Date 2 February 1942
Author unknown
Title The use of sales taxes in some foreign countries
Description Internal staff memo, Division of Tax Research, U.S. Treasury Department
Location Box 1; General Sales Taxes; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.
 

The use of sales taxes in some foreign countries

EXTENT

Sales taxes have been, or are, in used in the following countries: Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Canada, Ecuador, France, Germany, Great Britain, Hungary, Italy, the Netherlands, New Zealand, the Philippine Islands, Poland, Porto Rico, Rumania and Russia.

RELATIVE POPULARITY OF DIFFERENT TYPES OF SALES TAX

1. TURNOVER TAX: Austria, France (to 1936), Germany, Hungary, Rumania, Poland, Soviet Russia.

2. MANUFACTURER'S AND PRODUCER'S SALES TAX: Australia, France (after 1936), Canada, the Netherlands.

3. WHOLESALER'S SALES TAX: Argentina, Belgium, Bolivia, Brazil, Ecuador, Great Britain, Italy, Philippine Islands, Porto Rico.

Note: I have included "transfer" and "transactions" taxes under wholesaler's sales taxes, but it should be borne in mind that these designations mean different things in different countries.

RECENT CHANGES IN THE ATTITUDES OF NATIONS TOWARD THEIR SALES TAXES

In the main, changes in the sales taxes of individual countries have been in the rates and exemptions. This does not mean that all countries have been completely satisfied that another form of sales tax would not be preferable. The French never liked the turnover tax, and finally abolished it; but the manufacturer's sales tax that followed in 1936 was also sharply criticized. Germany tried for years to abolish the turnover tax; but it was found indispensable both from the point of view of revenue (20 percent of total tax revenues) and from that or price level control. Belgium, on the other hand, was pleased with her transfer tax experience. Canadian tax experts have spoken very favorably of the manufacturer's sales tax, while Great Britain, judging her new wholesale tax mainly by its success in restraining consumption during wartime, appears satisfied with its results.

Changes in attitude toward the sales tax by other countries do not appear to be directly relevant to possible United States practice. Most of the incentive to change has derived from special circumstances surrounding the tax psychology or economic peculiarities of the several countries. There has been no general movement in the direction of over-all adoption of any one type of sales tax. Although the turnover tax has been the most widely adopted sales tax, it has not been very popular in the countries that have used it.

FURTHER DETAIL ON THE SALES TAXES OF CERTAIN COUNTRIES

GREAT BRITAIN

Great Britain sharply increased various excises after September 1939. On October 21, 1940, the second finance act placed a 33-1/3 percent tax upon the wholesale value of luxuries and articles not normally requiring immediate replacement, and a 16-2/3 percent tax on the wholesale value of non-luxuries which are not subsistence goods. The main purpose of this tax was to restrict consumption. The NECESSITIES (food, water, gas, electricity, coal, children's clothing, farm machines, tobacco, etc.) were exempt from the purchase tax. No substantial changes have been made since that time.

CANADA

The Canadian sales tax is imposed at one point, namely, when the commodity passes from the manufacturer to the retailer. In 1939 this tax, which is at a rate of 8 percent, was extended to cover certain hitherto exempt items, such as electricity and gas. In the early years of this tax (before 1932) many exemptions had been introduced which tended to benefit large and small producers, leaving the burden mainly on the middle group. Despite this apparent inequity there was no strong feeling against the tax, and Canadian tax experts have enthusiastically supported it.

AUSTRALIA

The Australian sales tax is imposed at the producer stage, with exemptions for agricultural goods and for many articles used in extractive industries. The rates were progressively and sharply raised during the 1930's, finally reaching 8-1/3 percent by May 1940. A large schedule of exemptions had been built up concurrently with the rise in rates; but in the war emergency (November 21, 1940) this list was greatly cut down, and the sales tax was classified, according to the degree of necessity, at the rates of 15, 10 and 5 percent.

GERMANY

Germany has a turnover tax originally introduced after the first World War at a rate of 2-1/2 percent. It was reduced by stages to 0.75 percent by 1926. At the end of 1931 the turnover tax was raised to 2 percent and it has been an important revenue yielder ever since. The rates are now as follows:

         Retail (including professional services)          2.0%
         Retail sales 1,000,000 RM per annum               2.5
         Wholesale                                         0.5
         Producers                                         2.0
         Security transaction                          0.02 to 0.5    
         Agriculture                                       1.0

FRANCE

A tax of 2 percent on sales, commissions, interest payments, etc., and 4 to 13 percent on luxuries, was introduced after the last war. This tax was always unpopular and frequent attempts were made to substitute specific producer's taxes in 1936, in line with election promises of the People's Front, the turnover tax was replaced with a manufacturer's sales tax. At the time of the fall of France that rate was 8.7 percent, the increase of several percent being necessary to compensate for the loss of revenue by applying the tax at only one point. The new tax has been found difficult to administer despite the reduction in number of taxpayers.

ITALY

Italy has a transfer tax (collected by stamps attached to the bill of sales) on business transactions and the sale of commodities except at retail. The rate is 3 percent.

ARGENTINA

Argentina imposes a low rate transaction tax (0.3 percent) on all sales. In addition, up to the the spring of 1941, an exchange differential in favor of the Exchange Control Office provided about half of Argentina's total revenue.

