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Designing a Progressive VAT

IMF working paper addressing VAT regressivity and reform

The International Monetary Fund has published a Working Paper by Artur Swistak and Rita de la Feria with consideration to improving the fairness and efficacy of national VAT regimes on the back of advances in digital reporting and its already progressed adoption by global tax authorities.

It has often been a major criticism of VAT that it is regressive in that the same rates are applied to all consumers irrespective of their income. This is alleviated to some extent by the use of reduced, zero-rating and exemptions for many essential food, agricultural, medical and similar public services.

Withdrawing reduced VAT rates; shopping discounts to less well off

The paper discusses ideas to eliminate this actual or perceived regressivity in VAT systems, including:

  • a single-rate with withdrawal of reduced rates
  • broad-base with limited or no zero-rating and exemptions

To alleiviate the effects of the ending of untargeted VAT rates discounts on essentials and public services, the paper goes on to propose targeting support on spending via checkout discounts. This would provide a cut in the VAT applied to lower income households in real-time, at the moment of purchase. This could be achieved via the already extensive adoption of electrinoic fiscal cash registers which live report transactions to the governments as an anti-VAT fraud measure.

The paper concludes: “Thanks to digital technologies, we can now design consumption taxes that are de facto progressive, in a relatively straightforward manner, and without compromising efficiency or neutrality. There are, of course, risks, but there is now a path on how to design taxes that are both efficient and equitable – and given the potential rewards, from a policy perspective that is undoubtedly a path worth exploring.”


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