Abstract
Value added tax (VAT) has proven to be the most stable and revenue productive of all components of the tax system. However, for such a tax system to be policy sustainable over time, taxpayers must consider it fair, and it must be viewed by the National Treasury to be productive in terms of raising substantial revenue and administratively feasible by the VAT-implementing agency. The VAT system in Belize has been a highly productive component of the revenue system, and it was designed to be progressive, but in arriving at this position, over 40% of the personnel of VAT tax administration are engaged in processing tax refunds to promote progressivity and to fight against the fraud that such a refund system incubates. This is an unsustainable position for any tax system to remain intact over time. This paper evaluates the attempt by the government of Belize to introduce progressivity into their single-rate VAT through zero rating and exemption from taxation of many goods and services that are major expenditure items of poor households. The distributional impacts are measured by a tax reform that eliminates all zero ratings except for exports and a few exemptions. By eliminating zero-rated items and significantly reducing the number of exempt items, the impact of the reform adds a regressive element, although overall, the VAT system remains progressive. However, 75% of the revenues raised by this reform would be paid by the top 40% of the income distribution. The increased revenues could finance an expansion of an existing transfer scheme that exclusively targets poor households. In addition, reforms would eliminate at least 40% of the personnel costs of administering the current VAT system.
Highlights
Over the past two decades, substantial efforts have been made to reform tax systems in many countries to promote efficiency and effectiveness
All of the major tax systems implemented by governments must be seen as fair if they are to remain stable and sustainable in the long run
The problems associated with the administration of and compliance with a Value added tax (VAT) system grow exponentially with the number of goods and services that receive tax preferences
Summary
Over the past two decades, substantial efforts have been made to reform tax systems in many countries to promote efficiency and effectiveness. The main theme of this work was to develop solutions to simultaneously design a VAT base that yielded progressive consumption tax as well as a broad tax base with a uniform tax rate so that it would have a minimum level of compliance, an administrative uniform rate, and relief for the poorest taxpayers These studies considered the alternative designs of the VAT system, their relative administrative complexities, the income distribution impacts of these alternative designs, and mitigating measures that might be undertaken. In Belize, there is a pro-poor assistance program with a track record already in place, the program has been constrained owing to budgetary considerations In this analysis, we evaluate the potential uses of additional revenues from the reduction in the zero rating and exemption of pro-poor goods and services to expand a targeted pantry program.
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