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Below the Salt: Decentralizing Value-Added Taxes

Listed author(s):
  • Richard M. Bird


    (University of Toronto)

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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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
Handle: RePEc:ays:ispwps:paper1302
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References listed on IDEAS
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  1. Bird,Richard, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440, December.
  2. 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.
  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. Jorge Martinez-Vazquez & Andrey Timofeev, 2005. "Choosing between Centralized and Decentralized Models of Tax Administration (2005)," 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.
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  8. Jorge Martinez-Vazquez & Mark Rider & Sally Wallace, 2008. "Tax Reform in Russia," Books, Edward Elgar Publishing, number 2368.
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  13. Benoît Bayenet & Philippe De Bruycker, 2006. "Belgium: an unique evolving federalism," ULB Institutional Repository 2013/8847, ULB -- Universite Libre de Bruxelles.
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  15. Ernesto Longobardi, 2011. "From transfers to tax "co-occupation": the Italian reform of intergovernmental finance," SERIES 0038, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Dec 2011.
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  17. Massimo Bordignon & Silvia Giannini & Paolo Panteghini, 2001. "Reforming Business Taxation: Lessons from Italy?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 191-210, March.
  18. Wallack,Jessica & Srinivasan,T. N. (ed.), 2006. "Federalism and Economic Reform," Cambridge Books, Cambridge University Press, number 9780521855808, December.
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  20. 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.
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