Determinants of value - added tax revenue : a cross section analysis
AbstractValue-added tax (VAT) has become a major tax instrument in over 50 countries and an important element in tax policy advice to developing countries. But few studies have empirically tested some basic hypotheses about the performance and key feature of VAT as a revenue-raising instrument. The authors examine the main determinants of VAT revenue in a simple cross-country framework using data from 34 countries to answer certain key questions: What empirical relationship emerges from existing data on VAT revenue and VAT rates for countries with a single VAT rate? How much, on average, can a 1 percent increase in the VAT rate be expected to raise VAT revenue as measured by VAT-to-GDP ratio? What key determinants of VAT revenue emerge from a cross-country analysis of the full sample of countries? Is there a statistically significant difference in VAT revenue performance between countries with a single VAT rate and countries with multiple VAT rates? The results of their regressions generally confirm the conventional views on the key variables influencing VAT revenue performance: the rate, the base, and rate dispersion. The rate and the base coefficients are significant and with the expected positive sign in all of the estimated versions of the model. An estimated model is used with appropriate cavaets to predict VAT revenue potential in countries (such as Bulgaria) that are thinking of introducing a single rate VAT. They also find that - other things being constant - VAT generates higher revenue in countries with a single VAT rate than in countries with multiple VAT rates. The difference in the estimated models for the two country groups is statistically significant, indicating a structural change. However this change in the pattern of VAT revenues cannot be explained exclusively in terms of differences in rate structure. A satisfactory explanation must include other factors, such as the base and tax administration capacity. The key policy implications are simple: to provide superior revenues, VAT should be levied in a single rate on as broad a base as possible. And tax administration and enforcement must be tough to ensure compliance.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1203.
Date of creation: 31 Oct 1993
Date of revision:
Public Sector Economics&Finance; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research; Broadcast and Media;
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- Vito Tanzi & Parthasrathi Shome, 1993. "A Primer on Tax Evasion," IMF Working Papers 93/21, International Monetary Fund.
- Vito Tanzi & Parthasarathi Shome, 1993. "A Primer on Tax Evasion," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 807-828, December.
- Goode, Richard, 1993. "Tax advice to developing countries: An historical survey," World Development, Elsevier, vol. 21(1), pages 37-53, January.
- Zeljko Bogetic & Arye Hillman, 2005. "The Tax Base in Transition: The Case of Bulgaria, World Bank Policy Research Working Paper Series No. 1267 (March 1994), The World Bank," Public Economics 0510009, EconWPA.
- Michael Alexeev & Robert Conrad, 2009. "Assessment of Tax Reform Results in Russia: Comparative Analysis," Working Papers 0001, Gaidar Institute for Economic Policy, revised 2009.
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