VAT is amongst the worst conceivable of all taxes; it fails all the criteria set out in the Canons of Taxation. Yet its advance continues like the plague. India has adopted it, and now Saudi Arabia is going down the same path, as oil revenues fall and the tax free economy comes to an end.
Oil revenues are of course a resource rent, and so Saudi Arabia is accustomed to funding public revenue from this source. Saudi Arabia is one of the world's biggest investors in infrastructure. What seems not to be appreciated is that this is also generating resource rents in the form of land value, which could be used to replace the falling oil revenues.
Yesterday, the Saudi cabinet approved an IMF-backed value-added tax to be imposed across the Gulf, which demonstrates that governments should not take advice from the IMF. And so the VAT meme will continue to propagate until one of the HIgh Priests of the economics establishment breaks ranks and draws attention to the fact that VAT is not worth the candle, at which point politicians will rush off to pursue another fashion. It is a bit like fashions in healthy diet; for decades we have been told that fats are bad for us, until one fine day, sugar is declared to be the villain.
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