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Another Tale of Tax Cuts Not Delivering

The associations are screaming, not only because the industry is sinking deeper into a quagmire, but because the Value Added Tax for restaurants is going up again. In 2001, it was 19.6%, same as for most sectors. Then President Chirac, while running for reelection, promised to lower it. A promise that shattered on the floor of reality. He’d been blocked by the European Council’s fight against cross-border “tax dumping.” But President Sarkozy managed to arm-twist the Council into agreeing. And on July 1, 2009, the VAT was cut to 5.5%.

Enormous hoopla. It impacted the entire hospitality sector – hotels, restaurants, and cafés – the fourth largest sector in France with at the time 185,000 businesses. It was a grand bargain: restaurant owners committed to passing on the rate cut by lowering prices. That would stimulate consumption, which would create 20,000 jobs per year, for two years. Hallelujah.

Alas, since 2000, the sector had already been creating on average 15,000 jobs per year, with the exception of 2008-2009. So the ballyhooed 40,000 jobs over a two-year period would be a net gain of 10,000 jobs. The commitment to lower prices by 11.8% on average concerned only 12 products, such as coffee, bottled water, the daily special, etc., and each restaurant could lower prices on only seven of them. At best, it might have worked out to an overall cut in prices of 3% – not exactly a magnet to draw additional customers to the table.

But few restaurants lowered any prices. They swallowed with gusto the additional margin as profit. The hoped-for traffic didn’t materialize. Nor did the jobs. Wages didn’t go up either, as hoped. About a fifth of the employees in the sector were considered “working poor,” the highest of any sector. That failure of a tax cut to achieve anything at all turned into a toxic stew of mockery, scandal, and higher budget deficits.

As the Eurozone debt crisis spread its tentacles from the periphery to the core, and as France was sliding deeper into its budget quandary, raising the VAT in the restaurant sector suddenly became a solution. Hence, effective January 1, 2012, under a painfully grinning President Sarkozy who’d lose his job five months later, the VAT was jacked up from 5.5% to 7%. Since then, the tentacles have grabbed France, and its budget debacle has gotten worse. So President Hollande and his government found another solution: raise the restaurant VAT to 10%, effective January 1, 2014.

Via Testosterone Pit.

Categories: Notes.

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