Criticisms of Value added taxes
The "value added tax" has been criticized as the burden of it relies on personal end-consumers of products and is therefore, as any sales tax based on the consumption of essentials, a regressive tax (the poor pay more, in comparison, than the rich). French President Jacques Chirac has often pleaded for a reduction of European VAT concerning catering, in order to win favour from this sector.
Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalisation, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient.
Due to the fact that exports are generally zero-rated (and VAT refunded or offset against other taxes), this is often where VAT fraud occurs. In sectors or countries where VAT fraud is prevalent, attempts by authorities to control fraud may have unintended consequences, and raise costs for honest companies. This problem is also true of other types of taxation, however.
Certain industries (small-scale services, for example) tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be preferable because it captures at least some of the value-added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive VAT for various other inputs (lumber, paint, gasoline, tools, etc) sold to the carpenter, who would be unable to reclaim the VAT on these inputs. While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems.
