Value Added Taxation: The Policy Issues

The growth of value-added taxation from its first adoption in France in 1954 to its present implementation by more than 60countries is unprecedented by any other concept in taxation. While 80 nations use some form of a VAT, over 40 nations have implemented a comprehensive VAT. Its acceptance by nations in varied economic circumstances and stages of development is most impressive and indicative of the flexibility inherent in its form and design. Since 1984 the world has witnessed a virtual revolution in the field of applied public finance. During the past nine years there have been at least twenty-five major tax reforms that have taken a “systems” approach to the design of taxation systems—i.e., focusing more strongly on the broader tax system rather than individual tax structures. This is a radically different approach from the norm of the previous three decades. While individual variations do exist, they have all sought to simplify the structure of the tax systems and to remove incentives for tax avoidance or evasion. Most of the tax reform proposals put forth by these countries came to similar conclusions; namely, that the best design for indirect taxes is a broad base with a small number of rates. It cannot be coincidental that over 30 countries have implemented value-added taxes in the past five years. Most recent entrants to this group introduced a general consumption tax with only one positive rate of tax.