Main Issues for a Good Value Added Tax System

This article focuses on the main issues of VAT (tax rate structure, exemptions and enforcement and compliance) discussed in the Mirrlees Review (2010 and 2011). At present, especially after the Great Earthquake in Tohoku, a raise in the tax rate of Consumption Tax (the Japanese VAT) has been highlighted for the financial reasons. However, this paper argues that we should aim instead, and as well, to achieve a good VAT system from a long-term standpoint. The important factors for a good VAT system include a single tax rate, a broad tax base with few exemptions, and modernization of procedures for enforcement and compliance. The Mirrlees Review points out that the present VAT system in the EU is "old and imperfectly adapted to the changed international circumstances", and that this serious situation has been caused by a multiple tax rate structure and a wide range of exemptions. According to the Review, applying reduced tax rate is just a moderately pro-poor policy and less effective or less persuasive. The effective measures to remove or mitigate regressive effects caused by the VAT will be income tax credits or social benefit system. Once reduced rate has been introduced, it is definitely hard to show the political will that this rate structure is meaningless. Additional to lots of experiences of the EU, we can gain some clues for a modern VAT by overviewing the VAT system in New Zealand, which is highly regarded by the Review. Apart from its simple system (with a single tax rate and few exemptions), wide-ranged surveys on the VAT impact to the society were carried out by the government before introducing a new tax, which will be a key element for a social acceptance.