סקירה שלי בנושא מדיניות מס משנת 2018 – הניתוח מן הסתם כלכלי בעיקרו:

The spread of VAT in the world

VAT/GST has gained momentum since its introduction, several decades ago, and is now an integral part of the tax system of 168 countries in the world (and all the OECD countries except the US). The share of VAT in the total revenue of the countries has increased significantly since it was first introduced, while the share of specific consumption taxes has decreased[1]. VAT is also imposed in countries with high natural resources and recently (2018) also in Saudi Arabia and Emirates. Even in the US, where sales tax is imposed, there is constant debate about the need to impose VAT and extensive literature regarding its advantages in relation to other consumption taxes.

The tax base - consumption versus income

Some of the reasons for the popularity of VAT, even in relation to other consumption taxes, are related to the alleged advantages of the transition to consumption tax base as opposed to income tax base - the imposition of VAT constitutes, to some extent, a partial transition to a consumption tax base. These arguments are generally divided into two categories - economic efficiency and equity. I will briefly discuss both.

Efficiency - The argument is (simply) that income tax is less economically efficient[2]. The imposition of income tax "punishes" those who prefer to save, and at the end of the day they are taxed on a larger share (percentage) of their total income over the course of life (which is theoretically equal to their lifetime consumption). In contrast, consumption tax is neutral and does not discriminate (in terms of the tax burden (in percentages)) between those who save (choose to consume in the future) and those who chose to consume now. The person who chose to save will consume more (also the return on savings) and will pay more taxes but will bear the same tax burden as the person who chose to consume all. In fact, income tax is imposed (also) on the component that was saved (not consumed) at the time the income is received, and also on the later profit from the investment (on the date it is received). This is in contrast to consumption taxation that is considered to be an effective wealth tax[3]. The excess taxation of savings will lead to a reduction of capital and therefore will reduce productivity from work and real wage, and thus harm growth. In addition, some believe that the calculation of income tax on capital is more complicated (calculation of depreciation on assets, principal and interest, etc.) while the calculation of tax on a consumption basis is simpler and thus reflected in lower compliance costs.

On the other hand, the argument is that a consumption tax base is narrower and necessarily involves imposing a higher tax rate (because savings are not at the tax base) which will lead to a greater bias between leisure and work and inefficiency. Since the claim of bias against savings refers only to the risk-free component (Normal Return) as well as because the bias depends on human preferences, it is not clear which effect is stronger.[4] In addition, the consumption tax base calculation also involves special costs (the assets - the capital itself and the savings) so that it is uncertain which of the methods is more efficient in terms of compliance costs.

Despite this, the majority believes that consumption tax basis is more efficient, but it is not certain at all whether the costs involved in the transition between two different tax methods justify the transition[5].

Equity - The main argument against consumption tax base is that it is regressive. Even if a flat tax is imposed, the poor consume a larger share of their income and sometimes even more than their income (by taking loans). In addition, the possibility of saving and consuming more in the future is also valuable, and this is a matter reserved for the rich. Wealth can also be political power or produce other benefits even if it is not consumed (tax capacity).

The counter-argument is that from an empirical point of view, it is not at all certain that the possibility of saving in the future is of value, and that regressivity should be examined in relation to (lifetime) consumption rather than income.

In fact, some believe[6] that taxation on consumption is more just because, as mentioned, consumption is what you take from the world and investment is what you give. Hamilton even wrote that taxation on consumption is more just because it offers more freedom to the taxpayer (to consume or not to consume)[7].

In summary, there are various arguments, but the majority believe that taxation on consumption base is less correct in terms of progressivity and at least adjustments should be made in this regard.

In light of this I will examine the main advantages and disadvantages of VAT.

The main advantages of the VAT

Raising tax revenue- VAT enables fast and easy tax collection - A simple one percent increase in the tax rate means large revenue (and so is reduction). This is why VAT is called the "money machine". In addition, revenue is more stable, even in times of economic crisis, because the tax is on relatively fixed consumption (although the imposition of specific consumption taxes may be particularly effective if demand for the product is relatively rigid).

In addition, in countries where VAT is not implemented (such as the US), the imposition of VAT can be a one-time tool for drastic reduction in the deficit, insofar as it will not be offset by other tax cuts[8].

