Some Unresolved Issues in Design and Implementation of Value Added Taxes** Johnf.due*

Criteriafor Decision Makingon the A numberofvalue-addedtaxissueshave Issues not beenresolved,ordiscussedextensively To indicateoptimal, or at least second in the literaturedespitewidespreadadopbest, solutions to the issues, it is necestion of the tax.The purposeof this article sary to assume appropriate criteria for is to considersuch issues,including covevaluation.First, it is assumedthat in the erageof the tax by sector,the appropriate interests of economicefficiency,the tax thresholdforregistration, treatment offarm shouldcreate noincentivesto alter methinputs;zeroratingvs. exemption;the covodsofproductionand organizationofthe erageof services,realpropertyconstrucproductionand distribution systems. As tionand rental;multipleratesvs.separate an element in this criterion, the value levies;specialproblemswithinternational added tax must avoid cascading,that is transactions;and the refund issue. multipleapplicationoftax to the same final consumption items, which causes both economic distortions and loss of equity. alue added taxation (VAT) has beSecondly, the final burden of the tax should Vcome the standard form of sales tax be the same on imported and domestic throughout most of the world: Western production; the tax should not provide Europe, Latin America, Canada (as of protection, to be left to customs duties if 1991), Korea, Japan, much of Africa in desired at all, nor discriminate against simplified form, and now the Caribbean. domestic products. Thirdly, for both eqThe literature is substantial, the most uity and economic efficiency reasons, it is significant being Alan Tait's Value Added assumed that the burden of the tax, in the Tax (1988), OECD's Taxing Consumption sense of the pattern of reduction in real (1988), Charles McLure's The Value Added income, should rest in relation to con Tax (1987), and the World Bank volume sumer spending, either uniformly or in edited by Malcolm Gillis, Carl S. Shoup conformity with a desired pattern of nonand Gerardo P. Sicat, Value Added Taxuniformity. Fourthly, the tax must meet ation in Developing Countries (1990). There standards of equity accepted in the parare also numerous journal articles, govticular country, which typically means eniment reports, and World Bank and Bff avoidance of significant tax burden on the Working Papers.' But as anyone involved lowest income groups. Finally, the tax in the designing of a value added tax, must be structured to permit adequate particularly in a developing country, is compliance and administration at acceptwell aware, there are a number of issues able cost, a requirement that may conflict that arise about which the literature has with the others, necessitating a comprolittle to say. This paper is designed to admise. dress some of these issues although satisfactory answers cannot be provided for The Scope of Coverage by Sector: many of them. Major ones widely disManufacturing and Distribution cussed, such as the taxation of financial The standard form of a value added tax institutions and insurance, will not be in the industrialized countries extends covered. Emphasis is on the developing through the retail level, with some countries, but much of the analysis is relthreshold, discussed below, for excluding evant to all countries. very small shops. But in developing coun*University of Illinois at Urbana-Champaign, tries, retailing is primarily a small scale Champaign, IL 61820. endeavor, the proprietors often illiterate,