The Impact of Public Perceptions on General Consumption Taxes

The traditional view as regards general consumption taxes is that excluding certain products from the base decreases their natural regressivity. Whilst this view has been consistently questioned over the last forty years, public perceptions are still heavily influenced by it. Drawing insights from the legislative history of the old European VAT system and the newer Australian VAT system, this paper demonstrates how policy debates and changes in VAT rates have been heavily influenced by those public perceptions; and how special interest groups, which would be set to lose out from broad base VATs, are able to use the information asymmetry behind those perceptions to defend their interest in favour of base narrowing, or against base broadening reforms. The paper presents a novel analytical and conceptual framework – informed by tax law, political economy, political science, behavioural science, and regulatory theory – of the likely factors behind the prevalence of those public perceptions. It demonstrates how, in the absence of external pressures, they result in increased use of reduced rates over time, and the consequent narrowing of the tax base. It concludes by presenting a new pathway to shift public perceptions, and to overcome the political resistance to broad based consumption taxes.