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Below the Salt: Decentralizing Value-Added Taxes

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  • Richard M. Bird

    ()
    (University of Toronto)

Abstract

Although VATs applied simultaneously within the same country by different levels of government were long considered to be either undesirable or infeasible, two quite different types of sub-central VATs – regional consumption taxes and local business taxes -- now exist in a number of countries. Brazil, Canada, and India have introduced regional (state and provincial) VATs which, like national VATs, are general taxes on consumption administered through a transaction-based credit-invoice approach. Although these three countries are very different, and each has established such a tax for its own reasons in different ways and with varying degrees of success, as this paper discusses, on the whole such regional VATs appear to work fairly well, especially in Canada. The issues that arise with independent regional VATs are closely related to those arising with national VATs in a common market such as the EU. A number of problems such as ‘carousel’ (or ‘missing trader’) fraud have recently received considerable attention in the EU and a variety of alternative solutions to such problems have been suggested, some involving major structural changes in the VAT. Experience with regional VATs, however, suggests that what is needed to resolve most such problems is primarily a firmer ‘EU-wide’ framework for improving VAT administration. The second type of sub-central VAT that has recently emerged in Italy, Japan, and France (as well as in several U.S. states) takes the form of a revised form of local business tax which is generally imposed on an ‘income’ (origin) basis in contrast to the destination-based consumption VATs discussed earlier. These taxes seem superior in some important respects to other forms of local business taxation and appear to be compatible with both regional and national VATs. Although important economic and administrative aspects require careful consideration in designing and implementing ‘two-level’ (dual) VATs, such dual VATs (or even triple VATs, including an ‘income-type’ VAT at the local level) are evidently both feasible technically and acceptable politically. This conclusion does not mean that regional VATs are either inherently desirable or necessarily the best alternative for any country (or set of countries). But it does suggest that such taxes may work more satisfactorily in at least some countries than other forms of regional sales taxes or local business taxes. Indeed, both varieties of ‘decentralized VATs’ discussed here may become more important over time.

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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper1302.

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Length: 51 pages
Date of creation: 09 Feb 2013
Date of revision:
Handle: RePEc:ays:ispwps:paper1302

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  1. Daniel Artana & Sebastián Auguste & Marcela Cristini & Cynthia Moskovits & Ivana Templado, 2012. "Sub-National Revenue Mobilization in Latin American and Caribbean Countries: The Case of Argentina," IDB Publications 63418, Inter-American Development Bank.
  2. Davis, Lucas W., 2011. "The Effects Of Preferential Vat Rates Near International Borders: Evidence From Mexico," National Tax Journal, National Tax Association, vol. 64(1), pages 85-104, March.
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  5. Massimo Bordignon & Silvia Giannini & Paolo Panteghini, 2001. "Reforming Business Taxation: Lessons from Italy?," International Tax and Public Finance, Springer, vol. 8(2), pages 191-210, March.
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  7. Ernesto Longobardi, 2011. "From transfers to tax "co-occupation": the Italian reform of intergovernmental finance," series 0038, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Dec 2011.
  8. Benoît Bayenet & Philippe De Bruycker, 2006. "Belgium: an unique evolving federalism," ULB Institutional Repository 2013/8847, ULB -- Universite Libre de Bruxelles.
  9. Lockwood, Ben, 1992. "Commodity Tax Competition Under Destination and Origin Principles," CEPR Discussion Papers 733, C.E.P.R. Discussion Papers.
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  11. Genser, Bernd, 1996. " A Generalized Equivalence Property of Mixed International VAT Regimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 253-62, June.
  12. Isabelle Joumard & Tadashi Yokoyama, 2005. "Getting the Most Out of Public Sector Decentralisation in Japan," OECD Economics Department Working Papers 416, OECD Publishing.
  13. Jorge Martinez-Vazquez & Richard M. Bird, 2010. "Value Added Tax: Onward and Upward?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1026, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  14. Jorge Martinez-Vazquez & Andrey Timofeev, 2005. "Choosing between Centralized and Decentralized Models of Tax Administration," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0502, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  15. Luca Gandullia, 2012. "The role of direct taxes in fiscal decentralization," DEP - series of economic working papers 6/2012, University of Genoa, Research Doctorate in Public Economics.
  16. Ben Lockwood & David de Meza & Gareth Myles, 1995. "On the European Union VAT proposals: the superiority of origin over destination taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 16(1), pages 1-17, February.
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