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Where does the state's money come from?
Who pays, at which till — and why a rate alone never says what a tax brings in.
revenue = base × rateProblem / motivation
In 2025, French general government levied €1,305 billion. On what, at what rate, and by what route does that money arrive?
A figure like that means nothing until you know WHO is being talked about. “The state” in fact means three quite distinct tills: the state in the strict sense (the ministries, whose budget is voted each year in Parliament), the social security system (pensions, health, family) and local authorities (municipalities, departments, regions). The €1,305 billion is the total of all three — what statisticians call general government. The state's budget alone is about four times smaller. This course will say for every figure which till is meant; it is the first thing missing when you hear the budget discussed.
Then comes the mechanism. Every levy, whatever its name, obeys the same mechanics: you choose a BASE — what is levied on — and a RATE — the fraction taken. The revenue is the product of the two. That trivial sentence explains the most counter-intuitive result in French public finance: the levies with the highest rates are NOT the ones that bring in the most. The poll below illustrates it.
Assumptions
In your view, which assumptions are needed for this model to hold? Jot down your ideas — no lead is wrong, this is your worksheet.
Your worksheet is still empty. Go for it: propose at least one idea.
0 idea(s) proposedFormalization
Before any formula, the word “state” has to be settled, otherwise the figures contradict each other. Till 1, the state in the strict sense: the ministries, whose revenue and spending are voted each year in the budget act. Till 2, social security: a separate budget, voted in another act, funded mainly by contributions and the CSG. Till 3, local authorities: municipalities, departments and regions, with their own taxes (property tax, for example). All three together form GENERAL GOVERNMENT. Remember the reading rule: “state revenue” in the strict sense does NOT include social contributions — they go to till 2.
A second clarification, the one that catches everyone out: “tax” and “duty” are not two rival categories. In France, a “taxe” is legally a tax — VAT, whose French name means literally “value added tax”, is an indirect tax. So there are only TWO families of compulsory levies: TAXES (paid without counterpart, to the state, to local authorities or to social security) and SOCIAL CONTRIBUTIONS (levied on wages, opening rights). The genuinely useful distinction is not tax/duty but DIRECT/INDIRECT: a direct tax is paid by the person who owes it, in their own name (income tax, property tax); an indirect tax is slipped into a price and paid over to the revenue by the shopkeeper (VAT, excise duties on fuel or tobacco). Two cases worth knowing, because they catch everyone out. The CSG: levied on income like a contribution, it funds social security, but it opens no rights of its own — so legally it is a TAX, and the leading tax paid by French households. Conversely, what you pay in exchange for a specific service — an occupancy fee, a ticket for the municipal pool — belongs to neither family: there is a direct counterpart, so it is not a compulsory levy (assumption 1).
Now to the computation, with a €120 helmet in a shop. The VAT is already in the price tag, but the rate applies to the price EXCLUDING tax: price excluding tax €100, rate 20%, so 100 × 20% = €20 of VAT, and €120 to pay. Name the three pieces: the BASE is what is levied on (here €100), the RATE is the fraction taken (20%), the REVENUE is their product (€20). Learn to read it both ways — the second will serve you in the exercises: from a price excluding tax you multiply by the rate; from a price including tax you recover the tax by taking 20/120 of the price, that is one sixth (120 × 1/6 = €20). Now change the scale without changing anything else: the base of VAT is no longer a helmet, it is everything the country consumes.
All that remains is to stack them up. Public revenue adds up every levy — each being its base multiplied by its rate — then adds NON-TAX REVENUE: dividends from companies the state owns, fees, income from public property, fines. That last block is real but small (a few tens of billions for the state). And to compare one country with another, the total is related to GDP, the country's annual output (course “GDP”): this is the COMPULSORY LEVY RATE — 43.6% in France in 2025. Click each term of the two formulas:
Solving / calculation
Let's apply “revenue = base × rate” to France's three largest levies, with the real orders of magnitude. The bases are rounded; the resulting revenues are to be compared with the amounts actually measured, shown on each line.
