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The Value-Added Tax: Its Causes and Consequences

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Author Info
Ben Lockwood
Michael Keen

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Abstract

Has the VAT proved, as its proponents claim, an especially effective form of taxation? To address this, this paper first shows that a tax innovation-such as the introduction of a VAT- reduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This leads to the estimation, on a large panel, of a system of equations describing the probability of VAT adoption and the revenue impact of the VAT. The sign of the revenue impact is generally ambiguous, but most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/183.

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Length: 36 pages
Date of creation: 24 Jul 2007
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Handle: RePEc:imf:imfwpa:07/183

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Keywords: Working Paper Value added tax Economic models

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  1. Glenn P. Jenkins & Hatice Jenkins & Chun-Yan Kuo, 2006. "Is the Value Added Tax Naturally Progressive?," Working Papers 1059, Queen's University, Department of Economics. [Downloadable!]
  2. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75. [Downloadable!] (restricted)
  3. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April. [Downloadable!] (restricted)
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  4. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September. [Downloadable!] (restricted)
  5. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 755-773, April. [Downloadable!] (restricted)
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  6. John Piggott & John Whalley, 2001. "VAT Base Broadening, Self Supply, and the Informal Sector," American Economic Review, American Economic Association, vol. 91(4), pages 1084-1094, September. [Downloadable!] (restricted)
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  7. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January. [Downloadable!] (restricted)
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  8. Stanley Sang-Wook Cho & Sònia Muñoz, 2003. "Social Impact of a Tax Reform: The Case of Ethiopia," IMF Working Papers 03/232, International Monetary Fund. [Downloadable!]
  9. Agha, Ali & Haughton, Jonathan, 1996. "Designing VAT Systems: Some Efficiency Considerations," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 303-08, May. [Downloadable!] (restricted)
  10. Matthews, Kent & Lloyd-Williams, Jean, 2000. "Have VAT Rates Reached Their Limit?: An Empirical Note," Applied Economics Letters, Taylor and Francis Journals, vol. 7(2), pages 111-15, February. [Downloadable!] (restricted)
  11. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
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  12. Besley, Timothy & Jewitt, Ian, 1995. "Uniform taxation and consumer preferences," Journal of Public Economics, Elsevier, vol. 58(1), pages 73-84, September. [Downloadable!] (restricted)
  13. Kent Matthews, 2003. "VAT Evasion and VAT Avoidance: is there a European Laffer curve for VAT?," International Review of Applied Economics, Taylor and Francis Journals, vol. 17(1), pages 105-114, January. [Downloadable!] (restricted)
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