Abstract
It is widely agreed that in countries without major constraints on administrative capacity, a value-added tax (VAT) should tax all goods and services at a uniform rate. In these countries, VAT’s C-efficiency, that is, actual revenue over potential revenue, should be one if compliance is perfect. Under this approach, VAT’s C-inefficiency—the aggregate of the policy gap (exemptions, reduced rates, thresholds) and the compliance gap (revenue shortfalls due to laps in compliance and implementation)—is treated as a residual. This contribution shows that calculating VAT’s C-inefficiency independently of its C-efficiency produces a more telling benchmark, particularly of the policy gap. This is illustrated by an analysis of the revenues of the Dutch VAT, which, given the common VAT directive, should be representative of the VATs in other European Union Member States. The large policy gap, hovering around 0.50, forms the background for exploring three options to improve VAT’s performance: reforming the common directive, ceding VAT design to Member States, and introducing a common modern VAT which can be piggybacked by Member States.
Highlights
The harmonized value-added tax (VAT) of the European Union (EU) is anything but a modern consumption tax that taxes all goods and services at a uniform rate
Governments—central, regional and local—and other public bodies are considered out-of-scope of the EU-VAT, subject to some highly contentious conditions (as evidenced by a vast body of jurisprudence reviewed by Henkow (2013)), that they should be governed by public law, that they should be operated under public authority, and that their activities should not involve significant distortions of competition
To top it all off, accepting the common directive became a conditio sine qua non for joining the EU. On this basis of this reasoning, it appears that the guiding criterion for the VAT Committee in evaluating VAT reforms of individual Member States should be: do reforms enacted by Member States in redesigning the base of their VATs violate the principle that intra-EU imports should not be taxed higher than similar domestic products, and that exports should not be subsidized by refunding more tax than levied in previous stages of production and distribution? If not, presumably reforms should be allowed to proceed
Summary
The harmonized value-added tax (VAT) of the European Union (EU) is anything but a modern consumption tax that taxes all goods and services at a uniform rate. It has become widely recognized that in countries without major constraints on administrative capacity, the VAT should only be used to raise revenue, predictably and efficiently, leaving it to the income tax and social benefit schemes to address distributional concerns and to excise duties and subsidies to deal with negative and positive externalities In these countries, VAT should tax all goods and services at a uniform rate. To put VAT policy back on the agenda, this contribution renews the call for basic VAT reform It illustrates the distortions and complexities of exemptions and lowerthan-standard rates by analyzing the C-inefficiency of the Dutch VAT, which, in view of the mandatory exemptions of the common directive, should be representative of the VATs in most other Member States. Ways are explored to remedy the VAT base gaps by reforming the common directive, assigning VAT base design to the Member States, or by adopting a modern, common EU-wide VAT that can be piggybacked by the Member States
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