- VAT — an immense base, a moderate share of the price paid
≈ €1,550bn of household spending (tax included) × 13.5%≈ €209bn (measured: ≈ €209bn) - Income tax — advertised at up to 45%, but a far lower AVERAGE rate
≈ €1,300bn of declared income × 8%≈ €104bn (forecast for 2026: €104bn) - Social contributions — a wide base AND a strong rate
≈ €1,100bn of gross wages × 40%≈ €440bn (measured: €446bn) - The ranking, and its surprise
contributions 446 > VAT 209 > income tax 104 > corporation tax 67the highest rate (45%) finishes 3rd - The narrow till: the state's budget alone (2026 budget act)
revenue 325.4 − spending 458.9general budget deficit − €133.5bn
Three lessons to take away. (1) The BASE weighs more than the rate. VAT takes on average only 13.5% of the price paid, less than the sixth (16.7%) that a standard 20% rate applied everywhere would impose — reduced rates and exempt products oblige. Yet it brings in twice as much as income tax, which rises to 45% at the top of the scale: VAT touches the whole country's consumption, income tax only the declared income of some households. (2) The TILL matters: of the ≈ €209bn of VAT collected, only €109bn goes to the state in 2026; the rest is allocated to social security (€49.3bn in 2025) and to local authorities. (3) There is a fourth source, absent from the formula: BORROWING. In 2026, the state forecasts €325.4bn of revenue for €458.9bn of spending; the missing €133.5bn is borrowed. (You will often read −€134.6bn in the press: that figure adds the annexed budgets and special accounts to the general budget. Same deficit, a slightly wider perimeter.) Next: courses “Deficit and the public balance”, then “The dynamics of public debt”.
revenue = base × rate (bases: €1,550 / 1,300 / 1,100bn)You do NOT set the revenues: you set the rates, the only levers a government has. The bases are the country's — rounded, and calibrated so that today's rates give back the observed revenues. Look at what “+1 point” brings in depending on the levy, and look for the VAT rate it would take to match contributions.
- Social contributions 440
- VAT 209,3
- Income tax 104
- Total of the three 753,3 %
Economic interpretation
Three readings so as not to draw the wrong conclusion: why the big earners have small rates, who really pays, and where the money goes once levied.
The French ranking reads on two levels. At the top, social contributions win by COMBINING both factors: a strong rate (≈ 40%) on a wide base (the country's wages) — when both pull the same way, the revenue is overwhelming. Just below, VAT beats income tax with a far lower rate, and there it is the base alone that makes the difference. The simulator measures it directly: one point of AVERAGE rate brings in €15.5bn on VAT, €13bn on income tax, €11bn on contributions — a point of rate is a point in all three cases, so the difference comes ONLY from the bases. (A point of average rate is not a point of standard rate: raising VAT from 20 to 21% touches only standard-rated products, so it brings in far less.) The moral: a 45% top marginal rate makes headlines, but it applies only to a fraction of the income of a fraction of households — which is why modern states rely first on very wide bases, consumption and wages.
On your receipt, the VAT is paid over to the administration by the shopkeeper: they are the taxable PERSON. But it is included in the price you paid: the TAXPAYER, the one whose wallet gets lighter, is you. This split is the whole point of indirect taxes — they come in almost without friction, at every checkout, with no return to file and no chasing. One caveat, though: the real sharing of the burden between seller and buyer is not decreed in law, it depends on how sensitive each is to price (course “Price elasticity and tax incidence”).
Once levied, the money does not go into a single pot. Contributions and the CSG fund social security; property tax and business rates, local authorities; income tax and corporation tax, the state — and VAT is shared between all three. Whatever these revenues do not cover is borrowed: that is the fourth tap, the one that appears in no formula for a levy. Next: “Where does the state's money go?” (spending), “Deficit and the public balance” (the face-off) and “The dynamics of public debt” (what borrowing costs in later years).
Limits / critiques
Exercises
A levy applies to a base of €800bn at a rate of 12%. How much does it bring in (in €bn)?
Two levies: A applies to €1,500bn at a rate of 10%, B applies to €300bn at a rate of 40%. Which brings in more?
True or false: in France, “duties” form a family of levies distinct from taxes.
Compulsory levies reach €1,305bn for a GDP of €2,991bn. What is the compulsory levy rate (in %, one decimal)?
A tax brings in €60bn on a base of €400bn. What is its rate (in %)?
You buy an item priced at €120 including tax, with VAT at the standard 20% rate. How much VAT have you paid (in €)?
True or false: social contributions are revenue for the state's budget.
True or false: since everyone pays VAT at the same rate, it weighs the same on every household's budget.