Value-Added Tax (VAT) and Sustainability in the European Union: A Radical Proposal Design Issues, Legal Aspects, and Policy Alternatives

Abstract

This article aims to examine how the implementation of environmental taxes could build on the success of value-added tax (VAT) to become more efficient and consistent. This is not to increase the overall tax burden on citizens but to reorganize existing indirect taxation differently by better taking into account European Union (EU) environmental objectives, in particular regarding the circular economy. With its broad tax base, its systemic structure based on neutrality (which does not exclude differentiation), its wide acceptance among taxpayers, and its proven compliance process, the VAT has some features that could inspire environmental policymakers. It indeed impacts consumer choices at the broadest possible level while avoiding distortions. The authors begin by identifying the reasons for the success and robustness of VAT. A new concept of ‘green VAT’ will then be proposed based not on the classical instrument of reduced rates for specific transactions as is already done and advocated by EU institutions (European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A new Circular Economy Action Plan. For a cleaner and more competitive Europe, COM(2020) 98 final (11 Mar. 2020). See also Opinion of the European Committee of the Regions – New Circular Economy Action Plan (2020/C 440/18), OJ C 440/107 (18 Dec. 2020), para. 23.) but on a coherent life cycle approach to all goods and services. This new approach identifies negative externalities by following the same value chain as the VAT. It aligns as much as possible with the administration and compliance methods already implemented by the VAT. Finally, a possible virtual use of the new green VAT concept will be presented. It does not require any legislative changes. It takes the form of a ‘virtual tax’ that appears on the price tag of every product without being effectively paid and may be used as an indicator for the actual environmental cost of production. VAT, EU harmonization, environmental taxation, sustainability, life-cycle assessment.