Much of all household consumption is for necessities such as food and housing. In the lowest income categories, necessities account for about 60 per cent of consumption expenditure, while in the upper categories the corresponding proportion is just over 40 per cent.

The regression is clearly targeted at the lowest income group. The share of VAT will fall to nine per cent when moving to the second lowest income group.

The Difference Really

There is no similar difference between the other groups, and the proportions are much more even. For example, the shares of the third and eighth income groups vary within one percent. In the two highest-income groups, the share decreases by one percentage point.

  • In the two lowest-income groups, no significant progress can be observed even in terms of the overall tax rate. Thus, the progression of direct taxation in this case fails to fully offset the effect of the regressive of VAT.
  • It should be noted here that the review does not include excise duties. Based on the 2012 data, excise duties accounted for five per cent of revenue in the lowest tenth and three per cent in the highest tenth. Based on this, it is likely that excise duties would be targeted at the lowest income categories in the 2016 data as well.

By income or consumption?

An essential part of the debate is against which tax progression and regression are viewed. The view base has a significant effect on the outcome. VAT is a consumption tax, so it has been suggested that it should be assessed in relation to consumption.

  • Next, we present the shares of VAT on gross income as well as consumption. We use two different classifying docile variables, one based on gross income and the other on consumption expenditure.
  • When looking at the shares according to the Tithes, the outlook is clearly regressive. The lowest-income earners pay almost 12 percent of their income, while the highest-income earners account for about five percent.

The share of VAT in consumption expenditure is in the order of about ten per cent in all income decades. In this view, the tax is not regressive, but the progression is quite small. The small difference of one percentage point is probably due to the fact that in lower income groups, a larger share of consumption expenditure goes to necessities such as food with a lower VAT rate. Don’t forget about the small business tax rate  also.

What you Should Know

Looking at the shares of taxes paid by consumption tithes, the outlook is progressive, probably due to a difference in content. The least-consuming tithe pays VAT relative to its income of about five percent, while the highest-consuming tithe accounts for 12 percent.