Simplicity - VAT in its familiar format, especially when it offers limited exemptions and a uniform tax rate, is a relatively simple tax, which means less litigation with the authorities or reduced tax liability. Simplicity is one of the desired basic components of any tax system and it contributes to compliance and reduction of costs.

Self-Enforcement Mechanism – the credit-Invoice method guarantees payment of tax at each stage of the supply chain (or at least an invoice) and a full audit trail, which makes tax evasion very difficult and saves enforcement costs.

A weaker effect on economic growth compared with an increase in corporate tax rates - It is generally assumed that raising the corporate tax rate harms economic growth[9], while there is a weaker effect from a similar increase in other taxes, if any. In practice, VAT is imposed alongside corporate tax, so when it is necessary to raise a budget, it is preferable, economically, to do so through an increase in the VAT rate. This is especially true for small market countries in the current era of tax competition and the race to the bottom of corporate tax rates. It is no wonder that VAT collects a larger share of all taxes in countries such as Israel and New Zealand. In addition, some believe[10] that VAT can be an engine for growth (for a short period) by announcing an intention to raise the VAT rate, which will lead to increased consumption before the expected change.

Neutrality - the optimal VAT is neutral[11] because in practice it is not imposed on the business (transferred to the consumer). VAT at a uniform rate also does not affect consumer choices. Neutrality means economic efficiency - VAT does not distort business investment options, the choice of savings, the form of incorporation, the way of doing business and between capital intensive and labor intensive.

Import and export neutrality - VAT based on the destination principle with a good border tax adjustments (BTA- which guarantees the offsetting of VAT inputs in exports by imposing 0% rate and on the other hand imposes VAT on imports) does not distort between domestic production and imports or exports[12](and therefore is economically efficient). However, imposing a different rate on the export of certain products/services or imports may serve as a policy tool.

It is widely accepted by the world and this may have made it easier for statesmen (and the public) to adopt the tax (however, some believe that the tax is popular only after its initial adoption and that the experience proves that those who impose the tax for the first time will not be elected again[13]).

In addition, this means that the tax is more globally coordinated and facilitates coordination in the international trading arena.

It is hard to erode the tax base - unlike corporate tax and even income and capital taxes, it is difficult to erode the tax base by diverting activity or assets to other countries, because VAT is generally based on consumption according to the destination principle which is something that is difficult to mobile (see further discussion below).

The number of taxpayers - the integration of VAT into the tax system or the increase in the VAT rate will raise the minimum income tax thresholds and thus release many taxpayers from the need to file reports while reducing administrative costs[14]. On the other hand, a larger number of people will pay tax (on consumption) and even if they will receive grants it will contribute to their sense of tax burden and increase compliance and identification with the state.

The main disadvantages of the VAT

Regressivity - as explained above the main argument against a consumption tax base is repressiveness, and this is also the main argument against VAT: Although VAT is imposed alongside other taxes, in practice, the system's overall progressivity is not always adjusted to the desired level. For example, in Israel, where tax rates are low on passive income, it is argued that together with the VAT imposed on a broad tax basis, there is over repressiveness of the tax system.

High administrative and regressive compliance costs imposed on businesses - the common VAT is imposed on the basis of the credit-invoicing method on a monthly or bi-monthly basis. In addition the tax imposed on transactions. This creates very high costs on the supply chain businesses, especially when the volume of transactions is large, in the era of the digital economy and large corporations (this is why in many countries financial institutions do not pay VAT or it is calculated using another method). The burden (involving accounting and consultants) is relatively higher for small businesses and therefore regressive[15].

Counter arguments against the economic efficiency argument -one argument is that there are actually exemptions from income tax in order to encourage savings (such as pensions, etc.) and therefore there is no significance to the advantage of consumption tax base. However, these exemptions are usually restricted to the ceiling, and in some cases, such a specific exemption actually encourages the taking of a loan in order to invest[16] and distort.

Another argument is that, in practice, in all countries there are also exemptions for certain products/services and sometimes also different VAT rates. The exemptions are sometimes part of the supply chain (B2B) and in practice (due to the fact that inputs cannot be offset) are rolled over to the end consumer who is not aware of this. Sometimes this also leads to a preference for self-service. Similarly, the existence of different tax rates harms neutrality and allows for tax cuts (by means of a different classification)[17]. All of these impair economic efficiency and even the collection rate. An example of this can be found in China's relatively complicated VAT system (despite the broad tax base)[18].

