VAT and while dropping by an amount are equivalent (or while eliminating) the national insurance contributions. The expected positive tests are whereas:

the local Labor costs is reduced (lowers loads), helping the national companies to be more competitive, reinforcing the economic attractivity of the territory and increasing flows of IDE (entered of capital foreign), now or increasing GDP and the Emploi of the territory. That can contribute to reduce the Travail dissimulated;
the selling price of the imported products increases (rise in the VAT not deadened by a fall of contributions);
the selling price of the local products drops on the domestic market (if the rise in the VAT is less than the fall of the Production costs related to the fall of the contributions) and especially with the Exportation. This fall will be weak even null if the decision makers of company do not reflect the fall of the contributions on the selling prices, and choose to increase the Profit S, the wages, or the Investissement S;
by reducing the weight of the employers' national insurance contributions in the Labor costs, the rises of net salary is facilitated because they are less expensive the company, not involving more simultaneous rise of the National insurance contributions;
the Salaire S Nets remain unchanged (the level of the Taxes and social security deduction identical remainder), or possibly increase (cf above);
according to the partisans of social VAT an increase in the Rentabilité of the companies on the territory would encourage those to invest there, would create economic activities and thus of employment.

In addition, the economic theory of the general stability provides that the deviation of the profit S or the wages far from their level of balance is brought back to zero on medium term because of competition. " perturbations" induced by social VAT would thus grow blurred in the long term, whereas its positive effects perdureraient.

The possible negative results are:

a fall of the purchasing power if the fall of the prices net of tax (HT) does not compensate for the rise of VAT (the type of households concerned depending on the relative increases in VAT according to the goods);
a revival of the Inflation (this effect is particularly emphasized by the MINEFE and Christine Lagarde: “without a firm accompaniment as regards maintenance of the prices, installation of the social VAT would not be favourable, in what it would be factor of inflation and probably not very creative of employment. ”);
a Effect of aubaine for certain companies which can benefit from the fall of the contributions to increase their profits and not to lower their prices net of tax, in particular on the sectors where the economic Concurrence is the least strong;
if the rise of VAT is too big (more than 5 points approximately), the Tax evasion and the Contrebande are likely to become important economic problems.

In France, the effects of the social VAT had been studied since 2004, within a total economic model, by an analysis of DGTPE (a direction of MINEFI) in a report submitted to the Minister for Finance of the time Nicolas Sarkozy (report drawn up following a ordering of the Committee of supply of the Senate), and in an analysis of the Chamber of commerce of Paris. This report/ratio envisaged, in one of the scénarii considered, a slightly positive effect on employment at the end of two years, and on the long run a null effect on employment and a light fall of GDP because of a désincitatif effect on the investment.

The unanimity of the members of the Conseil of orientation for employment (compound of economists, Managements and labor and members of Parliament) was not obtained, and the COE wrote in an undecided conclusion:

“ On a side, the initial increase in employment is likely to start a virtuous circle: it increases the incomes of households, which increase their consumption then and thus the GDP since this addition of household consumption is not entirely satisfied by an increase in the imports.
On another side, of the negative effects is likely to appear because of creation of the new tax to finance the fall of contributions (CVA, ECA, CPG) or because of increase in an existing tax (VAT):

if one chooses a contribution which weighs partly on the EBB of the companies, the increase in the cost of the capital is likely to reduce the investment.
if one chooses a tax on consumption, if an inflationary effect engages, the purchasing power of the households is reduced, which weighs on consumption. If, on the contrary, the companies compress their margins in order to absorb the tax on consumption, it is their profitability and thus their investment which are likely to be reduced. ”

Contrary to the Tax Lauré, which aims at taxing only the products imported since with the countries with low costs of labor, social VAT does not pose any problem with respect to the agreements of Free trade, because all the products and service S are taxed in the same way.

The effect on the imports coming from the countries at low cost would be significant for certain, negligible for others which propose the immense difference of Production costs between the developed countries and the emergent countries. One can note that beyond the versed net salaries and of the social security contributions which are attached there, it is necessary to take account of other costs which weigh on these imports, primarily the costs of transport and the cost of the insurance against the movements of the Foreign exchange rate, costs which for bulky and weighty objects can represent a significant share of the cost price to the importation. On these types of products the impact on the imports could be notable.

The effect would be more important on the trade between the developed Pays, to which the production costs are closer.

