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VATs in Federal States: Experiences and Emerging Possibilities

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  • Richard M. Bird

    (Director of the International Tax Program, Joseph L. Rotman School of Management, University of Toronto)

  • Pierre-Pascal Gendron

Abstract

The biggest tax story of the last third of the 20 th century was the value-added tax (VAT). From its tentative beginnings in the reform of the French production tax in the early 1950s, by August 2000 some form of VAT existed in at least 123 countries. Few fiscal innovations have been adopted so widely and so quickly. Towards the close of the century, another striking trend was the increasing decentralization of the public sector in many countries around the world. In this process, increasing responsibility for delivering such important and expensive public services as education and health has been devolved to sub-national governments, often to regional governments such as states or provinces. Such decentralization may make good sense in many respects, but experience suggests that it is essential to devolve responsibility not only for expenditures but also for some significant revenues if adequate fiscal accountability is to be maintained.The traditional literature on tax assignment suggests that the best form of taxation for intermediate-level governments is a sales tax. Some form or another of sales tax does in fact constitute the major source of finance for intermediate governments in many countries. Indeed, in developing countries in which income taxes do not play a major role, it is hard to see what other major revenue sources such governments could utilize. The retail sales tax once favored as a regional tax, and still in place in most U.S. states (and some Canadian provinces) is now an aberrationfrom a worldwide perspective. The only good sales tax is now generally considered to be a VAT.There appear to be at least three reasons why the question of sub-national consumption VATs needs to bereconsidered, particularly in federal countries with important regional governments. First, there are few other major revenue options open to countries in which, for whatever reason, substantial expenditure responsibilities have been shifted to lower levels of government, if those governments are to behave in a fiscally responsible manner. Second, sub-national VATs have now in fact been successfully operating in Canada for a decade and have also existed, if to less general acclaim, in Brazil for over 30 years. Finally, several novel proposals have recently been made to overcome certain problems that some see with applying the system used in Canada to other countries in which tax administration is less well developed.

Suggested Citation

  • Richard M. Bird & Pierre-Pascal Gendron, 2001. "VATs in Federal States: Experiences and Emerging Possibilities," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0104, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper0104
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    File URL: http://icepp.gsu.edu/files/2015/03/ispwp0104.pdf
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    References listed on IDEAS

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    1. A. Bovenberg, 1994. "Destination- and origin-based taxation under international capital mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(3), pages 247-273, October.
    2. Richard Bird & Pierre-Pascal Gendron, 2000. "CVAT, VIVAT, and Dual VAT: Vertical ``Sharing'' and Interstate Trade," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(6), pages 753-761, December.
    3. Genser, Bernd, 1996. " A Generalized Equivalence Property of Mixed International VAT Regimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 253-262, June.
    4. Chun-Yan Kuo & Thomas Mcgirr & Satya Poddar, 1988. "Measuring the Non-Neutralities of Sales and Excise Taxes in Canada," Development Discussion Papers 1988-08, JDI Executive Programs.
    5. Ring, Raymond J. Jr., 1999. "Consumers’ Share and Producers’ Share of the General Sales Tax," National Tax Journal, National Tax Association, vol. 52(n. 1), pages 79-90, March.
    6. McLure, Charles E. Jr., 1997. "Electronic Commerce, State Sales Taxation, and Intergovernmental Fiscal Relations," National Tax Journal, National Tax Association, vol. 50(4), pages 731-49, December.
    7. Victoria J Perry & Katherine Baer & Emil M Sunley, 1996. "A Destination VAT for CIS Trade," IMF Working Papers 96/35, International Monetary Fund.
    8. Lockwood, Ben, 1993. "Commodity tax competition under destination and origin principles," Journal of Public Economics, Elsevier, vol. 52(2), pages 141-162, September.
    9. McLure, Charles E. Jr., 1997. "Electronic Commerce, State Sales Taxation, and Intergovernmental Fiscal Relations," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(4), pages 731-749, December.
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    11. Richard Bird & Pierre Gendron, 1998. "Dual VATs and Cross-Border Trade: Two Problems, One Solution?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(3), pages 429-442, July.
    12. Miguel-Angel Lopez-Garcia, 1996. "The origin principle and the welfare gains from indirect tax harmonization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 83-93, January.
    13. Breton,Albert, 1996. "Competitive Governments," Cambridge Books, Cambridge University Press, number 9780521481021, April.
    14. Robin Burgess & Stephen Howes & Nicholas Stern, 1995. "Value-added tax options for India," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(1), pages 109-141, February.
    15. Bird, Richard M., 1993. "Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization," National Tax Journal, National Tax Association, vol. 46(2), pages 207-27, June.
    16. Michael Keen, 2000. "VIVAT, CVAT and All That; New Forms of Value-Added Tax for Federal Systems," IMF Working Papers 00/83, International Monetary Fund.
    17. Shome, Parthasarathi & Spahn, Paul Bernd, 1996. "Brazil: Fiscal federalism and value added tax reform," Working Papers 96/11, National Institute of Public Finance and Policy.
    18. Lockwood, Ben & Meza, David & de Myles, Gareth D, 1994. " The Equivalence between Destination and Non-reciprocal Restricted Origin Tax Regimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(3), pages 311-328.
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    Keywords

    VATs; Emerging Possibilities;

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