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Is the VAT a Money Machine?

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  • Keen, Michael
  • Lockwood, Ben

Abstract

This paper considers what it might mean to describe the VAT as a "money machine," tests whether it is one, and asks if it might consequently be wise not to adopt it. We find broadly persuasive evidence, using panel data for the OECD, for a "weak form" of the money–machine hypothesis: that countries with a VAT raise more revenue than those without. But the effect may not be large. The evidence also supports a "strong form" of the hypothesis: that this association reflects not increased demand for government, but rather the greater effectiveness of the VAT in raising revenue. Models in which citizens/voters are likely to lose by entrusting politicians with a "money machine" rely on quite extreme views of their preferences and/or the effectiveness of electoral discipline.

Suggested Citation

  • Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 905-928, December.
  • Handle: RePEc:ntj:journl:v:59:y:2006:i:4:p:905-28
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    Citations

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    Cited by:

    1. Slemrod, Joel, 2008. "Does It Matter Who Writes the Check to the Government? The Economics of Tax Remittance," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(2), pages 251-275, June.
    2. repec:bla:obuest:v:79:y:2017:i:1:p:25-54 is not listed on IDEAS
    3. Ruud de Mooij & Michael Keen, 2012. ""Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times," NBER Chapters,in: Fiscal Policy after the Financial Crisis, pages 443-485 National Bureau of Economic Research, Inc.
    4. Keen, Michael & Lockwood, Ben, 2010. "The value added tax: Its causes and consequences," Journal of Development Economics, Elsevier, vol. 92(2), pages 138-151, July.
    5. Büttner, Thiess & Madzharova, Boryana, 2016. "WTO Membership and the Shift to Consumption Taxes," Annual Conference 2016 (Augsburg): Demographic Change 145780, Verein für Socialpolitik / German Economic Association.
    6. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 365-381, August.
    7. Romain Houssa & Kelbesa Megersa, 2017. "Institutional quality, economic development and the performance of VAT," BeFinD Working Papers 0115, University of Namur, Department of Economics.
    8. Antonio Gómez Gómez-Plana & Pedro Pascual Arzoz, 2011. "Fraude fiscal e IVA en España: incidencia en un modelo de equilibrio general," Hacienda Pública Española, IEF, vol. 199(4), pages 9-52, December.
    9. Silvia Fedeli & Francesco Forte, 2009. "EU VAT Frauds," Working Papers 129, University of Rome La Sapienza, Department of Public Economics.
    10. Silvia Fedeli & Francesco Forte, 2012. "Border Tax Adjustment without Borders: The EU Carousel of VAT Fraud," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 55-70, November.
    11. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    12. Fabrizio Borselli, 2011. "Organised VAT fraud: features, magnitude, policy perspectives," Questioni di Economia e Finanza (Occasional Papers) 106, Bank of Italy, Economic Research and International Relations Area.
    13. Richard M. Bird, 2012. "The GST/HST: Creating an Integrated Sales Tax in a Federal Country," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(12), March.
    14. Dietl Helmut M & Jaag Christian & Lang Markus & Trinkner Urs W.O., 2011. "Competition and Welfare Effects of VAT Exemptions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-29, April.
    15. Jean-François Brun & Maïmouna Diakite, 2016. "Tax Potential and Tax Effort: An Empirical Estimation for Non-resource Tax Revenue and VAT’s Revenue," Working Papers halshs-01332053, HAL.
    16. repec:eee:wdevel:v:108:y:2018:i:c:p:197-218 is not listed on IDEAS
    17. P Sivashankar & RMPS Rathnayake & Maneka Jayasinghe & Christine Smith, 2017. "Incidence of value added taxation on inequality: Evidence from Sri Lanka," Discussion Papers in Economics economics:201704, Griffith University, Department of Accounting, Finance and Economics.
    18. Mattéo Godin & Romain Houssa & Kelbesa Megersa, 2017. "The Performance of VAT in DGD-partner countries," BeFinD Working Papers 0116, University of Namur, Department of Economics.

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