Theoretical examples

Effect on competitiveness of the local and imported products

Simplified theoretical example, one supposes that VAT rate at the beginning is of 0 % and that the manufacturers do not apply a margin to their products:

a local product costs 100 to produce it with what is added 20 of national insurance contributions, it is sold 120 (except profit margin of this producer)
an imported product costs 100 to produce, but manufacturing it does not have social security contributions to pay, it sells 100 (except profit margin of this other producer)
by supposing that each product is sold in identical quantity (a unit of each product) , the State collects 20 of national insurance contributions for 2 market products.

After application of a social VAT of 10 %, and on the assumption that prices HT are not modified:

the local product costs 100 to produce, and is sold 110
the imported product is also sold 110
the State always collects 20 per 2 market products, whatever they are.

Three reports:

It appears whereas, by moving the weight of the national insurance contributions directly towards the consumer, the local product could become more competitive in price with that imported (this effect is especially visible if starting price difference including all taxes is lower or equal to 5 %).
the financing of social protection remains constant.
This example shows also the limit of the effectiveness of social VAT on the imported products at very low cost: if the price of the imported product is very largely lower than the price of the local product, social VAT reduces the price difference slightly and thus offers only one profit of competitiveness limited.

Reality is however a little more complex than this theoretical example:

the producers and importers can modulate their margins and neutralize the effects of social VAT .
the consumers carry out their purchases according to their preferences and of their propensity to pay. Thus, to claim that in the presence of two products, consumption is also distributed between the two products is illusory. In this example, certain consumers ready to buy the product with 100 are not inevitably any more able to buy to 110. Social VAT thus raises a real question about the economic impact on the level of the prices of the local products.
On the other hand, if the consumers more buy the local product with 110, compared to the imported product, that generates a virtuous spiral " local consumption, local" employment;. It is the required effect.
In this theoretical example, if the consumption of imported products is higher than 50 % of the market, then the product of the taxes increases (it is lower than 20 front, it passes to 20), and the financing of social protection increases compared to the initial situation.

Effect on the trend of prices of the local products

Example suggested by Jean Arthuis, president of the committee of supply of the French Senate, within the framework of a VAT with 25 % (against 19,6 % currently):

a market product 100 € excluding VAT is today sold 119,60 € including all taxes (except margins)
According to the level of the social exemptions from charges, the selling price of the product can for example be decreased of approximately 5 %, which gives a selling price of 95 € net of tax.
With a VAT rate with 25 % on these 95 €, the new price with the sale will be of 118,75 € including all taxes, slightly lower than the former price.
Conversely, an imported product which was at the beginning at the same price of 100 € HT undergoes the increase in VAT rate and passes from a price including all taxes of 119,60 € to a price including all taxes of 125 €.

This mechanism would carry out a transfer partial of the load on behalf of richness produced to the share of consumed richness. The adjustment of the employers' national insurance contributions and new VAT rate are calculated so that the play is with null sum for public finances.

On the other hand, and provided that the companies completely reflect the fall of the contributions on the prices, the mechanism involves a light fall in the prices of the goods produced in the country, and has an effect Inflation nist on the imported products. For Mr. Arthuis, inflation on the imported products will be weak taking into account the competition with the local products which could involve the reduction in the margins of the importers. In addition, the profit of competitiveness can have impact only for the products on which there exists still a national production and for which the price difference at the beginning with the imported products is weak, appreciably lower than the maximum impact of social VAT (thus of 1 with 3 %).

Applications

In Denmark

Between 1987 and 1989, the Denmark, which has an elevated level of Social protection, lowered the national insurance contributions of the employers of 50 % with 30 % by financing the measurement by a rise of 3 points of VAT rate, carried with 25 %.

This reform did not have a particular effect on inflation according to a report/ratio of the French senate; it has according to the same report/ratio contributed to successes of the Danish economy which followed: lower Unemployment rate with 5,5 %, Budget surplus, high growth (+3,4 % in 2005), Trade balance positive. One can however note that during the period considered, 1987-1989, the Danish growth strongly marked time compared to the rest of Europe, the effects of this measurement being added to recessionnists measurements taken the previous year.

In 2002, the VAT represents in Denmark 33 % of its revenues from taxes, against 25 % of the tax income in France. In addition, the direct taxes (returned of the people) represent 53 % of the receipts (against 17 % in France).

The overall tax structure is thus very different, and leads, for the low wages, with a tax corner among highest in OECD.

In Germany

In Germany, the government of Angela Merkel made pass to January 1st 2007 the VAT rate of 16 % with 19 % to finance part of social protection (VAT on the food products, it, not being modified). This rise of VAT can be connected with a social VAT, since the national insurance contributions in Germany were reduced equivalent of 1 point of VAT.

