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Main Content
Two Things in Life are Certain
Jean Baptiste Colbert once said that taxation is an art that consists in ‘plucking the goose so as to get the most feathers with the least hissing’ – are Europe’s leaders successful?
The age of austerity has frequently been cited in recent months as a necessity brought forth by the current economic climate. Cutting corners wherever possible and raising financial income is at the forefront of European governments’ minds. Increasing taxes or limiting public spending are among the most common measures, with higher Value Added Tax (VAT) rates constituting a specific possibility for generating money for the government.
VAT is a general consumption tax added to goods and services. It can be applied to almost all items, though food is among the exceptions that do not factor in a VAT into their retail price. The burden for the tax is placed directly on the consumer, at the last stage in the line of production, and is paid to the national revenue authorities. According to the EU’s VAT Directive, the standard VAT rate in each member state must be at least 15%, while the reduced rate cannot be lower than 5%. Despite the general regulation, the actual rates differ broadly across the European Union. At present, Denmark’s standard rate is 25%, while that of Cyprus and Luxembourg stands at the minimum of 15%. The lack of any fully harmonising EU law makes the scope VAT rates cover unsurprising and is further exemplified in the actual nature of exemptions that can be applied. Some member states have even come to a separate agreement with the EU regarding their own VAT rules, adapting them as they see fit.
The question of what is the right solution for a specific country’s economic situation is a sensitive one, highly debated across Europe. The controversy rages on around the seemingly simple question of whether VAT rates should be increased or decreased, with numerous arguments on either side. An increase in the VAT rate provides more income for the government, which can then reduce the cost of borrowing and ease recessionary worries. A decrease in the VAT rates can help stimulate confidence in the economy and encourage the public to spend money as goods and services become less expensive. The latter solution also has an impact on jobs in certain related sectors, for example in the retail industry, providing more security. The government also stands to benefit from such a measure as it receives more income as spending power of the public is higher than would have been the case otherwise.
Both options for the VAT rate have been applied in recent years. In France, VAT was cut on restaurant bills from the standard rate of 19.6% to the reduced rate of 5.5%, making eating out less financially straining and thereby safeguarding jobs in the restaurant business. In the United Kingdom, the opposite was suggested and the standard VAT rate of 17.5% will increase to 20%. The national debate erupting as a result of the hike illustrates how unpredictable and contentious the issue is. The Chancellor George Osborne expects this move to raise £13 billion while avoiding an increase in income tax and more cuts in spending. However, a raised VAT rate can have negative social effects. In a sense, it is perceived as an unfair method of taxation as everyone who purchases the affected products receives the same rate, no matter what their individual income might be. As a consequence, families at the lower end of the socio-economic scale are hit harder due to the higher percentage of their income that the contribution represents, contrasting with that of families who are better off.
The necessity of VAT is somewhat unique to Europe, as this specific tax does not exist in the United States, and the need for the EU to come up with an alternative that is seen as just by the public is becoming acute as citizens watch their finances more closely. As in any case when a government is expected to generate more money, whether it is raising the income tax instead or applying a higher VAT only for luxury products, there will always be opposition. Voiced dissatisfaction of having to pay the government is as sure to come up as taxes themselves, suggesting that in fact three things in life are certain – taxes, disgruntlement and death.