Ending consumption taxes on feminine hygiene products has become a worldwide movement and a rallying cry for feminist groups, who say such taxes are one of many examples of how local laws do not take women's concerns into account. (AP Photo/Mark Lennihan)
"Applying more than one rate of VAT gives rise to significant legal difficulties, creates economic distortions and it is at best unclear whether it actually has the social and distributional effects that it aims to achieve," wrote Rita de la Feria, a professor at the University of Leeds, and Michael Walpole, a professor at the University of New South Wales, in a recent paper. "Despite the evidence, however, multiple rates are still widely used worldwide."
The U.K.'s exemption follows years of legal battles and debates between British lawmakers and the European Union, which did not allow its members to tax feminine hygiene products at lower than 5%. The British Parliament first called for those products to be exempt in 2015, and has been using the VAT proceeds from the so-called tampon tax to fund women's charities since then. Following the U.K.'s finalized exit from the EU in 2021, lawmakers finally were able to follow through on the policy.
While it is used around the world today, especially in poorer countries that find income tax collection to be difficult, the VAT was born in Europe. France and Germany used the first form of the tax to raise funds quickly during World War I, and the European Economic Community formally introduced the concept in 1967.
Many economists prefer the VAT for its simplicity, ease of collection and lack of economic distortions. A VAT operates similar to a sales tax or any other consumption tax, with the cost normally passed on to consumers. In most VAT systems, vendors and suppliers can receive a rebate on some of the tax already paid, lowering the end cost for consumers and ensuring that products aren't taxed multiple times just because more businesses were involved in their production.
While this makes for an efficient system of revenue collection, many argue that it is also regressive, impacting the poorest the hardest. Those with more money are likelier to save a greater proportion of it, thus paying less in VAT as a percentage of their income than those who live paycheck to paycheck.
Many jurisdictions with VATs have responded by exempting some items from the tax, such as food, medicine and other necessities. Tax experts and economists mostly agree that a VAT is regressive, but they also agree that specific exemptions normally do more harm than good.
"The regressivity of consumption taxes is a reasonable concern, but there are many ways to tackle that problem — and exemptions for food or other 'essential' goods and services is the least useful way to do it," said Peter Barnes, a professor of tax law at Duke University School of Law, in an email to Law360.
Exemptions or lower rates for particular goods reduce a jurisdiction's tax base, cutting off revenue for government-provided services. And those benefits still largely help the wealthier, since they are the ones with more money to spend. According to de la Feria's and Walpole's paper, studies found that reduced rates and exemptions on VAT in Ghana gave those who spent the least about $16 per year in reduced taxation, while those who spent the most received $190 per year.
The benefit is lopsided not only because the richer spend more on essential items than the poorest. According to de la Feria and Walpole, vendors also do not always pass the tax savings along to their customers. Alternative products are not always available, and some consumers may not take the new price into account when purchasing — what the authors call "anchoring" based on prior information.
"The operation of supermarkets and competition will play a far greater role in price setting," said Judith Freeman, a professor of tax law at Oxford University.
Rather than provide exemptions, governments could use VAT proceeds to provide better services, or give taxpayers benefits and rebates to alleviate the regressive burden of the tax, experts argue. Or they could institute other taxes affecting high-income households, such as a wealth tax or a progressive income tax, to even out the burden.
Of course, many of the proponents of an exemption for tampons and other feminine hygiene products have said they aren't advocating for or against VAT exemptions in general, but are only calling for fairness. Activists say that failing to categorize tampons as essential is part of society's overall tendency to ignore and stigmatize the burdens of menstruation, often called "Period Poverty."
"It's been a long road to reach this point, but at last the sexist tax that saw sanitary products classed as nonessential, luxury items can be consigned to the history books," said Felicia Willow, chief executive of Fawcett Society, a British gender equality advocacy group, in a statement released by HM Revenue & Customs on Jan. 1, 2021, when the policy was enacted.
However, this type of debate is precisely why exemptions to consumption taxes are a bad idea in the first place, Walpole told Law360.
"I can't personally object to that exemption; it's perfectly rational. If you're going to have exemptions, that's one you can easily defend," he said. "But the problem is, you're just complicating your tax base again, and again and again."
The accumulation of consumption tax exceptions over time in jurisdictions around the world has led to a mishmash of product distinctions that seem arbitrary, if not absurd.
In perhaps one of the most infamous cases, courts in the United Kingdom spent years litigating whether Jaffa Cakes, a layered chocolate and jam treat, should be considered a cake or a cookie. Other bizarre exemptions catalogued by de la Feria and Walpole include a lower rate in Portugal for frozen fish if they are part of a ready-made meal, not sold separately; an exemption for fresh bread in Australia that only applies if it does not have a sweet filling or coating; and a controversy in the EU about whether a lower VAT rate for books applies to audiobooks and digital reading.
De la Feria and Walpole's paper, "The Impact of Public Perceptions on General Consumption Taxes," examines the political factors behind why VAT bases tend to narrow, instead of expand, over time even as policymakers learn more about the potential pitfalls. They note a bias toward arguments based on "relative fairness" over "absolute fairness," as well as the effectiveness of interest groups in advocating for favorable treatment.
"Where other products are already subject to reduced rates or exemptions it is easy — and indeed reasonable — that debates arise over the relative merit of items not yet subject to similar concessions," they wrote.
--Editing by Tim Ruel and Neil Cohen.
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