The VAT at 100: A Comprehensive Health Assessment, With a Plan of Care and Suggestions for Diagnostic Tests

This paper takes stock of what is known about the efficacy of actual Value Added Tax (VAT) systems, nearly 100 years since the tax was conceived. Existing VAT systems fall short of the idealized version on many dimensions, some by design and others unintended. Actual VATs might therefore have different equity and efficiency implications than an ideal VAT, although new technologies could bring practice closer to the ideal. Throughout the paper, we find a useful benchmark is the tax that the VAT most often replaced – the Retail Sales Tax (RST). Like the RST, the VAT is weak at the final consumer stage and technological advances that ameliorate VAT issues could also be applied to the RST. In addition, the VAT introduces some new opportunities for evasion not possible in an RST. A research agenda for the VAT should consider the efficiency and equity implications of real-life, imperfect VATs.