Value Added Tax, in many countries, is the first source of tax revenue for government. But on the other hand, constitutes a burden for the consumer. Based on this, what do you think would be an efficient VAT rate that can ensure revenues for the government while at the same time will not heart the consumption and the economy?
I think that VAT rate is very dependent on the state. The State Office applying the lowest VAT rate in EU is Luxembourg with a tax rate of 17%. Hungary is the country with the highest normal tax rate of 27%. The EU average rate is around 21%. In my country the VAT rate is 20% and has the largest share in the country's revenue, but puts a burden on the consumer. Maybe the optimal VAT rate is 18%.
Best regards!
In my country (Argentina) the general Value Added Tax rate is 21%, but it is not definitely an efficient rate.
In my opinion it is very difficult and maybe senseless try to fix a general VAT rate for every country. It is necessary to analyze the consumer behavior for determining the most efficient VAT rate for a particular country within a specific moment. The “Laffer curve” is it an interested theory about this issues. I share this paper that could be useful for the discussion:
https://repositorio.iscte-iul.pt/bitstream/10071/9303/1/RESUMO%20&%20ABSTRACT%20RUBEN%20ESPANHOL.pdf
Thank you dear Zarkova and Rodolfo for your replies. I agree that we can not set a rate without taking into account the particularities of every country, but still, in my opinion, a rate of 15% can enhance government revenues without harming consumption. Such a low rate will also prevent tax evasion.
What do you think?
This is indeed an intriguing question. I believe VAT is quite neutral toward consumer behavior. VAT is applied universally on all products that consumers don't have any preferences on any particular good or service. A change in VAT rate would not alter the pattern of consumption. Moreover, even though some economists may see VAT works on the favor of higher income people, it is actually neutral across income level. A modification on the rate of VAT would produce similar impact on the people. The magnitude of the impact might be different across level of income, but the pattern of consumption would remain the same.
Accordingly, if we raise VAT rate, disposable income and marginal propensity to consume would decline proportionately. Alternatively, if we reduce VAT rate, disposable income and marginal propensity to consume would increase proportionately. Therefore, it is save to say the efficiency would be the same across all level of VAT rate.
In comparison, the efficiency of interest rate would be higher. If we raise the level of interest rate, disposable income and marginal propensity to consume would decline disproportionately. Usually, the decline of the disposable income and marginal propensity to consume would be larger than the increase of interest rate.
When talking about efficiency in VAT, it would also interesting to discuss the threshold of VAT registration. Some countries implement higher threshold so that most of the companies are exempted. This policy might be more efficient than setting lower threshold, but the revenue might not be as high.
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