VAT: efficient but regressive

[petagny]

VAT has proved to be a very efficient way of raising revenues in many countries, but it has the disadvantage of often being a regressive tax.

Here's some evidence from the UK Office of National Statistics which shows that the poorest fifth of households paid out 10% of disposable income in VAT compared to 5% for the richest fifth in 2009/10. Benefiting somewhat from the temporary reduction of VAT from 17.5% to 15%, this is the lowest level for the poorest households since 1991, but still higher than in 1986. VAT has now risen to 20% and we can probably expect a reversal in this trend.

[Martin Johnson]

Very interesting from Petagny. I presume the reference to efficiency is to do with the cost of collection. VAT, of course, is also economically efficient in that it does not distort relative prices (assuming that there are not differential rates) and associated choices (including the choice between work and leisure) ... still regressive though ....