VAT in European Union Countries

By: EconomyWatch   Date: 30 June 2010

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The tax-to-GDP ratio rose steadily in most EU countries up to the late 1990s due to a sustained expansion of public sector commitments to welfare provision. Since the late 1990s, many EU countries have cut tax rates. The tax burden in the EU area remains much higher still now.

Consumption taxes account for a large share of total tax revenues

Effective tax rates on consumption in the EU area are, on average, higher than in most other OECD countries. This not only reflects a higher tax to GDP ratio but also a tax mix relying heavily on consumption taxes. In fact, consumption-based taxes accounted for 30 per cent of total tax revenues in the EU area in 1998 in comparison to 19 and 16 per cent in Japan and the United States respectively. VAT playing a dominant role accounting for about 60 per cent of total tax revenues on goods and services in the EU area.
The heavy reliance on consumption taxes has several advantages

(i) consumption taxes are relatively neutral towards saving and investment decisions;
(ii) they do not discriminate between imports and locally-produced goods and do not affect external competitiveness (as long as they are based on the destination principle); and
(iii) they provide a symmetric treatment of labour, transfer and capital income

Free movement of goods, people and capital within the EU area, combined with the advent of the single currency has affected the design of national tax systems. Thus, EU countries' experience in reforming their tax system may provide useful insights for other countries and regions where international integration is deepening.


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