Increase contributions, lower pensions or work more… This is the triptych of economists and the government when it comes to finding solutions to finance the pension system that should present significant deficits between 2022 and 2032 according to the COR.
But there is potentially another alternative that consists of increasing taxes and in particular the one that contributes the most income to the General State Budget: VAT.
The collection of this tax is estimated at 167,200 million euros in the 2023 Finance Bill, of which 102,000 million for the State and the rest for Local Entities and Social Security.
Taxes finance 12% of pensions
It is said that the French pension system is pay-as-you-go (taxpayers finance the pensions of retirees), but it is also contributory (the pension is proportional to the amount of contributions paid). In other words, it is not a public system that is intended to be financed with taxes, as is the case in the United Kingdom or in the Scandinavian countries for the basic pension.
However, of the 346,000 million euros of global resources of the pension system, taxes represent 12% of income. This is called taxes and duties assigned to social protection schemes (Itaf). There are about fifty of them, including CSG and VAT.
If the State makes a “sprain” to the tax system, it is on the one hand to compensate the exemptions from contributions on low wages and on the other to finance solidarity measures such as the minimum old age, the increase per family or the contributions of unemployed people or low for sickness.
Could we then consider increasing the financing of pensions by increasing VAT?
Legally, nothing prohibits it. Although the impact of an increase in the VAT rate is complex to assess due to the behavior of companies and households when faced with a change in the rate. The Mandatory Rates Council offers estimates, but its latest data is from 2019.
A VAT rate of 21.5%
This corresponds to the COR estimate of the pension system deficit for 2030.
Excluding the reduced rates of VAT, the increase in the normal rate should, however, be 1.5 points according to François Ecalle, which would place it around 21.5%.
This rate has already been higher in France. In 1973, for example, the standard VAT rate was 23%, that is, the highest level practiced from 1968 to 2013.
Many liberal economists also call for an increase in VAT in France so that taxes weigh more on consumption than on labor and capital.
Therefore, increasing the VAT rate from 1 to 2 points would make it possible to finance the pension deficit without changing the retirement age. But since this increase in taxation would not be offset by reductions in other taxes, it would not fail to have an impact on the country’s purchasing power and activity.
The side effects of the VAT increase
Regarding the standard of living, INSEE has calculated that a 3-point increase in the VAT rate causes a drop of 0.6% in the standard of living of all households, particularly the most modest ones. For the lowest 10%, the drop in the standard of living would reach 1.8%.
In addition, the effect of an increase in consumption taxes may have adverse effects on the activity as a whole. A VAT increase of 1 percentage point of GDP causes a drop in activity of 3.7% after one year according to this study that evaluated the evolution of VAT rates in 14 industrialized countries.
While the VAT rate may have been higher in the past, the overall tax burden was lower in France. From 34% of GDP in the 1960s, the mandatory tax rate continued to rise in the following decades to exceed 45% in 2022.
“I don’t think we should finance pensions with a VAT increase, it’s turning the problem upside down, believes tax expert Philippe Bruneau. The best way to finance pensions is for there to be more activity, more employment and more consumption. And that is why it is preferable to tax less”.
Source: BFM TV
