Against the backdrop of a difficult economic climate exacerbated by geopolitical tensions and trade restrictions, the need for resilient fiscal policies is growing more pressing. While some advocate for consumption taxes as a silver bullet for bolstering resilience and curbing public debt, others raise concerns around issues such as progressivity.

This meeting of the Global Responsible Tax Thought Leaders (GRTTL) group, explored the progressive potential of consumption taxes and their balance against income taxes. The group discussed the role of technology in facilitating a shift in the tax mix, considered the design of consumption taxes based on the aims of revenue raising or influencing behavior, the need for holistic change and the impact of politics and political will.

Executive Summary:

  • The global trajectory suggests a shift towards consumption taxes on the grounds that they are less vulnerable to the effects of globalization, can be more progressive, more neutral and more efficient if well designed.
  • Progressivity was debated and an expenditure-based approach to measurement demonstrated that consumption-based taxes are progressive when measured as a percentage of expenditure over a lifetime.
  • One idea to tackle VAT regressivity was suggested by proposing the adoption of a single-rate, broad-base VAT with lower-income households repaid some of the tax in real-time at the moment of purchase; though issues of privacy should be considered.
  • Consumption taxes have been shown to be effective in both raising revenue and, with considered design, to encourage positive behavior change. A dual objective is ideal to enhance their impacts.
  • A considerable challenge lies in harnessing political will to bring about holistic reform to the tax system and legacy issues around consumption taxes persist in developed economies. The costs of transition from an income tax-based system to a consumption tax-based also presents a significant barrier.
  • Emerging economies, with fewer legacy issues, may be better placed to lead the way in this transition.

Why has there been a shift towards consumption taxes? Less vulnerability to globalization, more progressive, greater neutrality, improved efficiency

The conversation began with reference to a recent address made by Professor Benjamin Dioknom at a special meeting on international cooperation in tax matters held by the UN’s Economic and Social Council, which highlighted the role of consumption taxes in building effective tax systems.1

The keynote indicated that the global policy trajectory suggests a shift from income taxes to consumption taxes, such as Value Added Tax (VAT), as the preferred revenue source of advanced and emerging economies. Suggested reasons for this shift, according to Professor Diokno include that consumption taxes are (1) less vulnerable to the effects of globalization; (2) more progressive; (3) more neutral; and (4) more efficient.

There was broad agreement from participants that consumption taxes are effective in the ways described, with, perhaps, the exception of the progressivity argument which sparked further debate.

One contributor suggested that different jurisdictions are at different points on or within the efficiency-equity frontier regarding their tax systems as a whole (including indirect and direct taxes). This means that some countries have a large potential to increase efficiency without significant impacts on equity (and progressivity) whereas for other countries, the improvement in efficiency can worsen equity implications. Many discussions view the VAT or another consumption style tax in isolation for efficiency and equity and tend to begin the discussion by assuming a trade-off between efficiency and equity, when in practice, in the context of other types of taxes the overall impact on equity can vary depending upon a country’s position on or below the frontier.

Are consumption taxes more progressive? Reducing inequality, exemptions and income-based vs expenditure-based approach to measurement

Some research supports the assertion that consumption taxes are more progressive. In his keynote, Professor Dioknom refers to a study published by the Harvard Kennedy School, in which consumption taxes were found to be more progressive and lowered inequality by 2-3 percent because higher income groups spend more on goods and services with VAT.2

However, some participants suggested that the level or types of exclusions can be construed as being more or less progressive. In Australia for example, fresh food is exempt from Goods and Services Tax (GST).3 With wealthier households more likely to purchase fresh food, and less likely to purchase processed food4, these exemptions therefore demonstrate regressivity.

An argument was made that measuring the progressivity/ regressivity of consumption taxes over a lifetime may provide a fairer picture. A study by the OECD found that VAT systems are regressive when measured as a percentage of income, but are generally either proportional or slightly progressive when measured as a percentage of expenditure. The report argues that an income-based approach may be of interest in analyzing the immediate distributional effects of consumption taxes, but that an expenditure-based approach could provide a more reliable measure of the lifetime distributional effects.5

What role could technology play? A progressive VAT, reducing tax evasion and privacy concerns

Participants discussed a recent working paper released by the International Monetary Fund (IMF) which presents a novel approach to addressing VAT regressivity, by proposing the adoption of a progressive VAT: a single-rate, broad-base, VAT, whereby tax paid on consumption is re-paid to lower-income households in real-time, at the moment of purchase.7

It was suggested that such a system can effectively eliminate regressivity, while minimizing the political economy, cash-flow, and welfare stigma obstacles often associated with standard welfare transfers used in modern VAT systems.

An example of this can be found in Uzbekistan7 though there is some degree of lag in the system. In a different form, some countries have begun to experiment with digital wallets to channel transfers to people; Columbia8 and Thailand9 are some examples.

