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Effects of Value Add Tax on Consumption in Developing Countries

Author

Listed:
  • Seyed Hossein Ghaffarian Kolahi
  • Zaleha Bt Mohd Noor
  • Ali Kashmari

Abstract

The most widespread economic problem today seems to be an abrupt decline in GDP and deep recession. Consumption is one of the most important elements constituting GDP, whose growth leads to GDP growth and thus the economic growth. In this study, the effect of value added tax on consumption has been examined especially on the developing countries. In details, the effects of VAT on the consumption of 19 developing countries for duration of 1995 to 2010 were investigated. At first, VAT was incorporated the consumption function and its impact on the consumption and consequently the saving was explored because consumption and saving are interrelated. For analysing the data, the GMM panel was employed because of the structure of the model. The results revealed that VAT, with a lag, influences the consumption negatively while this finding is consistent with the research literature background as well as Duesenberry theory and the consumers¡¯ consumption habits.

Suggested Citation

  • Seyed Hossein Ghaffarian Kolahi & Zaleha Bt Mohd Noor & Ali Kashmari, 2016. "Effects of Value Add Tax on Consumption in Developing Countries," Applied Economics and Finance, Redfame publishing, vol. 3(2), pages 186-193, May.
  • Handle: RePEc:rfa:aefjnl:v:3:y:2016:i:2:p:186-193
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    More about this item

    Keywords

    value added tax (VAT); consumption; economic growth; developing countries; generalized method of moments (GMM).;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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