IDEAS home Printed from https://ideas.repec.org/a/kap/itaxpf/v29y2022i1d10.1007_s10797-021-09683-0.html
   My bibliography  Save this article

The C-inefficiency of the EU-VAT and what can be done about it

Author

Listed:
  • Sijbren Cnossen

    (CPB Netherlands Bureau for Economic Policy Analysis
    University of Pretoria)

Abstract

It is widely agreed that in countries without major constraints on administrative capacity, a value-added tax (VAT) should tax all goods and services at a uniform rate. In these countries, VAT’s C-efficiency, that is, actual revenue over potential revenue, should be one if compliance is perfect. Under this approach, VAT’s C-inefficiency—the aggregate of the policy gap (exemptions, reduced rates, thresholds) and the compliance gap (revenue shortfalls due to laps in compliance and implementation)—is treated as a residual. This contribution shows that calculating VAT’s C-inefficiency independently of its C-efficiency produces a more telling benchmark, particularly of the policy gap. This is illustrated by an analysis of the revenues of the Dutch VAT, which, given the common VAT directive, should be representative of the VATs in other European Union Member States. The large policy gap, hovering around 0.50, forms the background for exploring three options to improve VAT’s performance: reforming the common directive, ceding VAT design to Member States, and introducing a common modern VAT which can be piggybacked by Member States.

