VAT Likely to Rise to 25%

The government is proposing to increase the rate of VAT to 25%, to offset a range of measures destined at reducing the tax burden on employment and business. The increase is planned to be operational from 2009, although a final decision on the proposed new rate and its start date has yet to be taken. The current VAT rate is 19.6%, with reduced rates for basic food items and building renovation work. It is likely these reduced rates will be maintained, and may even be extended to other products and services. It the basic rate goes up to 25% then it will be the highest in Europe, alongside Denmark and Sweden, which also have the same rate. In order to try and improve the competitive position of the country, and reduce the level of unemployment, the government is trying to rehabilitate the world of work through a 'choc fiscal' (fiscal shock), as they call it. France has one of the highest rates of taxation on the employment in the world, with social security charges of up to 50% on salaries and wages. Employees and the self-employed pay around a third of their income in social security contributions. Critics argue that the panoply of tax reductions proposed by the government favours the rich, and that price increases from a hike in VAT will fall hardest on the poor. Others argue that fiscal adjustments alone are not going to be enough to make the country more competitive, with more deep seated structural reforms required. Whilst many fear prices will rise, the government argues that prices should not do so, as employers will benefit from a reduction in employment costs, which they will be expected to pass on to the consumer. They also consider that by reducing employment costs, and increasing the cost of imported goods through a higher rate of VAT, it will help combat the transfer of jobs to cheaper foreign producers. Amongst the proposals made by the government are tax relief on mortgages, more generous tax breaks for gifts and inheritance, overtime to be free of taxation, a maximum total tax take per household of no more than 50%, lower taxes for small business’s and tax concessions for business investment. Unfortunately, the government does not have a great deal of room for manoeuvre. They already have one of the highest rates of VAT in Europe, and they have committed themselves to a reduction in the level of public debt. Unless the tax breaks can be funded by increased economic growth, it is by no means clear that the sums add up.