The voices of Tax Policy Center's researchers and staff
Before you head out for Black Friday shopping, take note of what can happen with a European-style Value-Added Tax run amok, courtesy of our friends at TaxProf.
In a paper presented Nov. 18 at the University of Connecticut Tax Lecture Series, Oxford University's Rita de la Feria described the amusing but instructive case of Jaffa Cakes. If these confections were indeed cake, they would be treated as food and thus exempt from the VAT. If, however, they were cookies, they would be subject to the full 17.5 percent rate.
This dispute made it to Britain's VAT Tribunal, which was presented with an oversized Jaffa Cake and asked to rule on a key legal test: What happened when the sweets went stale. If they became hard, this would be proof positive that they were tax-exempt cake. If they softened, they would be taxable cookies. The solicitors for the manufacturer conclusively proved that said Jaffa Cake indeed became rock-like when stale. This critical evidence helped produce a ruling that the cake qualified for the VAT exemption. I don't know if the Tribunal members wore powdered wigs while waiting for the cake to go stale, but I sincerely hope so.
Today's fiscal environment makes discussion of a VAT especially timely. TPC's Len Burman has proposed a VAT to pay for health reform. But De la Feria's presentation was a valuable reminder of what can go wrong when lawmakers lose their heads and, in the name of progressivity and fairness, begin exempting products from the levy.
De la Feria's paper is not finished, so isn't yet available. But her presentation at UConn was fair warning: A well-designed VAT has great potential as a revenue-raising mechanism, but the levy can be just as poorly implemented as our own income or sales taxes. The proof is, if not in the pudding, in the cake. Or cookie.
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