The mechanical impact of a change from 19.6% to 5.5% is -11.8%. However, some catering services were not affected by a change in VAT (take-out, alcohol, etc.), we retain a mechanical impact of 7.5%, in accordance with the assessment of the Senate information report.
The Aspect Of Interest
But it is also interesting to see that when the VAT increase in catering in January 2012 (from 5.5% to 7%), the price increase achieved was lower than the price increase that would have taken place in case of all-wheel drive of the VAT increase in prices (blue-green curve above the red curve)
- Empirically, whether it is during a VAT increase as during a VAT reduction, the transmission of VAT in the prices is not complete. That is to say that if the VAT goes for example from 20 to 22%, then a product costing 10 euros HT (therefore 12 euros including VAT with 20% VAT) will tend, on average, to drop to less than 12, 2 euros after the VAT increase. Companies therefore modify the price excluding VAT to absorb part of the increase in VAT (in the event of an increase) or to increase their margins (in the event of a decrease in VAT). Empirically, and still according to the company, “about 80% of VAT variations are transmitted to consumer prices one quarter after a change in VAT rate”. According to that you can make the calculation of the taxfyle.com/small-business-
In the case of a full rate VAT increase of 2 points, and by doing a calculation on a corner of the table, this would therefore give us:
- An average price increase of the products concerned of 1.66%: a product at 12 euros including tax (therefore 10 euros excluding tax) rising to 12.2 euros, i.e. an increase not of 2% but a mechanical effect on the prices concerned by 1.66%
- But, using empirical data, we can estimate that “only” 80% of the VAT increase would be reflected in prices, i.e. an increase of 1.33%
- As products at normal rates represent around 60% of the consumption basket, this therefore implies an overall effect on inflation of around 0.8 point.
Conclusion: The effect of a change in VAT on prices depends on the behavior of companies, which will more or less pass this change on to selling prices. The behavior of companies can also depend on the economic cycle, the sector’s margin rate, competition.
In the case of France, and with some assumptions on the percentage of VAT transmission in prices, a full rate VAT increase of 2 points would lead to an increase in inflation of around 0.8 point (and therefore, all other things being equal, if wages do not move, an almost equivalent loss of purchasing power). But in a period of fiscal crisis and fear of deflation, we can understand why this solution, simple to implement and allowing to generate revenue quickly and without any real possibility of diversion, was, according to Liberation (source here ), considered by the government a few weeks ago (all this is obviously denied for the moment). So that’s all for now.