An analysis into improving the negative distortion of VAT on income-based equity

Abstract

Taxes are used by governments around the world to generate government revenue. The most important principle of taxes is that they should be fair to taxpayers and taxpayers should pay tax in accordance with their income earning levels. Taxes are structured in a manner that allows citizens to pay in accordance with what their income earning levels are, promoting equity and fairness. Value-Added Tax (VAT) is a consumption tax that is used by over 200 countries around the world and is paid on consumption, the more you consume, the more tax you pay. This places an unfair burden on taxpayers as it does not consider the taxpayer's ability to afford the tax, which is determined by their income. The way VAT is levied and paid by taxpayers creates a negative distortion on income -based equity for different households. The purpose of this study is to evaluate VAT around the world by selecting three distinct countries, namely South Africa, New Zealand, and France. The study provides an evaluation and comparison of the relief provisions provided by the different countries' VAT models and additional government relief provisions to alleviate the burden placed by VAT on different households. A qualitative research method with a focus on the literature review was applied in this study, existing literature reviewed included but was not limited to Tax Acts, studies performed on VAT and other publications on government's social development programmes. The study shows that relief provisions provided by the various VAT models do not improve the impact VAT has on income-based equity between the different households, it only reduces the burden of the tax in certain instances. Various government social development programmes are more sustainable in terms of improving the negative distortion of VAT on income-based equity as they consist of income redistribution programmes that have a positive impact on the income-based equity of the different households. The study concludes that when VAT is in existence, it will always create a negative distortion on income-based equity and the different exclusions and provisions on certain goods and services do not address or improve the negative distortion. Income redistribution programmes are an effective way for government to address or improve the negative distortion and is proven to be the most effective way according to literature reviewed in this study. It is important to provide a quantitative analysis of this fact and further research on the quantitative effects of VAT exclusions and income redistribution programmes on income-based equity could provide a more conclusive understanding of the relationship between income-based equity and the different relief provisions evaluated in this study. Further research is likely to provide a better comprehension of VAT exclusions and the effects for both taxpayers and the various governments.