The biggest tax story of the last third of the 20 th century was the value-added tax (VAT). From its tentative beginnings in the reform of the French production tax in the early 1950s, by August 2000 some form of VAT existed in at least 123 countries. Few fiscal innovations have been adopted so widely and so quickly. Towards the close of the century, another striking trend was the increasing decentralization of the public sector in many countries around the world. In this process, increasing responsibility for delivering such important and expensive public services as education and health has been devolved to sub-national governments, often to regional governments such as states or provinces. Such decentralization may make good sense in many respects, but experience suggests that it is essential to devolve responsibility not only for expenditures but also for some significant revenues if adequate fiscal accountability is to be maintained.
The traditional literature on tax assignment suggests that the best form of taxation for intermediate-level governments is a sales tax. Some form or another of sales tax does in fact constitute the major source of finance for intermediate governments in many countries. Indeed, in developing countries in which income taxes do not play a major role, it is hard to see what other major revenue sources such governments could utilize. The retail sales tax once favored as a regional tax, and still in place in most U.S. states (and some Canadian provinces) is now an aberrationfrom a worldwide perspective. The only good sales tax is now generally considered to be a VAT.
There appear to be at least three reasons why the question of sub-national consumption VATs needs to bereconsidered, particularly in federal countries with important regional governments. First, there are few other major revenue options open to countries in which, for whatever reason, substantial expenditure responsibilities have been shifted to lower levels of government, if those governments are to behave in a fiscally responsible manner. Second, sub-national VATs have now in fact been successfully operating in Canada for a decade and have also existed, if to less general acclaim, in Brazil for over 30 years. Finally, several novel proposals have recently been made to overcome certain problems that some see with applying the system used in Canada to other countries in which tax administration is less well developed.
Working Paper Number 01-04.