A counter argument against the raising revenue argument- because it is easy to raise revenue through VAT, VAT creates lazy and wasteful governments - the problem is mainly government spending, not the budget[19].

Fraudulent scams: fictitious invoices, missing trader fraud (MTIC) and carousel fraud - because of the credit-invoice mechanism, there are many frauds that allow tax evasion and receipt of funds from the state (the credit). This is mainly due to the gap between the time of payment to the supplier and the time when the "collected" VAT is (not) paid to the tax authority (as well as exploitation of the fact that exports are subject to 0% rate VAT).

A counter argument against the "global coordinated" argument- because of the global similarities and coordination frauds such as those described above are possible, especially in a free trade zone (because there is no customs certificate) such as the European Union. In addition, there are no DTAs on VAT and sometimes there is a difference between the definition of the "place of supply" in each country (e.g. New Zealand and Australia from the EU)[20]

Vat and other consumption taxes-

Specific consumption taxes - These taxes apply only to a limited number of products and sometimes to specific taxpayers. The difference from VAT is that sometimes these are imposed as a fixed sum or/and according to quantity (and not value). These characteristics make the tax ineffective economically - its imposition causes distortions between different products (harms competition) and also involves large compliance costs and tax reductions (because taxpayers try to classify the items differently). Therefore, these taxes are used relatively narrowly (mainly on fuel, alcohol and tobacco) to conduct behavior (sin taxes and as green taxes) or to reduce inequality in society (luxury taxes).

Subtraction method VAT (business transfer tax) - In this method, the tax is imposed (usually on an annual basis) on the total value added of the business (the profit plus salaries), instead of the monthly calculation of the transactions minus inputs. It applies (partly) in Japan (as hybrid tax - annual VAT without invoices). In addition it applies in some countries (e.g. in Israel) only on financial institutions (since the credit-invoice calculation is difficult due to the large number of transactions). Apart from simplicity and cost savings, the tax is also more attractive to the public (because supposedly it applies to business as corporate tax - although the essence is VAT). The drawbacks compared to the credit-Invoice method are the absence of the self-enforcement mechanism (and the audit trail) and the absence of a BTA mechanism (no credit on the supply chain in exports and therefore no export neutrality). For the same reason it is also not possible to implement absolute differential tax rates on products or exemptions.

Retail Sales Tax (RST) – imposed in the US (and to some extent in Canada). Like VAT it is ultimately levied on sales to unregistered dealers and consumers, but is charged only at the final stage of the supply chain. The tax base is usually narrower than VAT (and on savings products) and it has the same BTA problem (as the subtraction VAT- its origin based tax). Since it is charged only at the final stage of the supply chain there is a higher possibility of tax evasion.

Personal Expenditure Tax (PET) - the tax was previously imposed as consumption base tax in India and Sri Lanka but was canceled due to administrative difficulties. It is intended to be imposed on households (who will report income less net savings) at a progressive rate to solve the regressive problem of consumption taxes. The tax still requires different calculations and data on savings (it is not as simple as VAT - perhaps even more complex than income tax as it requires annual capital declaration). As consumption tax it is also imposed in times of unemployment, and on the other hand, it does not apply to one-time capital gains such as the sale of a capital asset (for example, the sale of a home). Therefore, it is better averaged and stable (without years in which there are particularly high tax brackets and years in which no tax credit is utilized). However, such a tax will actually be on origin base (no BTA) and therefore it will harm its economic efficiency, which is the main reason for its imposition (though the assumption is challenged)[21].

The Flat Tax is essentially composed of two parts of the subtraction method (the business and the employee), but the total wage component of the business will be deducted (alongside investments which prevents depreciation calculations, etc.). The individual (employee) will be taxed on the wage component at the same tax rate as the business, but extensive exemptions will be granted according to certain criteria in order to create progressivity. The tax was proposed[22] in order to solve the repressiveness problem (e.g. of the VAT) while maintaining relative simplicity. However, the tax is not really progressive for the middleclass and the rich (only for the lower levels) - the employee part applies only to employees and not to property owners who will actually benefit from tax cuts. In addition, there will be a problem of classification of the income of the self-employed into wages or capital, and of distinguishing between financial transactions and real business transactions. The export neutrality problem also remains the same (its origin based).

