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More countries impose indirect taxes like VAT
October, 23rd 2009

Cash-strapped countries are increasingly imposing indirect taxes, such as value-added taxes, as governments hunt for new revenue sources, a survey by an accounting firm released on Thursday said.

In Europe this year average indirect tax rates rose to 19.8 percent from 19.5 percent, while in Latin America, indirect tax rates rose to 16.2 percent from 15.9 percent, the study of tax policies in 116 countries by KPMG found.

The increase in Europe would have been steeper if not for temporary tax cuts in Britain and Portugal aimed at stimulating their waning economies.

The most widely used indirect tax is VAT, a consumption tax imposed on the value added to goods and services at each stage of production, with the full cost falling on the consumer.

As the United States grapples with a three-fold spike in its federal deficit and limits on the amount of revenue that income taxes can raise, prominent officials, including House of Representative Speaker Nancy Pelosi and Obama economic adviser Paul Volcker, have suggested a VAT be considered.

The United States is the only Group of 20 countries without a VAT.

"We believe that it is only a matter of time before it happens, but this could still be four or five years away due to the serious political challenges which its introduction would pose," the report said.

"That said, given the significant gap in the U.S. public finances, U.S. policy makers may decide that now is the time."

Indirect taxes like the VAT will boost the prices of most goods and services. though many countries exempt certain goods such as prescriptions.

The report predicts the average VAT will rise to 20 percent in the EU over the next year or two.

The number of countries using a VAT is also increasing, with the countries in the Gulf region, India and China adding new regimes recently.

VAT rates are lowest in Asia, with an average of 10.8 percent in 2009, down slightly from 10.9 in 2008.

At the same time, the study found that a steady decline in corporate income tax rates stalled in 2009.

For example, in Europe, corporate rates stayed at 23.2 percent, the first time in more than a decade the average rate failed to fall.

U.S. multinationals have lobbied for a cut in the top U.S. corporate rate, now standing at 35 percent, for years. The rate is among the highest of its developed country peers.

Most Democrats and Republicans agree the rate is too high, though Democrats want to offset any cut with loophole closers.

Although the statutory corporate rate is high, many point out that the United States collects a smaller percentage of its GDP from corporate taxes than its peers, suggesting greater use of loopholes and deductions in the United States.

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