The Organisation for Economic Co-operation and Development (OECD) recently released its biennial economic survey of the UK. The assessment identifies the main economic challenges faced by the UK. According to the report, the UK VAT system is one of the least efficient of the OECD countries, with less than 60% of potential revenues actually collected due to widespread application of reduced and zero rates. The OECD recommends ending exemptions and increasing lower rates to provide a more efficient system and raise more revenues while targeting measures directed at compensating poorer households.
Raising tax rates and reducing/eliminating exemptions are two clear ways for tax authorities to raise revenues. The UK recently raised their VAT standard rate back to 20% in January 2011.
Most studies highlight the deficiencies in the tax administration system due to non-compliance with the imposed taxes. I find it interesting that the OECD measures efficiency based on how much revenue the VAT authorities could bring in if they didn’t have reduced rates or exemptions. Reducing and eliminating exemptions is no easy task, especially when the reduced rates are applied to basic needs such as health care, food, and housing. In the end, tax increases and removal of exemptions are equally painful.
OECD UK Report