Who benefited from the reduction in VAT in the catering sector in 2009?

In July 2009, the value-added tax (VAT) rate in restaurants with table service was reduced from 19.6 per cent to 5.5 per cent. At the time, a large number of restaurant owners signed the ‘Contrat d’avenir’, committing to share the benefits of the VAT reduction equally amongst themselves, their customers and their staff. This article shows that the effects of the reform differed significantly from the terms set out in the ‘Contrat d’avenir’. In fact, the VAT reduction mainly benefited restaurant owners. More specifically, we show that, thirty months after the VAT cut, prices had fallen by only 1.9 per cent, whilst the cost of wages and supplies had risen by just 4.1 per cent and 5 per cent respectively, and that owners’ profits had increased by around 24 per cent. These estimates lead us to conclude that: the impact on consumers was limited; employees and suppliers shared 18.6 per cent and 12.1 per cent, respectively, of the gains recorded; and the reform primarily benefited restaurant owners, who pocketed around 56 per cent of the tax reduction. We also analyse the effect of the VAT increases in January 2012 (from 5.5 per cent to 7 per cent), and then in January 2014 (from 7 per cent to 10 per cent), and we note that prices rose between four and five times as much as they fell following the VAT reduction. This shows that temporary VAT cuts mainly benefit firms rather than customers, and that once they are reversed, they can push up equilibrium prices.