As in France, the products of first need are taxed ata low rate (5,5 % currently), the impact of the rise of VAT on the inequalities was thus reduced.

The effect on the rate of Inflation is still difficult to evaluate: raise prices of 1,17 % between January and May 2007, against +0,92 % over the same period in 2006, even if the figures undoubtedly indicate light acceleration (additional rise of the prices of 0,25 % in five months, is 0,6 % over the year in projection). One can raise in addition that the German consumers strongly anticipated at the end of 2006 their purchases of durable goods, thus inducing a depressive effect on the prices at the beginning of 2007, which could counterbalance the inflationary impact of a rise of VAT.

This social VAT acts like a competitive devaluation, and supports the competitiveness of the Germany to the detriment of its principal business partners (1st being France), notwithstanding the fact that it is in the case considered of limited width (1 % of VAT).

In France

Overseas

The law Perben of 1994 founded a social VAT in the departments of the Réunion, the Guadeloupe and the Martinique. Thus, VAT rate was raised of 7,5 % with 9,5 % and of the social contribution exemptions were installation in the sectors of industry, hotel trade, the restoration, the press, agriculture and fishing.

A study of the Ministère of Overseas the of 1999 raised that four times more employment had been created in the sectors exonerated than in the sectors not exonerated between 1996 and 1998 but considered to be difficult to isolate the impact of the sectoral exemptions from the other factors contributing to job creation.

An econometric study of INSEE in 2000 showed that for the Meeting, that the law Perben explained only 20 % of the recruitings in the exonerated companies. This law also instituted a CAE (contract of assistance to employment) for the whole of the economy. Difficult thus to quantify the share of job creations due to the exemptions of employer contributions. On the other hand, which one can say, it is that the big rise of SMIC in 1995 (alignment of the SMIC réunionnais on the metropolitan SMIC) did not cause a deceleration of the economy. These measurements of exemptions had certainly their role. It appeared in this study that the exemptions from charges more benefitted the Microphone-companies (2 to 4 paid) in economic situation critical and very sensitive to the Labor costs. These exemptions allowed the maintenance of activity of a company which would undoubtedly have disappeared following the rise from the SMIC, that the pure creation of job.

In metropolis

In metropolis, social VAT does not exist at present. The generalized Social contribution (CSG), instituted in 1990 by the government of Michel Rocard and which touches the incomes of households (labor income and incomes of the inheritance), supplements the budget of the Social security, which remains financed mainly by the National insurance contributions.

In France, the level of the National insurance contributions, one of highest in the world.

The impact of the reform on the Inégalités of income is disputed. A study of rather summary EDHEC affirms that there exists a risk of increase in inequalities, whatever the modulation of the tax raise of VAT full and reduced. More deepened studies, in particular microfondées, show that on the contrary, the rise of VAT rate normal would reduce the inequalities.

A rise in inflation more touches the poorest households which devote a greater part of their incomes to consumption (in opposition to a behavior of saving).

the version of Pierre Aunac: the social VAT replaces the whole of the National insurance contributions (what would require a considerable rise of the VAT).
the deputy UMP Christian Vanneste, in addition, deposited, in November 2005, a private bill aiming at instituting the integral replacement of the national insurance contributions by a tax proportional.

Position of the economic actors and policies

; Governments In January 2006, Jacques Chirac, then President of the Republic, had emitted the idea to widen the plate of the employer contributions to the whole of the Added-value of the companies. However this measurement remained without continuation in front of the complexity of management of such a measurement and the forecast of a very negative effect on the investment studies the introduction of a social VAT in France by 2009, even later. A study was entrusted to Eric Besson; in front of initially appearing in July 2007, it was returned public in September 2007. Its mechanism would consist in indeed rocking part of the financing of the Social security of the Entreprises towards the Ménages, via a fall of the Employer contributions and a simultaneous rise of the Taxe on the added-value (VAT).

September 9th, 2007, Francois Fillon affirmed that the Besson report/ratio “leads to show that the question is broader than that of the VAT”.

; Other actors The concept of the “social VAT” is currently criticized by the French left, which fears an aggravation of the inequalities to the reason that the VAT touches uniformly the consumers, unlike the graduated incomes like the Income tax, or even of the direct taxes proportional like CSG, since the share of their incomes devoted to consumption is more important for poorest. She fears moreover one inefficiency of this measurement on the competitiveness of the companies vis-a-vis the products coming from emergent countries at very low cost of labor (China, India,…), and a risk of disturbances of the intra-Community trade between country at cost of labor neighbors. She fears finally that the French companies do not make the choice increase their profits by not reflecting the fall of the contributions on the final price of the product.

