World Economic outlook - Impact Sarkozy plan to hike value added tax : the months ahead, French President Nicolas Sarkozy's has vowed to hike value added tax--similar to the U.S. sales tax--to fund a cut in payroll taxes paid by employers. The aim is to make French production more competitive as Sarkozy counts on businesses using the breathing space the cut would provide to reduce their prices, but the measure could ultimately end up boosting prices.
Sarkozy argues his plan won't have an impact on prices as competition is high and French producers will be able to keep a cap on them thanks to the reduction in labor costs.
Some economists are not convinced of Sarkozy's logic.
French consumer prices fell in January from a month earlier, mostly due to seasonal sales which helped offset higher energy prices, according to data released Wednesday by France's national statistics office Insee. read more French cpi January 2012
Natixis, an investment bank, has estimated the VAT increase will create 0.5 percentage point of added inflation because businesses will use the breathing room to bolster their margins, which could help future investment but doesn't resolve competitiveness problems.
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