The Impact of Public Perceptions on General Consumption Taxes

Abstract

The traditional view with regard to general consumption taxes is that excluding certain products from the base decreases their natural regressivity. Whilst this view has been consistently questioned over the last 40 years, public perceptions are still heavily influenced by it. Based upon insights drawn from the legislative history of the old European VAT system and the newer Australian VAT system, this article demonstrates how policy debates and changes in VAT rates have been heavily influenced by those public perceptions; and how special interest groups, which would otherwise lose out from broad-base VATs, are able to use the information asymmetry behind those perceptions to defend their interests in favour of base-narrowing, or against base-broadening reforms. The article presents a novel analytical and conceptual framework—informed by tax law, political economy, political science, behavioural science, and regulatory theory—of the likely factors behind the prevalence of those public perceptions. It demonstrates how, in the absence of external pressures, these perceptions indirectly result in increased use of reduced rates over time, and the consequent narrowing of the tax base. It concludes by presenting a new pathway to shift public perceptions, and to overcome the political resistance to broad-based consumption taxes.

Note: “This material was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in the British Tax Review as The Impact of Public Perceptions on General Consumption Taxes (2020) British Tax Review 67/5, 637-669 and is reproduced by agreement with the publishers”

Keywords: Tax policy, political economy, VAT