OECD, “Consumption Tax Trends, VAT/GST and Excise Rates, Trends and Administration Issues,” December, 2012

Spread of VAT.

The spread of VAT has been the most important development in taxation over the last half century.  Limited to less than ten countries in the late 60’s it has now been implemented by more than 150 countries.  VAT now raises approximately 20 percent of the world’s tax revenue and affects about 4 billion people.  The recognized capacity of VAT to raise revenue in a neutral and transparent manner has drawn all OECD member countries to adopt this broad-based consumption tax, except the United States, which continues to employ retail sales taxes at the state level (and below) rather than apply a federal consumption tax.  Its neutrality principle towards international trade has also made it the preferred alternative to customs duties in the context of trade liberalization.

VAT has become a major source of revenue for the OECD member countries that have implemented it.  Over the last twenty-five years, the share of VAT as a percentage of total taxation has almost doubled passing from 11.2% on average in 1985 to 19.2% in 2009, this share remaining stable since 2000.  These taxes are globally the third important source of revenue for governments, behind social security contributions (27%) and personal income taxes (25%) but far above corporate income tax (8%); specific consumption taxes (11%) and property taxes (5%).  These ratios vary considerably between countries, but in 27 of the 33 OECD countries with VAT, the tax accounts for more than 15 percent of total taxation.  Following its adoption by a growing number of countries, a shift occurred within the category of taxes on consumption so that while the share of VAT rose, the revenue from consumption taxes on specific goods and services (mainly excise taxes) fell from 16% to 11% over the same period.”  p. 44

The revenue from general consumption taxes stabilized after 2000 as a percentage of both GDP and total taxation.  This followed a period of many years of increasing importance.  Between 2000 and 2009 the Czech Republic, Denmark, Estonia, Germany, Hungary, Korea, Luxembourg, and Sweden were the countries where general consumption taxes have increased the most as a percentage of GDP (by at least 0.5 percentage points), while in Canada, France, Greece, Iceland, Israel, Italy, Portugal, Spain and Turkey and the United Kingdom the percentage fell by at least 0.5 percentage points.

Over the longer term, OECD member countries have relied increasingly on general consumption taxes.  Since 1965, the share of these taxes as a percentage of GDP in OECD countries has more than doubled, from 3.3% to 6.7%.  They presently produce 20% of total tax revenue compared with only 11.9% in 1965.

This is especially true for VAT, which is the largest source of general consumption taxes, accounting for 6.4% of GDP and 19.2% of total tax revenues.  VAT is now operated in 33 of the 34 OECD countries, the United Stats being the only country not to have adopted a VAT.  In 1977, fourteen of the current OECD member countries had a VAT.  Greece, Iceland, Spain, Portugal, Turkey, Mexico, Japan and New Zealand introduced VAT in the 1980’s while Switzerland followed shortly afterwards.  The Easter European economies introduced VAT in the late 1980’s and early 1990’s, some of them adopting the EU model with their future EU membership in mind.  The tendency for VAT rates to rise over the long term also contributed to the growing share of general consumption taxes in the tax mix.” p. 61

OECD Consumption and VAT Tax Trends (Table: VAT Percentages by Country; General Consumption Taxes by Country (% of GDP; % of Total Taxes); VAT Taxes by Country (% of GDP, % of Total Taxes)