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Avoiding the Value Added Tax

Author

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  • Luiz de Mello

    (Organisation for Economic Co-operation and Development)

Abstract

This article develops a differential game of tax avoidance by modeling the interactions between a taxpayer and the tax authority. The solution to the game is a noncooperative Nash that depends on the resources used by the tax authority to enforce legislation and the cost borne by the taxpayer in tax compliance. Empirical evidence is provided for the value added tax (VAT) using a cross-section of Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. VAT efficiency, defined as the ratio of collections as a share of consumption to the statutory rate, rises the lower the VAT rate, the lower the share of administrative costs in tax revenue (proxying for the efficiency of tax administration), the more pro-competition the regulatory framework in product markets (measuring non-tax incentives for noncompliance) and the better the country's governance indicators (regulatory quality, rule of law, and government effectiveness).

Suggested Citation

  • Luiz de Mello, 2009. "Avoiding the Value Added Tax," Public Finance Review, , vol. 37(1), pages 27-46, January.
    • Handle: RePEc:sae:pubfin:v:37:y:2009:i:1:p:27-46
    DOI: 10.1177/1091142108316588
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    References listed on IDEAS

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    Cited by:

    1. Jorge Martinez-Vazquez & Richard M. Bird, 2011. "Value-Added Tax: Onward and Upward?," Chapters, in: Emilio Albi & Jorge Martinez-Vazquez (ed.), The Elgar Guide to Tax Systems, chapter 6, Edward Elgar Publishing.
    2. International Monetary Fund, 2011. "Republic of Lithuania: Selected Issues Paper," IMF Staff Country Reports 2011/327, International Monetary Fund.
    3. Andrew Feltenstein & Jorge Martinez-Vazquez & Biplab Datta & Sohani Fatehin, 2022. "A general equilibrium model of Value Added Tax evasion: an application to Pakistan," International Economics and Economic Policy, Springer, vol. 19(3), pages 537-556, July.
    4. Joaquim Sarmento, 2016. "The Determinants Of Value Added Tax Revenues In The European Union," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 21(2), pages 79-99.
    5. James Giesecke & Nhi Hoang Tran, 2012. "A general framework for measuring VAT compliance rates," Applied Economics, Taylor & Francis Journals, vol. 44(15), pages 1867-1889, May.
    6. Adandohoin, Kodjo, 2018. "Tax transition in developing countries: Do VAT and excises really work?," MPRA Paper 91522, University Library of Munich, Germany.
    7. Mr. Tigran Poghosyan, 2011. "Assessing the Variability of Tax Elasticities in Lithuania," IMF Working Papers 2011/270, International Monetary Fund.
    8. Kodjo Adandohoin, 2021. "Tax transition in developing countries: do value added tax and excises really work?," International Economics and Economic Policy, Springer, vol. 18(2), pages 379-424, May.
    9. Mr. Santiago Acosta Ormaechea & Atsuyoshi Morozumi, 2019. "The Value Added Tax and Growth: Design Matters," IMF Working Papers 2019/096, International Monetary Fund.
    10. Hashimzade, Nigar & Huang, Zhanyi & Myles, Gareth D., 2010. "Tax fraud by firms and optimal auditing," International Review of Law and Economics, Elsevier, vol. 30(1), pages 10-17, March.
    11. Aljoša Feldina & Sašo Polanec, 2012. "Underreporting and Minimum Wage," LICOS Discussion Papers 32412, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    12. Francesco Berardini & Fabrizio Renzi, 2022. "Mind the Gap! The (unexpected) impact of COVID-19 pandemic on VAT revenue in Italy," Questioni di Economia e Finanza (Occasional Papers) 669, Bank of Italy, Economic Research and International Relations Area.
    13. Ossowski, Rolando & Gonzáles-Castillo, Alberto, 2012. "Manna from Heaven: The Impact of Nonrenewable Resource Revenues on Other Revenues of Resource Exporters in Latin America and the Caribbean," IDB Publications (Working Papers) 4045, Inter-American Development Bank.
    14. Milosavljević, Miloš & Radovanović, Sandro & Delibašić, Boris, 2023. "What drives the performance of tax administrations? Evidence from selected european countries," Economic Modelling, Elsevier, vol. 121(C).
    15. Michael Safo OFORI, 2021. "Real Gross Domestic Product as Value Added Tax Base: Evidence from Ghana," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 5(1), pages 43-63.
    16. Santiago Acosta-Ormaechea & Atsuyoshi Morozumi, 2021. "The value-added tax and growth: design matters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1211-1241, October.
    17. Ms. Cemile Sancak & Jing Xing & Ricardo Velloso, 2010. "Tax Revenue Response to the Business Cycle," IMF Working Papers 2010/071, International Monetary Fund.
    18. Fikri R. Arrachman & Riatu M. Qibthiyyah, 2018. "The Relationship of VAT Rate and Revenues in the Case of Informality," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 64, pages 73-96, Juni.

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