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.
Description:
A preliminary draft of this paper was presented at the online congress of the International Institute of Public Finance held in Reykjavik, Iceland, August 23, 2020.