Higher taxes on low and middle incomes cut consumption and VAT revenue
Confidence: Medium
On by default
Shape: Proportional
People on low and middle incomes spend most of their income. When their taxes rise, consumption falls by nearly the same amount, and the VAT on that spending is lost. A cut raises consumption.
Of every 100 euros that a change to “Income taxes of low and middle incomes” saves or brings in, 15 € is lost as revenue on the line “Value added tax” every year. (The other way round if the change adds spending or cuts taxes.)
E(t) = s × T(t)
Derived: consumption falls about €0.80 per euro of tax (marginal propensity to consume), and about 19% of consumption is collected as VAT (VAT €27.1bn / household consumption €142bn in 2025): 0.8 × 0.19 ≈ 15%. The propensity to consume is an estimate.
How the effect builds up over time
Share of the change's own effect on the balance, year by year while the change continues: −15% means 15% of a saving comes back as cost (or 15% of extra revenue is lost). With the default values.
You can switch the effect on or off and adjust its assumptions in the simulator under Cause-and-effect chains.