VAT Rate Structures in Theory and Practice
Most countries’ value-added tax (VAT) systems apply reduced VAT rates to a selection of expenditure items in order to achieve distributional goals, and (to a lesser extent) social and cultural objectives. This paper assesses the case for applying reduced VAT rates, with a particular focus on OECD countries where reduced rates feature prominently. It examines both the theoretical and empirical evidence, as well as practical considerations, and concludes that the case for reduced VAT rates is weak. In particular, the optimal indirect tax literature finds no redistributive role for reduced VAT rates when other more direct instruments are available. These theoretical findings are supported by the empirical literature that shows reduced VAT rates to be a poorly targeted means of supporting lower income households, particularly when compared to targeted cash transfer programs. Similarly, reduced VAT rates are unlikely to be a well-targeted way to encourage consumption of merit goods, while they also create significant administrative complexity. These findings have significant implications for tax reform in both developed and developing economies. In particular, where countries have the administrative capacity to implement effectively targeted cash transfer programs, they should use these programs to support poorer households instead of reduced VAT rates.
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| Format: | Working Paper biblioteca |
| Language: | English English |
| Published: |
World Bank, Washington, DC
2024-01-25
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| Subjects: | VALUE ADDED TAX (VAT), REDUCED RATES, REDISTRIBUTION, TAX RATE, TAX REFORM, |
| Online Access: | http://documents.worldbank.org/curated/en/099920201182414099/IDU12d02d19f1336a14e0c1b53714d134b306a9f https://openknowledge.worldbank.org/handle/10986/40967 |
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