Chapter 1 Theories of Consumption and the Consequences of Partial Taxation of Financial Services Robert F. van Brederode and Richard Krever Abstract While the VAT is technically a tax imposed on registered enterprises making taxable supplies, it is designed to be a consumption tax, borne by persons making acquisitions for final consumption. The initial step when designing a law intended to tax personal consumption is to determine what constitutes consumption. Two different understandings have emerged. The first, and broader, view defines consumption from the perspective of the individual making an expenditure—the application of economic resources for any purpose other than savings equates to consumption. The second relies on a societal view based on total consumption in a country: only when an individual uses real resources from the pool available to all participants in the economy does consumption occur. A consumption tax based on the first view will have a dramatically different scope from a consumption tax based on the second, as the example of the tax consequences of the making of a gift reveals. The two views of consumption yield different tax bases and also offer different perspectives of neutrality. The consequences of both views are also illustrated with a consideration of how current VAT rules applying to gambling and insurance fit into the two paradigms. Separately, while there is not universal agreement on the point, generally under both views of consumption the loan intermediary services provided by financial service providers should be subject to tax. Nevertheless, in almost every case, jurisdictions have followed the traditional VAT precedent of characterizing loan intermediary services (as well as the provi- sion of intangible investment instruments) as exempt supplies. The partial taxation of exempt supplies, through the denial of input-VAT credits to persons acquiring these services and goods, gives rise to both theoretical and practical problems. A number of practical consequences are reviewed. R.F. van Brederode (&) Crowe Horwath LLP, Atlanta, GA, USA e-mail: robvanbrederode@aol.com R. Krever Monash Business School, Monash University, Clayton, VIC, Australia e-mail: Rick.Krever@monash.edu © Springer Nature Singapore Pte Ltd. 2017 R.F. van Brederode and R. Krever (eds.), VAT and Financial Services, DOI 10.1007/978-981-10-3465-7_1 3 rkrever@gmail.com