The X-Tax[23] is in fact similar to the flat tax, but it was proposed[24] as a progressive tax on the individual part (different rates rather than exemptions). However, here too, progressivity is limited only to those with income from work. In addition, the other disadvantages of the flat tax exist for this tax, and it will also be less simple.

Destination-based cash-flow tax[25] (DBCFT) - The tax was recently proposed to replace corporate tax so to be taxed on a cash flow basis and according to the place of consumption (sales abroad are exempt from tax and imports are taxable). A change in the tax base will promote mobility of businesses (the place of business is not important) and thus will contribute to economic efficiency while preventing the erosion of the tax base (done today by global multinational enterprises (MNEs) diverting profits to tax havens). The tax maintains neutrality between debt financing and equity (both are fully deducted) and in fact, its economic significance is equal to that of raising the VAT rate while reducing taxes on income from work. Although the tax may be contrary to the provisions of the tax treaties, imposing it by a large country may force other small countries (to which profits are "diverted") to change their tax base as well.

A more difficult problem will be the WTO because the export adjustment mechanism may be perceived as subsidy to exporters (the cost of labor is offset by a local producer who sells on the local market or exports (the proceeds from the sale are exempt) but importers do not benefit such offset) - although from a financial point of view the tax is equivalent to VAT, in view of the current trade agreements there will be a problem. This problem may also affect public support for the move because it means that large exporters will be paid by the government each year (reimbursement of costs). There will also be a problem of classification of receipts as export - an issue that will involve compliance costs and fraud.

As mentioned, and as the DBCFT tax planners emphasized, imposing the tax is economically equivalent to imposing VAT (or raising the existing VAT rate) while reducing the income tax on individuals.

Trends that support the continued popularity of VAT

Globalization and the erosion of the tax base. As can be seen in the above paragraph - VAT can better cope with the erosion of profits and even if similar corporate tax will also be imposed the administration will be similar. VAT is essentially a global tax, which is imposed and calculated in a similar manner around the world. In addition, more international transactions are carried out, even in small volumes (e commerce) and this also supports the continued popularity of VAT.

Ageing population - As the population grows older, the labor force becomes smaller and there is less growth in labor productivity. Hence economic efficiency and stability in raising tax revenue are more desired (also to compensate for the increase in government expenditure deriving from its subsidies in the older population). As noted, VAT is relatively efficient, does not harm the incentive to save, and it also applies to consumption (from people who have retired - in a manner that can increase (stable) revenue (on consumption base). That is why VAT was introduced in Hong Kong[26] and tax rates were raised in Singapore.

Technology and distributed ledger technology (DLT) in particular - As noted above, significant disadvantages of VAT derive from compliance costs related to the volume of transactions that modern technology allows, and the easy frauds. However, progress in the technology may also offer the solution: While there are already technological means to improve compliance, the DLT may offer a particularly suitable solution. The known advantages of it are transparency and the verification in a distributed manner. VAT is a tax on transactions and the connection between the inputs to the transactions can be verified by the technology to avoid evasions and reduce costs[27]. Transparency will enable good auditing and data processing by the authorities, and the "smart contract" technology will prevent the gap between the transaction time and the payment of the tax (although this could not be done with Fiat money). Thailand recently announced that it has set up an innovation lab to examine DLT as a tool to reduce VAT evasion[28].

Cognitive biases and their impact on the popularity of VAT

As noted above, much of the "viability" of VAT and the transition to tax on a consumption basis depends on people's preferences. From the literature that examined the effect of cognitive bias on taxes, we can also infer the popularity of VAT, as opposed to other taxes.

The problem of the famous Framing effect presented by Tversky and Kahneman[29] undermines the rationality model. The effect is due to two main reasons: A. passive acceptance of the presentation without reaching the real meaning and B. sensitivity to gain and loss situations - people prefer to earn something perceived not theirs rather than lose something of theirs even if ultimately the result will be the same (in terms of rational utility).