RUSSIA

Russia imposes a sales tax on total annual turnover. The rates vary according to a complicated system of classification.

HUNGARY

Hungary's turnover tax applies a rate of 2 percent to ordinary articles and rates of 10 percent to 25 percent on luxuries. In addition, classification is made according to industry.

BELGIUM

Great reliance was placed on the transfer tax by Belgium. Forty percent of total tax revenue was at one time accounted for by this tax.

COMMON FEATURES IN THE SALES EXPERIENCE OF VARIOUS COUNTRIES

Despite the variety in the forms of sales taxes in the past two decades, there has been a considerable degree of similarity in the experience of the countries that have used them. This can be summarized as follows:

1. The majority of those sales taxes were introduced during the period of financial stress following the first World War.

2. Each country passed through a period in which (a) administrative difficulties were underestimated and (b) yields fell short of expectations.

3. The tax tended to become unpopular and in many countries was considered temporary.

4. Nevertheless, the tax was written into the permanent law in all cases. That is, it was intended to operate until repealed. Since the tax did not have to be re-enacted in order to be retained, inertia alone might have been sufficient to insure its retention.

5. The permanency of some form of sales tax became more assured after several years' experience because:

a). Evasion declined as administration was tightened.

b). Litigation decreased as the tax was better administered and taxpayers became more used to it.

c). In the case of the turnover tax, avoidance by integration was eliminated in some countries by applying the tax at one point instead of at many; and a variety of devices were introduced to avoid placing a disability on exports, or a premium on imports.

d). Business recovery in the late '20's, and rising prices due to the upturn in business, depreciation of currencies, etc., sharply increased the yield, making the sales tax appear a desirable addition to tax systems.

6. The survival of the sales tax in most countries was finally assured by the reverse of reason (d): as revenues fell off during the depression those countries which, despite its rising yield, had hoped ultimately to replace the sales tax with other taxes found that not only must they retain it, but would have to raise its rate.

7. Some countries greatly extended the list of exemptions as they increased the rates.

a). This tended to cause the sales tax more nearly to resemble an excise.

b). These constant changes in rates and exemptions tended to open the way for much political jockeying.

8. The advent of war enforced the retention of the sales tax in all countries (the abolition of Argentina's exchange differential in the spring of 1941 appears to be the most important exception) and rates were further increased and exemptions sharply reduced in some countries.

9. Exemptions have generally been granted to commodities necessary to life, articles already subject to excises, transportation and other commodities and services provided by the State monopolies, newspapers and periodicals.

Some inference from the sales tax experience of various countries

Virtual every kind of sales tax has been employed by one country or another since 1920. For example:

Australia: A producers's sales tax;

France: A sales tax on retail sales, commissions, interest payments, etc.;

Germany: A turnover tax;

Italy: A transfer tax (collected by stamps attached to the bill of sale) on business transactions and commodities except retail;

Argentina: A transactions tax on all sales, plus an exchange differential in favor of the Exchange Control Office (which for a time accounted for about half of Argentina's total revenue).

The great variety of sales tax experience in countries that have made use of this tax would indicate (1) that nations have different economic, psychological and political characteristics which may favor the use of different forms of the sales tax, (2) that partly because of inertia each ration tends to work out its own system independently of the experience of other countries and (3) that there was a lack of interchange of ideas in an era (the '20's) when many countries were hurriedly introducing sales taxes because of the need for revenue.

Despite the variety in the forms of sales taxes in the past two decades, there has been a considerable degree of similarity in the experience of the countries that have used them. This can be summarized as follows:

1. The majority of these sales taxes were introduced during the period of financial stress following the first World War.

2. Each country passed through a period in which (a) administrative difficulties were underestimated and (b) yields fell short of expectations.

3. the tax tended to become unpopular and in many countries was considered temporary.

4. Nevertheless, the tax was written into the permanent law in all cases. That is, it was intended to operate until repealed. Since the tax did not have to be re-enacted in order to be retained, inertia alone might have been sufficient to insure its retention.

5. The permanency of some form of sales tax became more assured after several years' experience because:

a) Evasion declined as administration was tightened.

b) Litigation decreased as the tax was better administered and taxpayers became more used to it.

c) In the case of the turnover tax, avoidance by integration was reduced by applying the tax at one point instead of at many.

d) Business recovery in the late '20's increased the tax base.

e) Rising prices due to upturn in business, depreciation of currencies, etc. sharply increased the yield.

6. The survival of the sales tax in most countries was finally assured by the reverse of reasons (d) and (e): as revenues fell off during the depression countries which, despite its rising yield, had hoped ultimately to replace the sales tax with other taxes found that not only must they retain it, but would have to raise its rate.

7. Some countries greatly extended the list of exemptions as they increased the rates.

a) This tended to cause the sales tax more nearly to resemble an excise.

b) These constant changes in rates and exemptions tended to open the way for much political jockeying.

8. The advent of war enforced the retention of the sales tax in all countries (the abolition of Argentina's exchange differential in the Spring of 1941 appears to be the most important exception) and rates were further increased and exemptions sharply reduced in some countries.