It was suggested that a system such as this could also aid in fighting tax evasion though it was acknowledged that one risk associated with the IMF’s proposal is the issue of privacy. What kind of safeguards need to be in place if the state can access all of the information about what we consume? ‘Confidential Computing’, was suggested to address the issue of data privacy. Cloud computing technology can isolate data within a protected central processing unit (CPU).

Contributors suggested that although in many cases developing economies appear to benefit from a stronger consumption-based system to raise tax revenue, infrastructural capacity must be considered . For example, there is a lack of much-needed software to auto-populate debit–credit links in the production chain and significant compliance costs for business taxpayers administering the value-added consumption tax.

What should the aim of consumption taxes be and what are they effective at achieving? Revenue raising, encouraging or disincentivizing behavior

An overarching theme to emerge from this discussion concerned the aim of consumption taxes and the impact this will have on their structure and implementation.

One participant suggested that how you structure these taxes depends on whether you are aiming to raise revenue or to drive behavior. Designing consumption taxes to disincentivize behavior has positive examples. The ‘sugary drinks tax’ in England was cited with research showing a decline in the number of cases of obesity among older primary school children.10

Additionally, although results are preliminary, reduced VAT in the UK for the hospitality and tourism sectors, following the COVID-19 pandemic, show positive impacts for the sectors in achieving the objectives of job retention and incentivizing investment.11

Participants agreed that whilst consumption taxes are essential revenue raisers, their design can certainly impact behaviour change for the better and nowhere is this more needed than in the race to meet global climate ambitions.

Political will and the need for holistic change: Harnessing political will, legacy issues, costs of transition, holistic change and a balance against income taxes

There was a general consensus that the politics of broadening the base for consumption taxes presents one of the biggest challenges.

One participant highlighted that any form of change is very hard when you have a high VAT or GST rate. Using the UK as an example, changes to the base are difficult politically because there is a huge public response when you subject something to a higher rate (VAT in the UK is currently 20 percent). Participants referenced Professor James Meade arguing for a greater role for consumption taxes as part of the UK tax mix in ‘The Structure and Reform of Direct Taxation’ in 1978. However, over the 50-year period since, the UK has instead increased income-based taxes which, it was argued, highlights the political difficulty inherent in this challenge. Participants emphasized the difficulty in overcoming legacy issues where countries are moving from old systems of VAT and political problems of not beginning from a clean slate.

In addition, major reforms have significant costs during a transition, and the political difficulty of managing this, at a time when economies globally face significant pressure, compounds the challenge of enacting change. Participants suggested that the political challenge lies in discussing potential price increases, so framing the language from "tax increase" to "tax shift" could be helpful in gaining public consent.

Moreover, participants suggested that a political barrier to impactful tax reform, beyond revenue raising, is that taxes seem to be addressed in siloes, rather than holistically. A transition to more efficient taxes, which may have regressive implications, for revenue generation could be politically manageable, so long as the negative effects on distribution and equality are mitigated by wider reforms beyond consumption taxes. And furthermore, that this is actually seen to be sufficiently mitigated by those who are impacted. Measuring progressivity will require a more holistic view of tax systems with consumption taxes appropriately presented as a part of a bigger picture.

A further challenge is how to sustain change as the impacts of reform take longer to be clarified than the terms of most governments. How can you ensure that the efforts are not wasted during political turnover? Suggestions were made that a war-time-like consensus may be critical in achieving change at the pace required.

Without some of the legacy issues already discussed, developing nations may be in a strong position to press ahead with more holistic tax reforms and consumption tax reforms specifically. It was suggested that Nigeria, for example, which had a government revenue of 7.3 percent of GDP for 2021, may have an opportunity to lead the way.

Contributors to the conversation included:

  1. Hugh Corbett, Transparency Communications Specialist, Global Public Affairs, Ikea
  2. Sebastiaan de Buck, Vice President Tax, Unilever
  3. Bill Dodwell, Former Tax Director at the Office of Tax Simplification and Editor in Chief at, Tax Adviser Magazine
  4. Femke Groothuis, President, Ex'tax
  5. Anders Hjorth Agerskov, Head of World Bank's Preventive Services Unit, World Bank
  6. Neal Lawson, Partner, Jericho
  7. Ewan Livingston-Docwra, Cause Strategist, Governance & Transparency, B Team
  8. Benita Mathew, Lecturer in AI and Fintech, University of Surrey
  9. Artur Swistak, Deputy Division Chief (Tax Policy), IMF
  10. Grant Wardell-Johnson, Global Tax Policy Leader and Chair of the Global Tax Policy Leadership Group, KPMG International
  11. Phil White, Activist, working on social justice and climate change, Patriotic Millionaires

In addition to the main program of Global Responsible Tax work, the GRTTL group is a forum for individuals interested in more active participation. As part of this community, KPMG professionals conduct biannual workshops addressing significant tax-related matters, seek input on projects, research reports, and events.

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