From zero to hero: the invention of VAT as the world’s consumption tax

The idea of VAT was proposed around 1920 in Germany by Wilhelm and Carl Friedrich von Siemens to remedy the problems of cascading turnover taxes, and in the US by Thomas S Adams as an alternative to corporate income tax. However, it was not until the late 1940s that full-fledged VAT proposals emerged, this time by American tax academic Carl S Shoup for Japan and in France by French tax admin istrator Maurice Lauré. Since then, of course, VAT has spread around the world to almost all countries, with the notable exception of the US. The gap of the 30 years between 1920 and 1950 in the development of the idea is remarkably curious, as is how new interest in an apparently forgotten idea awoke again almost simultaneously from two different sources. The French official imple mentation of VAT in 1954 attracted little emulation until the late 1960s, since when it has followed a path of ever wider adoption in both developed and developing countries. This chapter discusses the inventive proposals of 1920, and how, despite the initial lack of interest in them at the time, elements of VAT were, nonetheless, introduced in a number of countries in the years leading up to 1950. It turns out that the innovation made by Shoup and Lauré was not, as Lauré claimed, to have invented VAT, but to have described it as an investment-promoting tax using consumption as its formal tax base. This description has driven the attrac tion of VAT internationally since then, but has conveniently sidelined the previous debates, even regarding Shoup’s and Lauré’s proposals, about whether the inci dence of VAT would fall on businesses or on consumers. Given the necessary imperfections of all modern VATs and in the face of proposals for novel variants, such as the destination-based cash flow tax, this debate about the incidence of VAT is well worth revisiting.