The Value Added Tax, introduced to simplify revenue collection after WWII, is a mainstay of France – and Europe’s – fiscal policy, bringing in a large part of state revenue. As an ‘invisible’ consumption tax that applies to everyone regardless of income, some consider it unjust, but it does allow France to fund its generous social welfare programmes.
“It's an indirect tax, so we don't always think of it as a tax, and sometimes we don't think about it at all,” explains economist Julien Blasco of Sciences Po university.
The VAT is included in the price of anything you buy in France, or in any European country.
Because it is paid by the consumer, it does not appear to be very different from a sales tax, but it has some distinct differences.
“What's very specific about this tax is that it is measured and collected by each intermediate business in the production process,” says Blasco. “So that means that every actor has to measure the value of what they are producing and they have to report it. That makes it a very powerful tool for the administration.”
The power is in the money it brings in: over 176 billion euros in 2023 – over half of France's tax revenue – according to economy ministry figures published by the Insee statistics agency.
Listen to the history of the VAT, in the Spotlight on France podcast:
France introduced the world’s first VAT through a law passed in 1954 that attempted to simplify what had become a jumble of taxes after the Second World War.
The country was rebuilding and trying to raise money, but artisans and small business owners considered they were carrying most of the weight and started rebelling against what they called a “vampire state” sucking all of their profits away.
Maurice Lauré, who became head of the newly-formed DGI tax directorate in 1952, set out to reduce the tax burden on businesses. He was inspired by a concept from German industrialist Wilhelm von Siemens who in the 1920s proposed the idea of a tax that touched on every stage of the production process.
VAT beyond France
The concept was not initially embraced in France, but lawmakers eventually passed a first version of a VAT on 10 April 1954. It applied only to the relatively small number of companies registered with the tax office.
By the end of the 1960s VAT was expanded to all businesses, and it was quickly adopted in countries around the world.
Today over 150 countries have VAT, and it is a criteria for countries wanting to join the European Union.
“It's quite complex tax, but when it is in place, a one percent increase actually raises a lot of money, so it becomes a very powerful tool for governments,” says Blasco.
Regressive tax
In France, VAT brings in more than income tax, and in the EU those taxes represent up to a fifth of all public finances,
However, the tax is contested – unlike income tax, which increases the more you earn, VAT applies to all consumers regardless of their income.
“The richer you are, the less consumption taxes represent a share of your income,” Blasco says.
“Poorest households spend all their income. While richest households can save up to 50 percent of their income.
"When you have a fixed VAT rate, it is applied only on what you consume, not what you earn. So for the poorest households who spend all of their income, the 20 percent VAT rate is 20 percent of their income. While if you only consume 50 percent of what you earn, that 20 percent VAT becomes 20 percent on half of your income.”
Tradeoff
While much of France’s tax and social policies are progressive – they change depending on income – the decision to maintain VAT is a tradeoff, says Blasco.
“VAT is a regressive tax, but it actually raises a lot of money, which is used by the welfare state for social transfers and public services,” he notes.
His research has shown that countries with higher consumption taxes – mostly European countries – have more social programmes, so "you can say that taxes such as VAT are necessary in order to support significant welfare states".
Progressive VAT?
VAT could be made more progressive, by setting different rates for different goods and services.
“If you really focus on what kind of goods are consumed by different levels of income, you can build a more progressive consumption tax, or at least a less aggressive one,” says Blasco.
France has four levels of VAT, with a basic 20 percent rate on most things, whereas food, basic necessities and medicine are taxed at the lowest brackets (5.5 and 2.1 percent).
But decisions such as reducing VAT for restaurants and cafes to 10 percent have been made for reasons other than making the tax more progressive.
Listen to the history of VAT in the Spotlight on France podcast, episode 109. Listen here
