STARI Lunchtime Seminar - Can VAT Help Address Inequalities?

Everyone wants fair taxation, but what do we mean by it? What impact can taxation have on inequalities? To what extent should the tax system be used to redress them? And do we (truly) want it to do so? This paper present a novel approach to addressing VAT regressivity, away from exemptions and reduced rates, by proposing the adoption of a progressive VAT: a single-rate, broad-base, VAT, whereby tax paid on consumption is re-paid to lower income households in real-time, at the moment of purchase. Such a system can effectively eliminate regressivity, while minimizing the political economy, cash-flow, and welfare stigma obstacles that are often associated with standard welfare transfers used in modern VAT systems. It would also have other significant advantages, particularly in terms of compliance incentives.

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