Proposed introduction of VAT on social security deferred

In recent months, there has been controversy in France over the possible introduction of a so-called ‘social value added tax’ (VAT). Under such a scheme, VAT will be used to finance social protection, which is at present largely financed by contributions paid by employers and employees. After much discussion and reports on the issue, the introduction of a ‘social VAT’ now seems to have been abandoned.

Debate begins on social VAT

The debate on the possibility of introducing a ‘social VAT’ – a value-added tax that would be dedicated to supporting social policies – first came about at the time of the parliamentary elections in June 2007. On 10 June 2007 – on the eve of the first round of the general elections – the then Minister for the Economy, Finance and Employment, Jean-Louis Borloo, admitted that the government was considering the issue. Between the first and second rounds of the elections, Prime Minister François Fillon stated that, ‘in line with the undertakings’ of Nicolas Sarkozy’s election campaign, ‘we are going to open negotiations with the social partners on a social VAT’.

The opposition parties immediately focused more attention on the issue in order to draw attention to the government, whose policies, on the one hand, benefited the richest people in society as a result of major income tax breaks. However, on the other hand, by increasing VAT, the government threatened to attack the purchasing power of the poorest people in society, which was further emphasised by Prime Minister Fillon’s hypothesis of increasing VAT by five percentage points.

Many deputies belonging to the parliamentary majority considered that these statements had affected the results of the parliamentary elections and led to the loss of dozens of seats for the majority. After the elections – during a ministerial reshuffle – Minister Borloo was transferred to the position of Minister for Ecology, Sustainable Planning and Territorial Development.

Proposed increase in tax for households

The proposed social VAT mechanism involved transferring part of the funding of the social security system from companies to private households, by decreasing the employer contributions while simultaneously increasing VAT. Supporters of this measure considered that such a transfer of social charges would make it possible to reduce labour costs in France and to increase the tax on imports, notably those coming from low-cost countries. According to those who rejected the measure, the system would, above all, lead to price increases which would inevitably penalise consumers, and in particular, the poorest members of society.

Views on introduction of social VAT

In September 2007, the Secretary of State responsible for Forward Planning and Assessment of Public Policies, Eric Besson, submitted a report to Prime Minister François Fillon, which considered a social VAT to be an ‘interesting’ and ‘probably efficient’ tool. At that time, the Minister for the Economy, Finance and Employment, Christine Lagarde, thought it was ‘not the right time’ to introduce such a tax. Moreover, the Economic and Social Council (Conseil économique et social, CES) was asked to present its opinion on the issue before the end of 2007.

Proposal of Economic and Social Council

In its recommendation made on 19 December, the CES observed that ‘there is no miracle tax base that grows sustainably faster than gross domestic product (GDP)’ and that could therefore simply finance the rapidly growing expenditure on health and on provisions for those of pensionable age. However, the CES also emphasised that it is ‘economically preferable that contributions – of whatever sort – should intervene downstream from production, rather than upstream on factors of production’. The CES proposed reducing employers’ health and family contributions by three or four percentage points and transferring these charges to a range of taxes, including ‘behavioural’ taxes – such as those on gambling, snacks and carbon emissions – and, in order to complete the measure, taking a contribution from VAT ‘in spite of its inflationary impact for which those on low pay should be compensated’.

All of the trade unions objected to the CES recommendation and are critical of companies disengaging from financing social protection at the expense of households, consumers and patients.

Uncertainty regarding social VAT

In a statement on 2 January 2008, Secretary of State Eric Besson highlighted that in the longer term – in 10 or 15 years’ time – social protection may inevitably have to be funded by taxation, thereby reopening discussions on this issue.

However, on 8 January 2008, the French President, Nicolas Sarkozy, considered that it was an ‘error’ to have talked about creating a social VAT. In his view, ‘it would have been better to talk about transferring costs from production to consumption’, because social VAT is ‘a term which does not mean anything’. President Sarkozy added that ‘it was also an error to talk about it and do nothing’. He commented: ‘Either you do it or you don’t, and you do what you have decided.’

Commentary

It is probable that the debate on a social VAT will be put aside for a few weeks, or even months, especially in the run-up to the municipal elections which took place in March 2008. This may also be the case as the issue of purchasing power has once again become a topic of heated public debate, following studies by consumer associations that have denounced rocketing prices of various food items in recent months.

Pierre Concialdi, Institute for Economic and Social Research (IRES)