- Liam Ebrill, Michael Keen, and Victoria Perry
- Published Date:
- November 2001
© 2001 International Monetary Fund
Production: IMF Graphics Section
Cover Design: Lai Oy Louie
Typesetting: Alicia Etchebarne-Bourdin
Library of Congress Cataloging-in-Publication Data
The Modern VAT/Liam Ebrill … [et al.].
Includes bibliographical references.
1. Value-added tax. I. Ebrill, Liam P. II. International Monetary Fund.
HJ5711 .T39 2001 336.2’714—dc21 20010339350
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The following symbols have been used throughout this volume:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1998-99 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1998/99) to indicate a fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
To tax and to please, no more than to love and to be wise, is not given to men.
Anglo-Irish political theorist and Whig politician
[Speech on American Taxation, 1774]
The rapid and seemingly irresistible rise of the value-added tax (VAT) is probably the most important tax development of the latter twentieth century, and certainly the most breathtaking. Forty years ago, the tax was little known outside dull treatises. Today it is a key source of government revenue in over 120 countries. About 4 billion people, 70 percent of the world’s population, now live in countries with a VAT, and it raises about $18 trillion in tax revenue—roughly one-quarter of all government revenue. Much of the spread of the VAT, moreover, has taken place over the last ten years. From having been largely the preserve of more developed economies in Europe and Latin America, it has become a pivotal component of the tax systems of both developing and transition economies.
This book seeks to draw out the lessons from this experience, especially that in recent years. The VAT has been seen as a key instrument for securing macroeconomic stability and growth by placing domestic revenue mobilization on a sounder basis, so that the International Monetary Fund (IMF) has attached considerable importance to its proper design and implementation. Within the context of these wider concerns, the Fiscal Affairs Department (FAD) of the IMF has provided a considerable amount of technical assistance in relation to the VAT (sometimes in conjunction with the IMF’s Legal Department).1 Indeed well over half of all countries that have introduced a VAT during the last twenty years made use of FAD advice in doing so, and the proportion has been rising. This book has its origins in a self-assessment of the advice that FAD has provided in the area. While some traces of that exercise doubtless remain, and the book draws heavily on FAD’s experience, the focus of this book is outward-looking.
Its purpose is to explore, and draw the lessons of experience for, some of the central questions that those concerned with the VAT—whether as policymakers, practitioners, or academics—must wonder about. Has the VAT lived up to its promise as an efficient and fair source of revenue? What does a VAT do well, and what, conversely, does it do badly? What are the key issues that arise in designing a VAT? What should be exempt, and what should be taxed? How should small traders be treated? What about the agricultural and financial sectors? Does a VAT require restructuring the organization of the tax administration? What are the main administrative problems that a VAT is likely to encounter, and how can they be resolved? Is it an inherently costly and regressive tax, or, to the contrary, can it be designed to be simpler and fairer than the taxes it often replaces? Are there countries for which a VAT is simply a bad idea?
These and other issues addressed here have both policy and administrative aspects; that is, they involve both the design and the implementation of the tax. Indeed a key theme of the book is precisely the importance when thinking of VAT of the interaction between the two. At the most basic level, they are entirely congruent. Just as economic analysis points to the proper role of the VAT as being a broad-based tax on consumption, so the administrative concern with simplicity (for taxpayer and tax collectors alike) points to a clean tax that is applied with minimal exceptions. Beyond that, however, there can be a tension between the two sets of considerations. There is a trade-off, for instance, between the desire to minimize distortions of competitive behavior by including as many traders as possible in the VAT system and the administrative advantages of excluding small traders from whom little revenue can be expected. The proper response to such tensions, of course, is to incorporate administrative concerns carefully into policy formation. This is a delicate exercise, but we believe an essential and fruitful one. In part it requires that public finance economists address themselves much more forcefully than they have in the past to issues that administrators have long battled with; the analysis here of the proper threshold for the VAT is one example, but there remains much more to do.
The coverage of this book is not exhaustive. We have tried not to duplicate material that can be found elsewhere, most notably in Tait (1988, 1991), which this book complements; the present book does not address other than in passing, for instance, timetables and transitional issues associated with the introduction of a VAT, or the impact of the VAT on inflation. Oldman and Schenk (1995) provides an interesting legal perspective on many of the issues addressed here.
What is most striking, however, is how much the previous literature leaves out. Indeed there has been surprisingly—shockingly—little serious research effort devoted to the VAT. Why this should be is itself something of a puzzle, given the manifest importance and dramatic spread of the VAT. We hope that this book will go some way to stimulate further and deeper work in this area.
This book reflects the efforts and invaluable expertise of many of our colleagues in the Fiscal Affairs Department, who found time in their overloaded schedules to provide us with information and advice. Katherine Baer and John Brondolo were especially generous and helpful. Particular thanks to Assi WoldeMariam, who undertook the substantial exercise of data collection and analysis reported here. We are grateful too to Richard Bird, Alan Tait, and many colleagues in FAD for their helpful comments on various drafts. Jeremy Clift of the External Relations Department edited the manuscript and coordinated production. Views and, unfortunately, errors are entirely the responsibility of the authors, and should not be attributed to the International Monetary Fund.
Figure 1.1.The Spread of the VAT
Value-Added Tax, first introduced less than 50 years ago, remained confined to a handful of countries until the late 1960s. Today, it is a key source of government revenue in more than 120 nations. About 70 percent of the world’s population now live in countries with a VAT.
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.