Reassessing the regressivity of VAT

Aug 17, 2020

The OECD has published a working paper; Reassessing the regressivity of the VAT. The paper assesses the conclusion that VAT is regressive in numerous studies undertaken to date and looks at the case for VAT reform to address this issue. 

Reassessing the regressivity of the VAT outlines that VAT is found to be either roughly proportional or slightly progressive in most of the 27 OECD countries examined. However the results for a small number of countries highlight that broad-based VAT systems that have few reduced VAT rates or exemptions can produce a small degree of regressivity.

In light of COVID-19, the findings of the paper suggest there may be scope in many countries for VAT reform to help address revenue needs, as this revenue may be generated with less significant distributional effects than previously thought. The paper outlines that while standard VAT rates are high in many countries, OECD evidence shows that scope exists to broaden VAT bases. However, any VAT increases, including VAT base broadening measures that impact the poor, should be accompanied by compensation measures for poorer households, such as targeted tax credits or benefit payments.