The Value-Added Tax (VAT) is a major component of tax systems worldwide, with more than 160 countries using it and generating between 20% and 30% of their total revenue from this source. Its design, which taxes only the value added at each stage of production while allowing credits for previously paid tax, helps avoid double taxation and supports compliance.
A recent analysis highlights that VAT’s effectiveness comes from its broad base and single rate, which minimize economic distortions. "In short, VAT combines three rare virtues in taxation: revenue sufficiency, neutrality, and efficiency. In economies with high informality or limited administrative capacity, these features make it a crucial anchor of fiscal stability," the author states.
Despite concerns about regressivity—where lower-income households might be disproportionately affected—empirical studies suggest that VAT is roughly proportional when measured against household expenditure rather than income. Efforts to make VAT more equitable through exemptions or reduced rates often benefit higher-income groups instead and complicate administration. The analysis notes: "Direct and targeted cash transfers are a much more effective redistributive tool." It also points out that international best practice is to maintain a single general rate on a broad base for efficiency while using social spending for redistribution.
VAT performance is often measured by the C-efficiency ratio—the actual revenue collected compared to what would be possible under perfect compliance and no exemptions. OECD countries average about 57% on this measure; New Zealand reaches as high as 96%. In Latin America, Chile exceeds 60%, Mexico and Colombia are around 40%, while Argentina lags at approximately 47%. This gap in Argentina reflects both policy issues such as exemptions (especially in health, education, construction, and some food products) and enforcement challenges like an estimated evasion rate of about 30%.
The structure of tax collection is another area of debate. Fiscal federalism theory generally supports centralized administration for consumption taxes like VAT because the tax base can move across regions and because managing credits and anti-fraud measures requires uniformity. Decentralizing VAT could increase regional inequalities unless there are strong coordination mechanisms between government levels.
Argentina presents a unique case among global peers. While its VAT generates about 7% of GDP in revenue, multiple overlapping consumption taxes remain in place—including provincial turnover taxes (about 4% of GDP) and the national Bank Credits and Debits Tax (1.6% of GDP). These cumulative taxes raise production costs, hurt competitiveness, discourage formal business activity, and create financial burdens for companies through advance withholding schemes.
Most countries eliminated cascading taxes when adopting VAT; Argentina did not—and even expanded them—making it one of the world’s top five countries in terms of consumption-tax revenue but with an unusually large share coming from cumulative levies.
Recent reforms in India and Brazil have aimed to unify cumulative with non-cumulative consumption taxes—a move likened to introducing a “Super VAT.” These cases show that harmonization across government levels is possible but requires lengthy negotiations, compensation funds for affected regions or sectors, and gradual implementation processes.
"VAT, well designed, is the most efficient tax on consumption: it raises significant amounts with low economic and administrative cost," says the report’s author. He concludes that Argentina should focus on improving efficiency by reducing evasion rates, simplifying design elements like exemptions or reduced rates meant for redistribution (which should instead be handled through social spending), and harmonizing consumption taxes between different government levels through long-term coordination inspired by other countries’ experiences but adapted locally.