The Long Arm of the European VAT, Exemplified by the Dutch Experience

The European Commission is evaluating the performance of the common VAT, which has many shortcomings. The numerous exemptions and differentiated rate structures violate the logic and functionality of the VAT. The exemptions distort input choices and outsourcing policies. Reduced rates are ill-targeted tools for mitigating the regressivity of the VAT. In view of these design shortcomings, the EU VAT is in danger of becoming an anachronism compared with modern VATs elsewhere. This paper illustrates its shortcomings with reference to the Dutch experience. The paper does not break new ground, but provides a disconcerting picture of the excess burden of a major revenue source. Bold reform is indicated.