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National Retail Sales Tax: What is the experience of other countries?

Many other countries have attempted to implement a national retail sales tax or variants of such a tax, such as wholesale-level taxes or "ring" taxes (retail sales taxes with business exemptions certificates for businesses "in the ring"). Almost all of these countries have ended up with value-added taxes (VATs). The general lesson from these countries is fairly clear, if perhaps often overstated. In 1967 nineteen OECD countries had some form of wholesale, retail, or turnover tax. By 1995 all nineteen had converted to VATs. Developing countries as well have largely abandoned retail sales taxes in favor of VATs.

  • Retail sales tax rates are generally lower than VAT rates. According to Ken Messere, countries that have relied on retail sales taxes "tend to charge around 4-6 percent of the tax exclusive value of goods...whereas standard VAT rates tend to vary between 14 percent and 25 percent."
  • The typical retail sales tax rate is also much lower than the rate advocated by proponents of the national retail sales tax. Only a few countries-Iceland, Norway, South Africa, Sweden, and Zimbabwe-have ever instituted a retail sales tax with a rate in excess of 10 percent. And none of this select group currently maintains such a tax.
  • A retail sales tax with a rate in excess of 10 percent is difficult to administer, in large part because of the increased incentive for evasion. One tax policy expert, Vito Tanzi, noted, "The general view among experts, a view obviously shared by most governments, is that 10 percent may well be the maximum rate feasible under an RST."
  • There are good reasons why retail sales taxes get replaced with VATs, namely, cascading and evasion. Cascading occurs when taxed inputs are used to produce taxed outputs, so that the total tax on the goods compounds beyond what was intended. This can be avoided by exempting all business purchases from taxation, but it is difficult administratively, and possibly politically as well, to enforce this provision. Moving to a VAT removes the problem, since businesses receive tax credits for the taxes they paid on their input purchases.
  • Evasion is higher under a retail sales tax than under a VAT for several reasons. First, retailing is the weakest enforcement link in the entire production chain. Second, if a retailer evades the tax, the full tax on the sale is lost under a retail sales tax, but only the tax on value added at the retail level is lost under a VAT. Third, there is no paper trail with a sales tax.
 
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