Suggested Citation

  • Sijbren Cnossen, 2022. "The C-inefficiency of the EU-VAT and what can be done about it," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(1), pages 215-236, February.
    • Handle: RePEc:kap:itaxpf:v:29:y:2022:i:1:d:10.1007_s10797-021-09683-0
    DOI: 10.1007/s10797-021-09683-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10797-021-09683-0
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10797-021-09683-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michael Keen, 2013. "The Anatomy of the Vat," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(2), pages 423-446, June.
    2. Clemens Fuest & Jean Pisani-Ferry, 2020. "Financing the European Union- New Context, New Responses," Policy Contributions 38108, Bruegel.
    3. Poddar, Satya & English, Morley, 1997. "Taxation of Financial Services Under a Value-Added Tax: Applying the Cash-Flow Approach," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(1), pages 89-111, March.
    4. Kerrigan, Arthur, 2010. "The elusiveness of neutrality – why is it so difficult to apply VAT to financial services?," MPRA Paper 22748, University Library of Munich, Germany.
    5. Richard M. Bird, 2010. "Central and Subnational VATs in Federal Countries," Chapters, in: Ehtisham Ahmad & Abdulrazak Al Faris (ed.), Fiscal Reforms in the Middle East, chapter 3, Edward Elgar Publishing.
    6. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    7. Sijbren Cnossen, 2018. "VAT and agriculture: lessons from Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 519-551, April.
    8. James,Kathryn, 2015. "The Rise of the Value-Added Tax," Cambridge Books, Cambridge University Press, number 9781107044128, November.
    9. M.C. Wassenaar & R.H.J.M. Gradus, 2004. "Contracting out: The Importance of a Solution for the VAT Distortion," CESifo Economic Studies, CESifo Group, vol. 50(2), pages 377-396.
    10. Sijbren Cnossen, 2011. "A Proposal to Improve the VAT Treatment of Housing in the European Union," Fiscal Studies, Institute for Fiscal Studies, vol. 32(4), pages 455-481, December.
    11. Richard M. Bird & Michael Smart, 2014. "VAT in a Federal System: Lessons from Canada," Public Budgeting & Finance, Wiley Blackwell, vol. 34(4), pages 38-60, December.
    12. Alastair Thomas, 2020. "Reassessing the regressivity of the VAT," OECD Taxation Working Papers 49, OECD Publishing.
    13. Poddar, Satya & English, Morley, 1997. "Taxation of Financial Services Under a Value-Added Tax: Applying the Cash-Flow Approach," National Tax Journal, National Tax Association, vol. 50(1), pages 89-111, March.
    14. Sijbren Cnossen, 2013. "A proposal to apply the Kiwi-VAT to insurance services in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(5), pages 867-883, October.
    15. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    16. Mr. Santiago Acosta Ormaechea & Atsuyoshi Morozumi, 2019. "The Value Added Tax and Growth: Design Matters," IMF Working Papers 2019/096, International Monetary Fund.
    17. Teresa Garcia-Milà & Therese J. McGuire & Wallace E. Oates, 2018. "Strength in diversity? Fiscal federalism among the fifty US states," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 1071-1091, August.
    18. Richard M. Bird, 2008. "Tax Assignment Revisited," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0805, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    19. Clemens Fuest & Jean Pisani-Ferry, 2020. "Financing the EU: New Context, New Responses," EconPol Policy Reports 24, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    20. Leon Bettendorf & Sijbren Cnossen, 2015. "The Long Shadow of the European VAT, Exemplified by the Dutch Experience," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(1), pages 118-139, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leon Bettendorf & Sijbren Cnossen, 2014. "The Long Arm of the European VAT, Exemplified by the Dutch Experience," CESifo Working Paper Series 4730, CESifo.
    2. Sijbren Cnossen, 2020. "Modernizing the European VAT," CESifo Working Paper Series 8279, CESifo.
    3. Ramon Caminal, 2002. "Taxation of banks: A theoretical framework," UFAE and IAE Working Papers 525.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Michael Firth & Kenneth McKenzie, 2012. "The GST and Financial Services: Pausing for Perspective," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(29), September.
    5. Peña, Guillermo, 2021. "A Monetary Policy Rule using Gravity Models," MPRA Paper 105967, University Library of Munich, Germany.
    6. Sijbren Cnossen, 2002. "Tax Policy in the European Union: A Review of Issues and Options," CESifo Working Paper Series 758, CESifo.
    7. Sajid M. Chaudhry & Andrew W. Mullineux & Natasha Agarwal, 2015. "Balancing the Regulation and Taxation of Banking," Books, Edward Elgar Publishing, number 16668.
    8. Mahfoudh Hussein Mgammal & Ebrahim Mohammed Al-Matari & Talal Fawzi Alruwaili, 2023. "Value-added-tax rate increases: A comparative study using difference-in-difference with an ARIMA modeling approach," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-17, December.
    9. Gemmell, Norman, 2021. "Economic Lessons for Tax Policy Advisers," Working Paper Series 21109, Victoria University of Wellington, Chair in Public Finance.
    10. Ms. Thornton Matheson, 2011. "Taxing Financial Transactions: Issues and Evidence," IMF Working Papers 2011/054, International Monetary Fund.
    11. Alain Babatounde & Bart Capeau & Romain Houssa, 2023. "Welfare effects of indirect tax policies in West Africa," DeFiPP Working Papers 2301, University of Namur, Development Finance and Public Policies.
    12. Cnossen, S., 2002. "Tax policy in the European Union : a review of issues and options," Research Memorandum 023, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    13. Agrawal, David R. & Mardan, Mohammed, 2019. "Will destination-based taxes be fully exploited when available? An application to the U.S. commodity tax system," Journal of Public Economics, Elsevier, vol. 169(C), pages 128-143.
    14. Gemmell, Norman, 2021. "Economic Lessons for Tax Policy Advisers," Working Paper Series 9463, Victoria University of Wellington, Chair in Public Finance.
    15. Börjesson, Maria & Asplund, Disa & Hamilton, Carl, 2021. "Optimal kilometre tax for electric passenger cars," Working Papers 2021:3, Swedish National Road & Transport Research Institute (VTI).
    16. Harry Huizinga, 2004. "The Taxation of Banking in an Integrating Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 551-568, August.
    17. Tim Besley & Rohini Pande, 1998. "Read my lips: the political economy of information transmission," IFS Working Papers W98/13, Institute for Fiscal Studies.
    18. Jaume Sempere, 2022. "On potential Pareto gains from free trade areas formation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1502-1518, December.
    19. Christian Keuschnigg, 2008. "Corporate Taxation and the Welfare State," Working Papers 0813, Oxford University Centre for Business Taxation.
    20. Ferriere, Axelle, 2020. "Comments on “Capital income taxation with housing”," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:itaxpf:v:29:y:2022:i:1:d:10.1007_s10797-021-09683-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.