January 2013

IZA DP No. 7127: Incidence of a "Social VAT" Reform: A French Scenario

This paper studies the fiscal incidence of a fiscal reform consisting of a reduction in employers' social insurance contributions financed by a tax based on the value added. In a closed economy with two sectors calibrated thanks to the French National Accounts, a "social VAT" leads to a rise in labor incomes which is usually higher than the rise of capital incomes. In case of perfect intersector mobility of production factors, a reduction in 1 percentage point of the social contributions leads to a rise in net labor incomes which is 0:51 to 0:66 percentage point higher than the rise of the interest rate. For a low intersector mobility the gains of workers, even though unequally distributed, remain higher than that of capitalists. In an open economy when the international capital mobility is sufficiently high, workers are more inclined to suffer from the reform.