BY: Andres Castro Araujo*
In a previous entry, Diana Rodríguez-Franco showed that human rights cannot remain on the sidelines of tax-related discussions given the importance of taxes in the effective financing of rights. If we keep ignoring taxes, we will continue to remain outside the most important public policy discussion of our times. Following this train of thought, I would like to discuss value added taxes (VAT) and the way in which they relate to the human rights perspective.
The VAT is a tax that has the ability to collect massive quantities of public money in an efficient fashion and thus, has become the greatest source of revenue for the majority of the 140 countries that have decided to implement it. What differentiates the VAT from other taxes at consumption – that by definition are regressive – is a refund scheme designed to prevent that the tax continues to accumulate through the productive chain and generate negative impacts over the production of goods and services. This ensures that, in theory, the tax falls exclusively on the final consumer. This same scheme produces an overlapping surveillance system inside the productive chain given that it is the producers and sellers themselves who ensure that their providers are fulfilling their tax obligations. This is due to the fact that before claiming their refund, each producer or seller needs to prove that their providers did pay their VAT in an honest manner. The larger the productive chain is, the better this self-generating surveillance mechanism works. This is what finally makes the VAT particularly efficient in comparison to other taxes*.
However, it is a tax with two recurring problems: 1) it lacks popular legitimacy and 2) it is a permanent victim of corrupt practices. These two problems have to be seriously approached. Although the complex specificities of each country prevent a one-size-fits all solution, I am convinced that both problems can be tackled through the human rights perspective. Thus, I propose two general measures:
- Greater popular legitimacy through the human rights framework.
The VAT is an unpopular tax because, just like any other indirect tax, it disproportionately falls on the poorest. Some countries, especially in Europe, have achieved greater legitimacy for this tax because they have a combination of additional redistributive taxes and effective public spending. In these countries the overall tax system succeeds to lessen inequalities and massive VAT collection is used to finance effective systems of education, health, and housing. From a human rights perspective, these countries are effectively fulfilling their obligation of utilizing the “maximum available resources” to materialize the written aspirations of several international agreements.
But in other countries, especially those in Latin America, the strengthening of the VAT occurred during a historical moment characterized by the total re-engineering of the state apparatus: less provision of public services by the State and less direct taxes with a redistributive character. In these cases, public opinion sees the VAT as an unjust tool for governments to finance both their debt and public spending that is not sufficiently subject to participation, transparency, and accountability mechanisms.
For example, in Brazil income and corporate taxes significantly decreased during the period between 1985 and 1997. Today, the VAT is responsible for collecting 70% of total taxes with low income families disproportionately facing this burden. In addition, some studies indicate that the money spent by the most poor in VAT surpasses the benefits received through social spending. Given this situation, in 2009 the UN Special Rapporteur on the Right to Food said:
Another important example is the Paraguayan case, where both tax collection and social spending are minimal. Here consumption taxes represent 78% of total tax collection, while personal income tax represents approximately 0.7%. In light of this situation of minimal and regressive tax collection, in 2015 the Committee on Economic, Social, and Cultural Rights recommended the following:
In these contexts of high inequality and resource scarcity, the best way to legitimize the VAT in the eyes of public opinion is to position it under the human rights discourse and obligations such as the use of “maximum available resources”. In this sense, tax systems in the Global South are not taking enough advantage of the type of collection that could be done through direct redistributive taxes. Another way to legitimize the VAT in these contexts is to adopt measures to protect the consumption of the poorest, such as tax exemption of essential goods and services in countries like Brazil. Afterwards, the government can implement alternative compensation mechanisms – a measure that for now does not seem feasible in countries where tax administration is weak.
2. Strengthening of the tax administration to combat corruption
Many think that corruption is a problem that mostly affects governments and thus, mistrust any measure that empowers them before citizens. When it is about public money, any measure that limits the discretion of governments seems to be welcomed. This is one of the main reasons why contemporary countries have autonomous central banks that prevent the government from printing money when it thinks it is convenient. This position is completely legitimate, but it is far from reality when we are discussing the VAT.
Many would be surprised to hear that States are not the only ones with the power to print money. Each time a provider issues a receipt with VAT, in reality it is “writing a check” in the name of the public treasury that later will have to be paid to other producers and sellers. This constitutes a serious problem in all countries with VAT where it is common to find false claims to the refund scheme; for example, when exporters – who do not pay VAT but can ask for refunds – inflate the value of their merchandise, report transactions that never existed, present receipts for inexistent goods, among others. This is a problem that even affects countries in the European Union, where supposedly the VAT functions better. In Colombia, the most famous case deals with a network dedicated to the fictitious export of scrap metal, which cost more than 100 million dollars and left a trail of deaths that guaranteed absolute impunity. But this case is just the obscenest manifestation of a phenomenon that happens every day behind the backs of the tax administration.
Just like there is corruption in every world government, there is also VAT corruption in every country where it exists. The only way to tackle this problem is strengthening the tax administration in a way that it rapidly refunds the legitimate VAT creditors and sanctions the fraudsters in an exemplary fashion. It is practically impossible to legitimize taxes in the eyes of the population without a strong tax administration that is capable of combatting corruption and generating additional revenue through redistributive taxes.
In summary, we should not throw away an efficient revenue mechanism as important as the VAT, but we should look for ways to make it compatible with the human rights discourse and try to find solutions to its implementation problems.
*Andrés Castro Araújo is a researcher at the Center for Law, Justice and Society (Dejusticia).
Featured photo: José E. Rodríguez Santiago.