With regard to the first part, it has been shown[30] that people are more deterred by fixed tax than percentage tax, although equivalent (because it is difficult for people to make calculations). It has also been shown that unskilled people misdiagnose progressivity when it comes to fixed sums (they tend to think the tax is more progressive), that people will have the same difficulty in assessing progressivity when it comes to integrative taxes (in a tax system), and that people prefer indirect (hidden) taxes.

As for the second part, it was proved that indirect tax substitution in direct taxes would provoke more resistance - since people are characterized by loss aversion, the cancellation of the indirect tax will be underestimated compared to the direct taxation change. Similarly, cancellation of public services provided by the government (in favor of privatization) via cancellation of hidden taxes may be perceived as a loss of an existing right.

Therefore, it is possible to understand why VAT, which is an indirect tax that fuels a broad government, is so popular even in relation to specific consumption taxes (which are sometimes imposed on a fixed basis) as well as why it is difficult to reduce VAT while raising direct taxes.

In particular, it is possible to learn about the need for transparency in order to ensure that the desired progressivity is maintained in a system in which VAT is imposed alongside other taxes (For example, Gale and Harris suggest[31] that the VAT transparency in Canada (presented separately on the invoice, similar to the RST) is the reason why there was no significant increase in government spending as a result of the imposition of VAT).

The optimal VAT

In light of all of the above, it is possible to understand why VAT has become so popular and why it is reasonable to assume that it will remain - VAT offers key advantages such as efficiency, easy tax collection, and simplicity. VAT also has some disadvantages, but as detailed below, that the countries are working to reduce:

Tax design- Differential VAT, multiple exemptions and 0% VAT (excluding BTA) cause economic ineutrality (including preference for imports from zero-rate products) and high compliance costs. These measures are also not the most effective way to achieve progressivity because even if the lower classes enjoy exemptions more, the middle class and the higher strata benefit no less. Direct grants are a more effective way to correct progressivity, even if there is a public fear that they will eventually be eliminated (as was done in New Zealand, for example[32]). Therefore, more and more countries are expanding[33] the tax base in favor of a better VAT Revenue Ratio (such as that of New Zealand and as recent reforms have been made in China).

The Global Aspect -As stated, there is still a mismatch in the rules of origin between the various countries (New Zealand[34] and Australia), but the trend is coordination. The destination tax base is the binding base by the WTO, and the OECD has adopted several measures designed for international coordination and reduction of tax avoidance (e.g. BEPS1 which will also be implemented in Australia and New Zealand and the International VAT/GST Guidelines)[35] alongside administrative cooperation between the countries.

SMEs costs- as noted above, a significant disadvantage of VAT is administrative costs and high compliance costs, which place a heavier burden on small businesses. In order to deal with this, most countries exempt small businesses from VAT. However, as stated, exemptions are not economically efficient and such thresholds even constitute a disincentive to the small business to grow or to split business activities in an economically inefficient way. Therefore, over time, additional solutions are adopted such as a flexible minimal thresholds (which grows slightly each year), the option (for the small business) to choose whether to register, alternative mechanisms for calculating the tax for some dealers and some transactions[36], and the reverse charge.

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[1] OECD, Consumption Tax Trends 2018 VAT/GST and Excise Rates, Trends and Policy Issues < https://doi.org/10.1787/ctt-2018-en>

[2] Alan J. Auerbach, The Choice between Income and Consumption Taxes: A Primer. NBER Working Paper No. 12307 (June 2006) <http://taxreview.treasury.gov.au/content/html/conference/downloads/conference_report/04_AFTS_Tax_and_Transfer_Policy_Conference_Chap_4.pdf>

[3] William Gale and Benjamin Harris, A Value Added Tax for the United States: Part of the Solution,

Brookings Institution and Tax Policy Center, July 2010, p 11<

http://www.taxpolicycenter.org/UploadedPDF/1001418_VAT_solution.pd>.

[4] <https://escholarship.org/content/qt444479wh/qt444479wh.pdf> Tax Reform in the 21st Century. Alan J. Auerbach*. University of California, Berkeley, and NBER. May 6, 2006.

[5] See 2 above

[6]W. Andrews, A Consumption-Type or Cash Flow Personal Income Tax, 87 HAuv. L. Rrv. 1113 (x974)

[7] Hamilton, Alexander (2008). The Federalist Paper. Oxford University Press. pp. Federalist No. 21

[8] Keen, M& Lockwood, B, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 905-928, December.

