Report on ‘regressivity of VAT’

The OECD has published a taxation working paper ‘Reassessing the regressivity of the VAT’. The paper ‘reassesses the often-made conclusion that VAT is a regressive tax’ and considers the competing methodological approaches used in previous studies of the distributional effects of VAT. Its analysis of the distributional effects of VAT indicates that VAT is either roughly proportional or slightly progressive in most of the 27 OECD countries examined.

The results for a small number of countries, however, highlight that broad-based VAT systems that have few reduced VAT rates or exemptions can produce a degree of ‘regressivity’, emphasising the importance of ensuring the progressivity of the tax-benefit system in order to compensate poorer households for the loss in purchasing power from paying VAT.