This Working Paper was first published by the IMF
In this paper, Rita de la Feria and Artur Swistak present a novel approach to addressing VAT regressivity, by proposing the adoption of a progressive VAT where VAT-related tax expenditures are eliminated. The authors propose a single-rate, broad-base, VAT, whereby tax paid on consumption is re-paid to lower income households in real-time, at the moment of purchase. Such a system – they argue – can effectively eliminate regressivity, while minimizing the political economy, cash-flow, and welfare stigma obstacles that are often associated with standard welfare transfers used in modern VAT systems. It would also have other significant advantages, particularly in terms of compliance incentives.