The shares of VAT in consumption are parallel but more moderate: about eight per cent for the least consuming tenth and about 12 per cent for the most consuming. The share of VAT in both gross income and consumption expenditure is clearly higher for the most consuming group. Do not forget about the small business tax rate also.
Consumption and income defiles are different distributions in terms of content: low-consumption is not automatically low-income. The most consuming category may well include low-income people who pay a larger share of their income in VAT.
If we compare the VAT shares of gross income, we find that they look as if they are mirror images of each other. Households that consume more than they earn are in lower income categories but in higher consumption categories.
Excise duties further exacerbate the regression
In terms of income groups, VAT is regressive according to this study, ie lower-income households pay more in relation to their income than high-income ones. This can be seen as problematic against the balancing role of tax revenue distribution.
- In direct taxes, the progression is clear, but indirect taxes weaken it in terms of the overall tax rate, as shown.
- In relation to income, VAT is targeted specifically at the lowest income groups. Excise duties are missing from the review, but they are not progressive based on the 2019 data. Their contribution could therefore be considered to exacerbate the regression seen in this review as well.
The result looks different when looking at the share of VAT in relation to revenue or consumption. Examining consumption tithes makes the results seem more progressive, but does not change the fact that the lowest-income earners pay more VAT relative to their income. Everyone has to consume, and with a low income, consumption – and therefore VAT accounts for a larger share of income.
VAT is therefore regressive in nature
However, the final progression and regression of taxation is most meaningfully assessed at the level of the entire tax system. The regression of consumption taxes could be smoothed out, for example, by adjusting the progression of income taxation.
- In addition to efficiency, a good tax system is about what is considered fair and equitable, which is primarily a political issue.
- The author works as a senior actuary in Statistics USA’s income and living conditions area of responsibility.
- It is conceivable that a large family with children would, on average, consume more than a childless couple and thus pay more indirect VAT.
- On the other hand, VAT-free recycling of children’s clothing and accessories, as well as economic benefits, may reduce the share of consumption on which VAT is paid.
In addition, the majority of consumption is spent on necessities such as food and housing. Foodstuffs are subject to a reduced rate of VAT and part of the cost of housing is fully exempt from VAT.