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The Value-Added Tax; Its Causes and Consequences

  • Ben Lockwood
  • Michael Keen

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
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/183
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  1. 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.
  2. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
  3. Kent Matthews & Jean Lloyd-Williams, 2000. "Have VAT rates reached their limit?: an empirical note," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 111-115.
  4. Wacziarg, Romain & Alesina, Alberto, 1998. "Openness, Country Size and Government," Scholarly Articles 4553014, Harvard University Department of Economics.
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  6. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  7. repec:cup:cbooks:9780521877657 is not listed on IDEAS
  8. Kent Matthews, 2003. "VAT Evasion and VAT Avoidance: Is there a European Laffer curve for VAT?," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(1), pages 105-114.
  9. Bovenberg, A.L., 1987. "Indirect taxation in developing countries : A general equilibrium approach," Other publications TiSEM adac046e-0845-4c4e-904a-5, Tilburg University, School of Economics and Management.
  10. 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.
  11. 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.
  12. Besley, Timothy & Jewitt, Ian, 1995. "Uniform taxation and consumer preferences," Journal of Public Economics, Elsevier, vol. 58(1), pages 73-84, September.
  13. Keen, Michael, 2008. "VAT, tariffs, and withholding: Border taxes and informality in developing countries," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1892-1906, October.
  14. 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.
  15. Ary Lars Bovenberg, 1986. "Indirect Taxation in Developing Countries; A General Equilibrium Approach," IMF Working Papers 86/1, International Monetary Fund.
  16. Joshua Aizenman & Yothin Jinjarak, 2005. "The Collection Efficiency of the Value Added Tax: Theory and International Evidence," NBER Working Papers 11539, National Bureau of Economic Research, Inc.
  17. 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.
  18. Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association, vol. 59(4), pages 905-28, December.
  19. Stephen Smith & Michael Keen, 2007. "VAT Fraud and Evasion; What Do We Know, and What Can be Done?," IMF Working Papers 07/31, International Monetary Fund.
  20. Sònia Muñoz & Stanley Sang-Wook Cho, 2003. "Social Impact of a Tax Reform; The Case of Ethiopia," IMF Working Papers 03/232, International Monetary Fund.
  21. John Thornton & Fabian Bornhorst & Sanjeev Gupta, 2008. "Natural Resource Endowments, Governance, and the Domestic Revenueeffort; Evidence From a Panel of Countries," IMF Working Papers 08/170, International Monetary Fund.
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