[9] See The US Council of Economic Advisers, The Growth Effects of Corporate Tax Reform and Implications for Wages(October 2017) <https://www.whitehouse.gov/sites/whitehouse.gov/files/images/Corporate%20Tax%20Reform%20and%20Growth%20Final.pdf>

[10] See Gale and Harris

[11]On neutrality see for example Judgment of the General Court of the EU (23.04.2015) in Case C-111/14, GST - Sarviz AG Germania Vs. Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ Plovdiv pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite

[12] Slemrod J, Does a VAT Promote Exports?,

Tax Analysts (2011(

[13] Avi-Yonah, R. "The Political Pathway: When Will the US Adopt a VAT?" The VAT Reader: What a Federal Consumption Tax Would Mean for America, 334-7. Washington, DC: Tax Analysts, 2011.

[14] Graetz, M.J.. (2010). 100 million unnecessary returns: A simple, fair, and competitive tax plan for the United States..

[15] Barbone, L Bird, R Miller and Vázquez Caro, Jaime, The Costs of VAT: A Review of the Literature (March 1, 2012). Case Network Reports No. 106/2012. Available at SSRN: https://ssrn.com/abstract=2024880 or http://dx.doi.org/10.2139/ssrn.2024880

[16] Carroll, R , D. Viard, A, Ganz, S. (2008). The X Tax: The Progressive Consumption Tax America Needs?.

[17] See 1 above

[18] Shen, S. Y., & Krever, R. (2017). China's VAT Reform: Experiences and Lessons Learned. International VAT Monitor, 28(2), 147-153.

[19] see Gale and Harris

[20] Millar, R l, Sources of Conflict in Cross-Border Services Rules for VAT (January 1, 2008). Sydney Law School Research Paper No. 08/14<SSRN: https://ssrn.com/abstract=1068542> or <http://dx.doi.org/10.2139/ssrn.1068542>

[21] Keen and S. Lahiri, The comparison between destination and origin principles under imperfect competition, Journal of International Economics, vol.45, issue.2, pp.323-350, 1998.

[22] By Robert E. Hall and Alvin Rabushk.

[23] see 16 above

[24] By David F. Bradford.

[25] Auerbach, A , Devereux, M P, Keen, M and Vella, J, Destination-Based Cash Flow Taxation (February 6, 2017). Oxford Legal Studies Research Paper No. 14/2017; Saïd Business School WP 2017-09; Oxford University Centre for Business Taxation WP 17/01.<https://ssrn.com/abstract=2908158 >or <http://dx.doi.org/10.2139/ssrn.2908158>

[26] Porter, Nathan. (2007). Guarding Against Fiscal Risks in Hong Kong Sar. International Monetary Fund, IMF Working Papers.

[27] Deloitte Blockchain technology and its potential in taxes | December 2017<https://www2.deloitte.com/content/dam/Deloitte/pl/Documents/Reports/pl_Blockchain-technology-and-its-potential-in-taxes-2017-EN.PDF>

[28]FTREPORTER, Thailand Tracking Revenue VAT With Blockchain(December 2018) <http://ftreporter.com/thailand-tracking-revenue-vat-with-blockchain> Thailand Tracking Revenue VAT With Blockchain

[29] Kahneman, Daniel & Lovallo, Dan. (1993). Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking. Management Science. 39. 17-31. 10.1287/mnsc.39.1

[30] McCaffery, Edward J. and Baron, Jonathan, Heuristics and Biases in Thinking About Tax (December 12, 2003). U of Penn, Inst for Law & Econ Research Paper 03-31; USC Law School, Olin Research Paper No. 03-22; and USC CLEO Research Paper No. C03-23. Available at SSRN: https://ssrn.com/abstract=467440 or http://dx.doi.org/10.2139/ssrn.467440

[31] See Gale and Harris

[32] Morse, Susan C., How Australia Got a VAT (August 4, 2010). The VAT Reader, Tax Analysts, 2011. Available at SSRN: https://ssrn.com/abstract=1653609

[33] See 1 above

[34] See 1 above

[35] See 1 above

[36] See 1 above