These same leaders had however considered previously in a favorable way of the rises of VAT or a relatively similar mechanism of " contributions on the value ajoutée" :

Ségolène Royal had indeed pled in favor of setting-up for the companies of a direct imposition on the added-value as average to reduce the national insurance contributions while Dominique Strauss-Kahn had evoked the idea of increases modulated of the VAT. At the time of the congress of Mans in November 2005, the final motion of the socialist party put at the government program, on the assumption of a victory to the elections of 2007, “ the transfer of part of the employers' national insurance contributions, which weigh today on the only wage bill, on the added-value ”, while reaffirming its preference for direct taxes and progressive (" The field of progressiveness must extend to the detriment from the proportionnalité" , " The rebalancing between direct and indirect taxation must be privilégié") in opposition to the VAT.

The democratic Mouvement during the countryside was expressed in favor of the social VAT, by the voice of its principal economist. Francois Bayrou wants to be careful.

For other reasons, this concept meets also the opposition of some liberal movements . According to them, social VAT would do nothing but move the tax, which would thus make only move its gravity on the economy, they show also this measurement of protectionism, which would have like consequence to slow down the exchanges.

The party UMP supports the reform, but divergent voices are make hear, like Jean-Pierre Raffarin or Serge Dassault which considers that the social VAT " is not good a idée" and " recommends; rather a levy on the turnover of the entreprises".

In France, many wage earners associations (FO, CFDT, CFTC, CGT) there are unfavorable and generally prefer CSG to him: they fear in particular a consecutive reduction of the purchasing power (this VAT being paid in fine by the consumer), a transfer of corporation tax on the households but also a potential loss to be able to them on the management of the disease or pension funds.

The country trade unions are on the other hand favorable there: FNSEA decided for, just like the rural Coordination.

The MEDEF, representing the heads of undertakings, is favorable to a reduction of the national insurance contributions, but considers that social VAT is only one measurement among others, the priority having to be given to the reduction of the Labor costs.

The CFE-CGC proposed a “national insurance contribution on the consumption” to which operation is very close to social VAT (transfer partial of the employer contribution disease on consumption).

The party of the greens, at the time of presidential of 2007, recommended an important VAT on the products of Luxe.

Alternatives

The alternatives to the social VAT, to obtain a fall of the National insurance contributions, are primarily an additional rise of CSG, or the recourse to a " Contribution added-value ".

Contribution added-value

An alternative of the social VAT would be a " contribution added-value " ( CVA ), also called " CSG employer ". The companies would be taxed on their added-value. The consequence of the contribution added-value is above all to reduce the relative weight of the factor work for the companies, compared to the cost of the capital. The cost of the capital would increase by an amount are equivalent to this fall, which lets fear, according to the majority of the reports/ratios, a negative effect on the Investissement. Compared to the initial situation, the companies with strong intensity of Labor would be favoured with the detriment of the companies with strong capital intensive Intensité.

This tax on the Added-value of the companies would not have the load symbolic system of a rise of VAT, but its installation would be very complex and its important costs of management. It would have a rather weak impact on the imports (only the added-value brought at the time of the sale (possibly during transport) of the imported products would be taxed, but not the added-value of the production of these goods). With equivalent reduction of National insurance contributions, the weight on the national production of this CVA would be more important than that of the social VAT, the taxable amount being less broad. In addition, the CVA cannot play the part of competitive devaluation which is lent to the social VAT.

The CVA would reduce the risks of Inflation which would involve social VAT , since this one will increase the prices of the national products and imported.

The CAE, which had studied in July 2006 the question, had rejetté this idea: “ is not convinced of the interest of a widening of the plate of the employer contributions, which would be carried out by the means of a CVA, it was removed from its economic disadvantages most obvious (tax on damping). Because, whatever the formula selected, the costs of the management of the formula, and which are undoubtedly not that of transition, would be significant compared to dubious and probably limited advantage. A kind of precaution principle returns here the status quo gravitational enough for much of the members of the CAE…

; External bonds

Opinion of the the Council of orientation for employment on the widening of the plate of the contributions of social security, July 2006.

Others

In addition, a brief study of EDHEC proposes that the social VAT is applied specifically to the wage national insurance contributions '' ''.

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