Super, Medium, or Mini VAT? Understanding how the Value-Added Tax really works, challenges for Argentina

Por Julián Folgar¹

The Value-Added Tax (VAT) is one of the central pillars of modern tax systems: over 160 countries apply it, and it accounts for between 20% and 30% of their total revenue. Its ability to raise significant resources at low administrative and economic cost has made it the world's dominant consumption tax. Yet, in many countries, its design and actual performance remain subjects of ongoing debate.

This note revisits the basics-why VAT is an effective tax, which myths surround its alleged regressivity, how its efficiency should be measured, and what Argentina's main challenges are in strengthening it. The extended version of this analysis is available for download here (Spanish).

1. Why VAT is efficient

The success of VAT lies in its design: it taxes only the value added at each stage of production, allowing taxpayers to credit the tax paid on previous inputs, thus avoiding the "tax-on-tax" cascading effect. As highlighted in the recent study by De Mooij, VAT is one of the most efficient instruments for raising public revenue because it collects much while generating minimal welfare loss compared with other taxes. Its architecture creates a self-enforcing mechanism-each taxpayer has an incentive to request invoices from the previous stage, strengthening compliance. Moreover, by applying a single rate on a broad base, it minimizes distortions across sectors and activities.

In short, VAT combines three rare virtues in taxation: revenue sufficiency, neutrality, and efficiency. In economies with high informality or limited administrative capacity, these features make it a crucial anchor of fiscal stability.

2. Is VAT regressive? Should it be used for redistribution?

Although VAT is often labeled "regressive," empirical evidence shows it does not necessarily penalize lower-income households. When measured relative to expenditure rather than income, VAT behaves roughly proportionally, as higher-income households both consume more and account for most formal spending.

Rate reductions, exemptions, or refunds-often introduced to promote equity-tend to cause more harm than good. These schemes, which could be seen as a kind of "mini-VAT" applied to specific goods, typically erode the base, complicate administration, and end up benefiting middle- and high-income groups. In practice, direct and targeted cash transfers are a much more effective redistributive tool.

The international consensus is clear: maintain a single general rate and broad base so that VAT can perform its role-raising revenue at the lowest efficiency cost-and pursue equity objectives through social spending, not within the tax.

3. Measuring revenue efficiency: the "C-efficiency" indicator

VAT performance is assessed through the C-efficiency ratio, which measures how much revenue is collected relative to the theoretical potential if all consumption were taxed at the standard rate with full compliance. The shortfall comes from two sources: the policy gap (design-exemptions, reduced rates) and the compliance gap (evasion or non-payment), which often reinforce one another.

Across OECD countries, the average C-efficiency is about 57%, with best-performing cases such as New Zealand approaching 96%. In Latin America, Chile exceeds 60%, while Mexico and Colombia hover around 40%. Argentina, at roughly 47%, lags behind, reflecting structural weaknesses on both design and enforcement fronts.

4. Who should collect VAT?

Fiscal federalism theory favors centralized administration of broad-based consumption taxes for two main reasons:

(i) the tax base is mobile across jurisdictions, creating risks of fiscal competition, and
(ii) the technical complexity of VAT (credits, refunds, anti-fraud control) demands uniform administration.

In practice, almost all countries collect VAT centrally and redistribute its revenue afterwards. Moreover, from an equity perspective, in large, heterogeneous countries, partial "provincialization" of VAT-what could be called a "medium VAT" split between levels of government-could deepen regional inequalities, as tax bases differ widely across provinces. Without precise coordination, broad intergovernmental agreements on spending responsibilities, and robust equalization mechanisms to offset weaker jurisdictions, such initiatives risk undermining the provision of essential public services.

5. The Argentine case: high revenue, low efficiency, and multiple consumption taxes

Argentina represents an atypical case. While VAT yields around 7% of GDP, its efficiency is only 47%. According to the 2026 Budget, the policy gap equals about 1.3% of GDP, concentrated in exemptions and reduced rates for sectors such as health, education, construction, and certain food products. The compliance gap is reflected in an estimated evasion rate of about 30%.

Argentina's main structural challenge, however, is the coexistence of multiple general consumption taxes. Alongside VAT operate cascading, turnover-type levies such as Turnover Tax (provincial, ~4% of GDP) and the Bank Credits and Debits Tax (national, 1.6% of GDP). This overlap inflates production costs, undermines competitiveness, and discourages formalization. Moreover, in many provinces, advance withholding schemes under Turnover Tax impose a significant financial burden on businesses.

Whereas most countries eliminated cascading taxes upon adopting VAT, Argentina kept-and even expanded-them. Indeed, Argentina ranks among the world's top five countries in consumption-tax revenue, but with an unusually high share derived from cumulative taxes (Figure 1).

Recent reforms in India and Brazil have sought to unify and harmonize cumulative and non-cumulative consumptions taxes-roughly comparable, though not identical to the idea of a "Super VAT". These experiences demonstrate that coordination across government levels is feasible, provided there are strong political agreements, compensation funds, and gradual transition mechanisms.

Reformas recientes en India y Brasil han tendido a unificar y homogeneizar un impuesto al valor agregado -asimilable, aunque salvando las distancias, con la idea del "Super IVA". Estas experiencias, muestran que la coordinación entre niveles de gobierno es posible (adaptada a cada caso), aunque exige largos procesos de negociación, fondos compensatorios y transiciones graduales (Tortarolo 2025).

El IVA, bien diseñado, es el impuesto más eficiente para gravar el consumo: recauda mucho con bajo costo económico y administrativo. El desafío no es reinventarlo, sino preservar su esencia, ampliando su base y evitando tasas reducidas o exenciones con fines redistributivos, que deberían abordarse desde el gasto social. En Argentina, la prioridad pasa por mejorar la eficiencia -reducir evasión y simplificar el diseño- y armonizar lo más posible la imposición al consumo entre niveles de gobierno. Esto exigirá coordinación, gradualismo y consensos de largo plazo, inspirándose en experiencias como las de Brasil o India, pero adaptadas a las particularidades institucionales locales.

¹The author is the Country Economist for Argentina.