Tax simplification

I am a few weeks behind on this story, but Ho Chi Minh City (HCMC) is looking to increase taxes on luxury goods, including mobile phones. Uh oh. Apple won’t be happy with that. Or Samsung. Although now Xiaomi and Oppo are big players as well.

There are a few interesting points in this story.

First, it appears that this was a proposal by the HCMC People’s Committee to the Finance Ministry, who usually makes these sorts of changes. It will be interesting to see if this is positive for the proposal or negative.

SOURCE: WORLD BANK

Second, it seems like there is a proposal to raise VAT every year, but then people get upset and puts pressure on the government. Then the government steps back and “studies” it again. This is their third bite at the apple, depending on how you count.

Third, the story got lots of headlines because of the mobile phone tie-in, but it is a broader proposal for simplification of taxes. VAT on luxury items, also called a special consumption tax (SCT), is 15%, normal VAT is 10%, but lots of goods and services are taxed at 5% (basic foodstuffs, transport, etc), and others are not taxed at all (such as fertilizers, exports, and agricultural feed, among others).

“[T]oo many items are exempt from value-added tax (VAT), the people’s committee said. Normally countries have some four to eight groups of excluded items, but Vietnam has 25, it pointed out.”

If implemented, VAT exemptions would be cut drastically to just a few items. The proposal ties these changes (which broaden and therefore raise taxes) with cuts to personal income tax and higher allowances for middle income earners, so that these people would have less of a tax burden. The tax burden in the country is relatively high: Vietnam collects more tax as a percentage of GDP (according to the World Bank) than other countries (see the chart above).

Generally, people talk about the goal of taxes to be efficient (meaning they don’t discourage good economic activity) and equitable. For me, that means the holy grail of taxes is to have them simple, widely applied, consistently enforced, and progressive so that lower income people face less of a burden (which I believe is equity). That might not be the most “efficient,” because some high income earners would be disincentivized, but greater simplicity would lessen some of these concerns.

The problem with the HCMC proposal, which actually checks many of my preferred boxes, is that the headline about mobile phones may gin up opposition for no real purpose. We won’t get to simplification, because everyone will be riled up about a 5% additional tax on their mobile phone.

But this could be a negotiating stance: start high and compromise lower. Maybe, but if I look into my crystal ball, I feel this proposal, like the ones in 2017 and 2018, will be dead on arrival.