This “degressivity” of VAT as a function of income is mainly due to the fact that the savings rate increases with income. Consequently, the higher is the income, the lower is the share of consumption, and therefore VAT, in income. However, the income and savings rate of a given household are not constant over time. A household may have a high income and save a lot for one period and then un-save because its income has declined over another period. According to a working paper of 2015 INSEE, VAT is regressive half when the whole life cycle is taken into account.
As shown in the aforementioned study by the Institute for Public Policy, a different and complementary view of the effects of VAT can also be obtained by relating it to household consumption (excluding rents): it represents roughly a share of it. Constant (between 11.5 and 12.0%), or even very slightly progressive, depending on the income decile. You can use the s corp tax calculator in this case.
What the Study Covers
This study covers income, consumption and VAT in 2005. The changes made since to the rules relating to VAT (see above) are not likely to call this diagnosis into question, as the 2015 report notes. of the council on compulsory VAT deductions.
Reduced VAT rates are often justified by the concern to attenuate its anti-redistributive effects by taxing less on “essential” products. However, goods and services subject to reduced rates are often as much, if not more, consumed by wealthy households (eg, cultural products). The aforementioned report of the compulsory deductions council underlines that the exemptions and reduced rates have a very limited redistributive impact, the low progressive nature of the rate of 5.5% being offset by the declining nature of the rate of 10%, and that VAT is a “bad instrument of redistribution”.
The Incidence of VAT
The question of “tax incidence” is dealt with in a specific sheet, but VAT provides an interesting illustration. While businesses are legally accountable, it is generally accepted that it actually weighs on households.
However, this conclusion is only valid if household consumption is very insensitive to prices and if companies can therefore not change their prices excluding tax and fully pass an increase or decrease in VAT in their prices including all taxes, which is not the case in reality. The aforementioned study by the Institute of Public Policies shows that the reduction in VAT on restaurants in 2009 was only reflected in consumer prices by 30 to 45%.
In addition, if households bear VAT through the price of the products they buy, part of their income is indexed to these prices (minimum wage, pensions, etc.) and an increase in VAT is then in fact passed on to businesses or public administrations.
All in all, it is not possible to assert that VAT is a tax on households, or on companies, which puts its supposed redistributive or anti-redistributive effects into perspective.