Working Paper Series no. 244: Social VAT : Good or bad idea? (in French)

Abstract

The quantitative and dynamic consequence of a social VAT reform, i.e. a fiscal reform consisting in substituting VAT for social contributions, is assessed using two general equilibrium models. The first one is a Walrasian model with no other frictions than distortionary taxation of labor and capital incomes and consumption. The second one introduces in addition matching frictions in the labor market. Two alternative financing schemes are considered for the practical details of implementing the social VAT. In all cases, the fiscal reform turns out to generate a small, positive long--run effect on aggregate variables and yields a modest welfare gain. In the no--friction model, this welfare gain is substantially reduced when the reform is pre--announced six quarters prior to implementation. The effect of such a pre-announced reform are smaller when labor market frictions are taken into account.

Patrick Fève, Julien Matheron and Jean-Guillaume Sahuc
August 2009

Classification JEL : E10, E20, G12.

Keywords : social VAT, DGE, pre-announced fiscal reform.