VAT

The tax and benefit system is a key tool for a government trying to reduce inequality. In this briefing note, we examine the effects that cash benefits and taxes had on UK inequality in 2016–17.

As in high-income countries, reduced rates of VAT and VAT exemptions (“preferential VAT rates”) are a common feature of indirect tax systems in LMICs. Many of the goods and services that are granted preferential rates – such as foodstuffs and kerosene – seem likely to receive such treatment on the grounds that they provide a means for the government to indirectly target poorer households, for whom such expenditures may take up a large proportion of their total budget.

As in many high income countries, VAT systems in low and middle income countries (LMICs) are often characterised by different tax treatments for different types of goods and services. Often, reduced rates of VAT and exemptions (“preferential rates”) are granted on equity grounds, for goods and services that are thought to take up a greater proportion of the budgets of poorer households. Given typically limited capacity to redistribute through the direct tax and benefit system, it has been suggested by some economists that such rate differentiation might be the best way for governments to transfer resources to poorer households.

This briefing note presents preliminary results from a study on value added tax (VAT) and tax compliance in the Indian state of West Bengal.

The simplest form of value added tax (VAT) – and the form often advocated by international organisations – is one with a broad base and a single (‘uniform’) rate. In practise, most countries exempt and/or apply lower VAT rates on certain categories of goods and services. In this note authors summarise the pros and cons of such ‘VAT rate differentiation’ that are highlighted in the economics and taxation literatures, paying particular attention to the applicability and relevance of each factor for low- and middle-income countries.

This document provides an overview of the UK tax system, describing how each of the main taxes works and setting their current state in a historical context.

By the end of the parliament, tax receipts are due to return to their pre-recession share of national income. However, compared with 2007/08, policy choices mean the taxman looks set to raise more from VAT and less from other indirect taxes; about the same amount from personal income taxes, though with more of that coming from the highest earners; less from the main property taxes; and substantially less from corporation tax. HM Treasury will be more reliant on small taxes, including five entirely new ones. Whether these changes have been part of a clear and coherent overarching strategy is, to put it kindly, unclear.

IFS researchers made a small contribution to this report, prepared for the European Commission by a consortium of researchers led by IHS Institute for Advanced Studies, Vienna.