Is EU VAT a regressive tax?

Wed 13th Apr 2016

Is Value Added Tax a regressive tax – meaning the less well off pay a more than proportionate amount of their income on it?  Well, yes, of course it is since it is generally levied at a single, standard rate for most goods and services irrespective of the ability of the consumer to pay.

However, EU governments’ interventions with the use of reduced and zero VAT rates on essentials have transformed the majority of EU VAT regimes into progressive tax systems according to the European Commission (EC).

UK ONS says VAT is regressive

The UK’s Office for National Statistics (ONS) published on the 8 April its finding that VAT partially contributes to the country’s widening income inequality, as measured by the Gini co-efficient.  This is a popular measure of income differences across household incomes (income before welfare payments and tax).  The ONS says the UK’s Gini Coefficient has risen from just over 42% in 1977 to 50% (equivalised original income)

The ONS points to indirect taxes, like VAT, changes over the years as directly raising the UK’s Gini inequality coefficient by 2%. This has included raising the UK standard VAT rate from 8% in 1977 to today’s 20%

EC says the majority of EU countries have progressive VAT regimes

However, the ONS figures ignore the impact of reduced and zero VAT rates. The UK enjoys the most beneficial use of reduced and zero rated VAT on goods and services of all the other 27 EU member states, which are all required to follow the EU VAT Directive on setting VAT rates.

This means the UK’s effective VAT rate for households is only 8% – the EU average is 11%. This has led to the EC concluding that the UK has a ‘progressive’ VAT regime.

In a 2013 study, the EC* concluded that 15 EU member states have progressive VAT regimes.  These states are: United Kingdom, Luxembourg, Italy, Belgium, Poland, Malta, Slovenia, Finland, Ireland, Denmark, Sweden, Portugal, France, the Netherlands and Germany.  It also found that 11 EU states have neutral VAT regimes.  These are: Spain, Romania, Bulgaria, Lithuania, Slovakia, Estonia, Greece, Austria, the Czech Republic, Cyprus and Latvia.  The EC found that only Hungary has a regressive VAT regime.

* A study on the economic effects of the current VAT rates structure Final Report TAXUD/2012/DE/323 FWC No. TAXUD/2010/CC/104