Thursday, November 27, 2008

No General VAT Reduction

Eric Woerth has let it be known that the government does not favor a general reduction of the VAT like the one announced earlier this week in Britain. Furthermore, the targeted reduction of the VAT to help certain industries, such as the troubled auto sector, cannot be implemented without approval of all EU member countries, and at this point it appears that Germany will not go along with the idea despite Christine Lagarde's insistence that it remains on the table.

10 comments:

kirkmc said...

While I'm proud to be a European (I have dual US-Irish citizenship), I find that the EU has done little useful for us. The need for everything to be agreed on by everyone is fine in a federalist system, but the EU is not that. Giving no latitude to individual countries - and it's clear that each country has different problems - is ludicrous.

kirkmc said...

Oh, just a short follow-up - what does Germany care whether France lowers VAT on certain sectors, or acress the board? If anything, lowering VAT on cars will help German cars to sell better in France; the French can't limit the VAT drop to only French cars.

Kirk

Arthur Goldhammer said...

Since the VAT can apply at every step in the production chain, French manufacturers could be given an advantage over foreign manufacturers by well-targeted reductions. The VAT can thus be used as a disguised form of protectionism (and has been so used in the past). That is why EU regulations prohibit such practices. The EU is, however, making an exception for labor-intensive service industries, which are non-tradable, so that protectionist concerns don't arise.

kirkmc said...

Nope. VAT is collected at each step of the production chain, but each manufacturer recuperates VAT that they pay, so it's a wash. The only VAT reduction that counts is the final one, to consumers.

This is why the level of VAT I pay on professional expenses has no effect on my bottom line, and I wouldn't care if it were higher or lower.

Arthur Goldhammer said...

Kirk,
Yes, I guess you're right. Here's an alternative hypothesis: the favorable treatment of autos in France would shift consumption toward automobiles. Since French manufacturers have greater market share in France than elsewhere, this would allow them to operate at a more efficient scale and reduce their average cost, enabling them to reduce prices in other markets.

kirkmc said...

I think that French carmakers would benefit, but I don't think that, together, they have more than 50% of the market, if even that much. In fact, other countries' carmakers would benefit as well.

It reminds me of the Juppé bonus for getting rid of old cars. The whole market got a boost, but then when it was stopped, the car market was depressed for about a year. I don't see it as being a very good idea for the long term. And I'm not sure that focusing just one a specific, high-priced product is the best type of stimulus.

Couldn't they just do something simple? Give everyone a voucher for, say, EUR 1000 that they have to spend (ie, that can't be converted to cash or put in the bank). I'd buy stuff with it... It would actually just be like each of us were taking out a loan, though, because we'd have to pay it back through taxes later.

Leo said...

Kirk and Art,
Europe-wide VAT rules are designed to prevent cross-border shopping by consumers.

kirkmc said...

If that were true, then VAT (and other taxes, on things such as gas and cigarettes) would be the same. That's not the case.

Leo said...

Kirk,
it is true. There are two basic VAT rates, a standard rate (minimum 15%) and a reduced rate(around 5%)for some items.
The rules are very complicated and suffer many exceptions (like the 0% rate for children's clothes in the UK) but any new exception has to be unanimously approved.

You will find the current rates here:
http://www.scopulus.co.uk/taxsheets/european_vat_rates.htm

Of course, countries are free to add any other consumption tax they wish e.g. tobacco, alcohol, petrol, etc...

The system was devised to prevent predatory tax policies that would distort competition by setting low VAT rates to attract cross border shopping.

Of course,countries are free to shoot themselves in the foot by setting high tax levels. This might have been the case with tobacco, but I guess governments decided public health benefits more than offset tax shortfalls.

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