On the Threshold: Smallness and the Value-Added Tax

68 Pages Posted: 9 Mar 2018 Last revised: 28 Mar 2018

Emily Satterthwaite

University of Toronto Faculty of Law

Date Written: March 16, 2018

Abstract

Three-quarters of the world’s population live in a country in which a value-added tax (VAT) is collected on sales of goods and services. The registration threshold determines which businesses—typically as measured by their annual revenues—remain exempt from the obligation to register for and collect VAT on their sales. Among VAT economists, there is broad consensus that setting thresholds higher rather than lower (such that more rather than fewer businesses are exempt) increases the economic efficiency of a VAT. Despite these high stakes and the longstanding expert consensus in favor of high thresholds, real-world thresholds vary widely and skew low, even within OECD and European countries. This article leverages the insights of the economic model to address an issue that lies outside of it but is central to lawyers and policymakers: fairness. Numerous studies show that smaller businesses’ costs of complying with the VAT are disproportionately higher than larger businesses. To the extent that lower-income entrepreneurs internalize those costs or pass them on to lower-income consumers, there is a vertical equity rationale for raising thresholds. Moreover, in the (typical) context in which small firms are more common than large firms, setting thresholds higher rather than lower—while also offering small suppliers an election to voluntarily register—can reduce the competitive unfairness of drawing an arbitrary bright line between firms above and below the threshold. Under these conditions, higher registration thresholds can improve both the fairness and the efficiency of a VAT.

Keywords: taxation, value-added tax, entrepreneurship, small business, elections

JEL Classification: K34

Suggested Citation

Satterthwaite, Emily, On the Threshold: Smallness and the Value-Added Tax (March 16, 2018). Columbia Journal of Tax Law, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3135076

Emily Satterthwaite (Contact Author)

University of Toronto Faculty of Law ( email )

84 Queen's Park
Toronto, Ontario M5S 2C5
Canada

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