Indirect Taxes

Ian Crawford (Surrey / IFS)
Michael Keen (IMF)
Stephen Smith (UCL)
Introduction
•
Developments in theory since the Meade report have
considerably altered our understanding of the
contribution that can be made by indirect taxes to
revenue-raising efficiency.
•
The VATs of EU member states have now run for some
35 years. Time for a review?
•
The elimination of internal frontiers in the EU has
brought new issues of administration, enforcement and
tax competition.
•
There have been suggestions that the existing VAT
struggles to handle some recent developments in
business activity and organisation, such as the growth of
services and e-commerce.
Outline and key issues
•
Theory, and empirical results
• The rationale for indirect taxes.
• Uniform vs differentiated commodity taxes
•
Indirect tax systems
• VAT versus Retail Sales Tax, etc
•
International aspects of indirect taxes
• VAT treatment of international trade in goods and services
•
Conclusions: what future for indirect
taxes?
Principles
•
The rationale for indirect taxes.
•
Why do we have them at all?
•
Equivalences between indirect taxes and other taxes
•
Uniform vs differentiated commodity
taxes
•
Efficiency
•
Equity
•
Administrative considerations
•
The incidence of indirect taxes: who
bears the burden?
Empirical evidence / results
•
The key parameters: What does the
empirical evidence show?
•
Summary of the state of knowledge about elasticities of
demand, cross-elasticity with labour supply, etc.
•
VAT, excises and income distribution
•
Simulation of uniform VAT versus UK
zero-rating.
Indirect tax systems
•
VAT versus Retail Sales Tax
•
(and, more briefly, different forms of VAT)
•
Practical compromises
•
VAT registration threshold
•
Treatment of financial services
•
other hard-to-tax goods and services
•
VAT and capital goods
•
Enforcement and compliance aspects
•
Evidence on VAT compliance costs
•
VAT evasion
•
Specific versus ad valorem taxes
International aspects 1
•
Origin and destination principles
• Conditions for equivalence, etc
•
Different VAT mechanisms for cross-
border trade
• export zero-rating
• VAT-inclusive exporting (as Commission 1987)
• VIVAT, etc
•
VAT and international business
organisation
• The Commission's 1996 definitive regime proposals, based on a "single
place of taxation"
International aspects 2
•
Indirect taxes and cross-border shopping
•
implications for revenue-maximising tax rates
•
case for rate harmonisation?
•
VAT and internationally-traded services
•
Reasons for complexity, and growing
significance of the problem
•
Basic principles
•
E-commerce
Conclusions: what future for
indirect taxes?
•
VAT will remain central component of tax
system
•
Substantially greater revenue potential than RST
•
The UK’s VAT zero rates
•
Hard to justify. Main focus of our empirical simulation.
•
VAT treatment of international trade
•
Strong case for moving to a system that does not break
VAT chain at borders (eg “exporter rating”, or VIVAT)
Applied Issues
•
Knowledge of demand responses is important
•
What do we know?
•
Not a huge amount
–
Elasticites are heterogeneous
–
They are hard to measure
–
Getting income effects right at different points matters
–
There are few (zero?) published papers reporting
large scale, household-level UK demand systems
•
So we have decided to estimate one
Applied Issues
•
We used the Quadratic Almost Ideal Demand
System (Banks, Blundell and Lewbel, 1999)
–
It’s Rank 3 (so we can get the income effects right)
–
It’s integrable (so we can do welfare analysis)
–
It allows a degree of heterogeneity in elasticities.
•
Data: 25 years of the UK Family Expenditure
Survey (176,068 households)
•
20 commodity groups (we don’t model leisure)
Applied Issues
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Applied Issues
• Mean elasticities are for the most part moderate
• Classic inelastic commodities appear to be
inelastic
Tobacco: -0.839
Petrol & Diesel: -0.314
• But
Wine & Spirits: -2.995
Applied Issues
•
We simulated the effects of ending zero rating
and having uniform 17.5% VAT
•
The tax revenues have been burned
•
For each household we calculate the welfare
loss:
( ) ( ) p p p , ,
h h
m V m V − ∆ +
Applied Issues
Indirect Taxes
Ian Crawford (Surrey / IFS)
Michael Keen (IMF)
Stephen Smith (UCL)