Chapter 12: Below the salt: decentralizing value-added taxes
Since the most striking tax development of the last half century has been the worldwide rise of the value-added tax (VAT), it is no surprise that most countries now have national VATs (Martinez-Vazquez and Bird 2011). More surprisingly perhaps, two quite different types of sub-central VATs – regional consumption taxes and local business taxes – now exist in a number of countries. Can two (or even three) levels of government tax essentially the same base without creating undesirable tax competition, giving rise to unnecessary administrative and compliance costs, and requiring an unattainable level of intergovernmental cooperation? VATs applied simultaneously within the same country by different levels of government were long considered to be either undesirable or infeasible. One reason was because of the high administrative and compliance costs of imposing two sales taxes on the same base. Another was that divided jurisdiction over such an important tax base might unduly limit the scope of central macroeconomic policy. Still another was simply because central governments were reluctant to allow others a share in this attractive tax base. However, the major technical problems perceived were undoubtedly those arising from cross-border trade and the need for border adjustment. National taxes in a common market are analytically analogous to sub-central taxes within a country, so it is no surprise that most of these issues were first discussed in detail in the early years of European integration (Shoup 1967).
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