A Uniform Rate on Consumption Taxation Benefits the Poorest: Presentation and Analysis of the International Debate

Abstract

The proposal to adopt a uniform rate for the taxation on consumption has been criticized because supposedly differentiated rates would favor the poorest. Based on the analysis of the international literature, the article concludes the opposite: differentiated rates are not the best means of protecting the poorest for four reasons: (i) lower rates affect both the poorest and the richest, who normally consume more than the poorest, in absolute terms, goods with a reduced rate or which are exempt; (ii) reduced rates foster complexity, creating litigation that impairs the functioning of the system as a whole; (iii) lower rates favor the action of pressure groups; and (iv) rate reductions are not normally or fully passed-through to product prices.

Keywords: Value-added tax, tax justice, VAT, consumption taxation, progressivity, Brazil