From the mid-1980s to 2000, four industrial democracies introduced the VAT for the first time. Their introduction of the VAT (New Zealand in 1986, Japan in 1989, Canada in 1991, and Australia in 2000) can be regarded as a response to chronic budget deficits, which have become a common problem in industrial democracies since the mid-1970s. The Australian introduction of the VAT has made the United States the only country among eighteen OECD countries without the VAT. Each of these countries has a modest-sized welfare state and has not had an effective revenue measure to finance it. Despite their current low tax levels, however, these governments' efforts to explore new revenue sources have met formidable opposition except in New Zealand. This chapter compares the experiences of Canada and New Zealand with their neighbors: the United States and Australia, respectively.

Divergence and Convergence in the United States and Canada

Both the United States and Canada are typical Anglo-American countries whose tax revenue is heavily reliant upon income taxation. A quick comparison between the U.S. and Canadian tax revenue structures (Figure 1.2a, b, c, d) reveals that the two countries have shown both convergent and divergent patterns over the last three decades. In 1965, the Canadian tax level was closer to the average of the eighteen OECD countries, and the U.S. level was fourth from the bottom; in 1980, both became lower-tax countries, especially the United States, the second from the lowest; in 1995, while Canada restored its relative rank, the United States became the country with the lowest tax level (for more detailed changes, see Figure 3.1).