0.21 Taxation and development  (Page 3/4)

In all nations, a large share (14-28%) of goods is used exclusively as inputs into a business. These are called “single-use” goods, or producer’s goods. There are items purchased by a firm to be used for further production. Example: furniture firm purchasing a lathe, or parts and materials, machinery, equipment. A consumption tax should not apply to producer’s goods, because the goods are not consumption goods.

The VAT is also likely to be conducive to economic growth in emerging nation for yet another reason: it is a revenue workhorse, See Cnossen, 1998, p.413. to finance capital formation of current government operations. The VAT has often been viewed as a “money machine.” The fear that the VAT will in fact result in large revenue increases accounts for the reluctance of many otherwise market-oriented politicians and even economists to endorse the tax. See Gillis, 1986. Liberals, on the other hand, fear the VAT will be regressive. See Charles McLure “Income Distribution and Tax Incidence under the VAT”, in Malcolm Gillis, Carl Shoup&Gerardo Sicat (Eds.), Value Added Taxation in Development Countries , Washington, DC: World Bank, 1990. Most economists agree with a flat-rate VAT is in fact the most efficient way to raise revenue. But to some this is not an unalloyed advantage of VAT. They are argue that countries utilizing “more efficient” broad based taxes such as a flat-rate VAT tend to have a larger role for government in the economy. Indeed, the authors argue that less efficient tax systems can improve taxpayer welfare because the system creates additional political pressure for suppressing the growth of government. While this reputation is not fully deserved, it is nevertheless true that a simple flat-rate tax credit VAT can raise more revenue with fewer economic and administrative costs than any other tax now in use.

The vat: a taxonomy

There are many kinds of VAT:

A Retail VAT includes retail, wholesale and manufacturing level (all levels are taxable). A retail VAT is the most comprehensive. It is by far the “best form of VAT, but it is difficult to use when a country has very large numbers of small retailers. In that case consider a wholesale or manufacturing VAT should be considered.

The VAT most relevant to emerging countries is the one used in Europe for past 30 years, with the following features:

• A VAT employing a Uniform Rate.
• A Consumption VAT, collected through a tax credit mechanism, extending to the retail level but exempting very small firms with poor record-keeping.
• Exports are zero rated (and thus exempt from VAT).
• A VAT extending through the retail level.