In this chapter, we consider four simple questions. First, what exactly is a VAT? Second, which countries have VATs, and how important is VAT in these countries? Third, why has VAT spread around the world so quickly and so broadly? Fourth, is there one ‘VAT world’ or two?

WHAT IS A VAT?

What exactly is a VAT? A recent definitive statement defines a value-added tax as “a broad-based tax levied at multiple stages of production [and distribution] with – crucially – taxes on inputs credited against taxes on output. That is, while sellers are required to charge the tax on all their sales, they can also claim a credit for taxes that they have been charged on their inputs. The advantage is that revenue is secured by being collected throughout the process of production (unlike a retail sales tax) but without distorting production decisions (as a turnover tax does)” (International Tax Dialogue 2005, 8; emphasis omitted). The same name, however – whether value-added tax (VAT) or the more recently favored goods and services tax (GST) – may cover a variety of taxes in different countries. Like the personal income tax, a VAT is not so much a single tax as a set of taxes that share certain characteristics. To put the point in zoological terms, VAT is neither a gorilla nor a chimpanzee but rather a genus like ‘primates.