Benefits and drawbacks of VAT
As a taxing system, VAT has been used globally since the 1950’s and it presents unique benefits and drawbacks in itself. First, VAT is beneficial in generating income for governments which is important to cover government expenses as Stiglitz and Rosengard, (2015) observe. Since VAT is vast and is imposed to most produced goods and services, most governments regard it as money production engine. Through this taxation system also, tax evasion is minimized. Consequentially, a reliable income source is achieved by governments. Through value added tax system, it is also possible to enter into regional protocols (Pomeranz, 2015). By having a unified taxing system, industries and governments can take part in trade agreements having a unified economic playing field according to Pomeranz, (2015). Because of the fact that in value added system, the invoice of sales made constitutes the basis of calculating tax, auditing control is possible in a simple and effectual manner.
On the down side however, VAT calculations have a significant impact on businesses which calculate VAT on every produced product at each step of production. Accrued costs due to this process are eventually passed on to consumers. Furthermore as Avi-Yonah, (2015) documents, VAT is hugely regressive with the final cost falling mostly on the poor. Additionally, it remains a challenge to calculate VAT in small professional jobs and among retailers. The high cost of implementing the system because it is based on a full billing system equally makes it problematic. Value added tax is also complex to comprehend as Stiglitz and Rosengard, (2015) observes with its calculation being a difficult undertaking.
Who bears the benefits and burdens of the VAT
The burden of VAT cannot be predicted by merely appraising whom or where the tax is applied. On the contrary, VAT has effects on the status quo, consumer behavior and it triggers economic changes which in turn shift some or in other cases the entire economic burden to other entities as Bamford, (2014) documents. Alterations in prices of goods for instance due to variations in taxes affects the consumer’s purchasing power. By increasing taxes for instance, producers are forced to raise the prices of commodities and the consumer is forced to pay more thereby beating the burden of high taxation. However, the economic burden of tax sometimes does not rest on either the person or the business bearing the statutory liability of paying the tax to the government. For instance, a sudden unexpected increase in tax on printing would hit hardest on the persons taking part in the business because by raising prices, demand drops with the effect trickling down on all entities involved in the trade. The biggest beneficiary of the VAT as Agrawal, Fox and Slemrod, (2014) observes is the government.
Owing to its efficiency, the VAT system results to more revenue acquisition by the government. By basing the tax on all the final sales, the value added system also ensures tax evasion is greatly minimized. Furthermore, the value added tax model offers lower tax rates compared to other taxation systems further minimizing incidences of tax evasion. If for instance one company “cheats” in paying tax, losses are incurred by another company since both companies have to file tax returns and since they have opposing interests, the system self enforces making it hard to evade tax. The government also benefits from maximizing its revenue pool including online platforms, by imposing VAT on all sales including online sales. Finally, by collecting VAT, extra income is generated by the government to fund important programs including proving healthcare to the citizens.
Current tax structures in developed and emerging markets - Comparison
Tax structures in emerging markets differ significantly from that in the developed markets in many dimensions. First, GDP is amazingly lower in emerging markets than in the developed markets with taxes levied on labor income playing an insignificant role (Al-Najjar, 2013). Additionally, whereas taxes on consumption may be significant, effectual tax rates differ significantly depending on the firm. Many firms in the emerging markets thus avoid taxes by operating their cash in the informal sector. Whereas all these policies may be sensible responses to the VAT issues, governments can only collect taxes from the firms which utilize the financial sector. With the use of a financial sector, companies generate paper trail which allows for tax enforcement (Arosa, et al., 2014).
Developed markets have majority of the businesses being conducted through financial sectors hence VAT is applied in almost all sectors of the economy. However, incidences of tax evasion have continued to be reported. Tax can thus be collected easily from firms that rely on the financial sector especially capital intensive companies. The tax structure in developed and emerging markets may however differ on this level with emerging markets offering tariff protection or tax reduction for capital intensive firms in order to attract more investments. Capital commodities are thus exempted from tax in emerging markets or are reduced significantly. This tax structure may however not apply for developed countries. Calculating the VAT also varies between emerging markets and the developed with the problem affecting retailers and owners of small professional jobs. This is especially a problem in emerging markets due to the high number of retailers in such markets. Additionally, as Schenk, Thuronyi and Cui, (2015) observes, emerging markets unlike developed markets exclude agricultural products from the tax structure because: first, the existing policies of supporting low income persons and the problems that come with implementing this taxation system.
References
Agrawal, D. R., Fox, W. F., & Slemrod, J. B. (2014). Competition and subnational governments: Tax competition, competition in urban areas, and education competition. Competition in Urban Areas, and Education Competition (October 27, 2014).
Al-Najjar, B. (2013). The financial determinants of corporate cash holdings: Evidence from some emerging markets. International Business Review, 22(1), 77-88.
Arosa, C. M. V., Richie, N., & Schuhmann, P. W. (2014). The impact of culture on market timing in capital structure choices. Research in International Business and Finance, 31, 178-192.
Avi-Yonah, R. S. (2015). The Inexorable Rise of the VAT: Is the US Next?. Available at SSRN 2693905.
Bamford, D. (2014). 8. Ethical taxation and finance. Taxing Banks Fairly, 156.
Pomeranz, D. (2015). No taxation without information: Deterrence and self-enforcement in the value added tax. The American Economic Review, 105(8), 2539-2569.
Schenk, A., Thuronyi, V., & Cui, W. (2015). Value Added Tax. Cambridge University Press.
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.
