Use the criteria offered by Cattoir to evaluate a European VAT

Alessandro Granata 1334387 Leiden University a.granata@umail.leidenuniv.nl

A modulated VAT has been one of the most discussed options in making up for the needs of the EU budget. The Modulated VAT is examined with regard to each of the criteria introduced by Cattoir: budgetary, equity and efficiency criteria.

In budget terms, this tax would ensure a certain degree of sufficiency and stability, taking into account that VAT is fairly influenced by national contingencies and economic cycles. Therefore the revenues from VAT should be sufficient enough even in a long period. What Cattoir (2004) assures is that the average revenue from VAT was 7% of GDP in member states. Therefore applying the surcharge of 2% to existing VAT rates should generate the revenue 0.8% - 1.3% of member state GDP. Consumption taxes in general have regressive character. Private expenditure is considered to be very instable and it is really conditioned by the economic cycle. This phenomenon is bigger in states that have a relatively higher marginal propensity to consume. But if we compare VAT source with GDP based source, the VAT source should be more stable. In case that the VAT would be applied in the form of two independent systems of tax rates national and European one, it would be highly visible for citizens the amount that has been paid for EU financing. Furthermore low cost criterion is reached as the introduction of European rates should not generate any additional administrative costs, as it would work under the current system. The effect of modulated VAT on the allocation of the resources should be very limited, the European rates should be 1.5% in case of the reduced rate and 3 % in case of the basic rate. The equity criteria are connected with the tax theory. According to it, the basic attribute of the taxation system should be the tax equity.

The principle of horizontal equity should be preserved by the modulated VAT, for the tax bases have already been harmonized. The same taxpayers will be submitted to that system and treated equally. As was mentioned above, VAT has generally regressive character, since poorer people tend to consume a larger proportion of their total income. Therefore the principle of vertical equity could be broken. However, by setting a double set of rates, which includes lower rates on essential goods, it would be possible to overrun this issue. The last criterion represents the requirement of the fair contribution. The EU-tax should bring from the Member State such amount of money, which is in accordance with its economic development. But it appears that VAT payments are influenced by many factors which bring to non-fairnesses between the States putting a proportionally bigger burden on poorer regions, where the level of consumption as a proportion of overall GDP would tend to be higher.