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The Anatomy of the VAT

  • Michael Keen

This paper sets out some tools for understanding the performance of the value added tax (VAT). Applying a decomposition of VAT revenues (as a share of GDP) to the universe of VATs over the last twenty years, it emerges that developments have been driven much less by changes in standard rates than by changes in ‘C-efficiency’ (an indicator of the departure of the VAT from a perfectly enforced tax levied at a uniform rate on all consumption). Decomposing C-efficiency into a ‘policy gap’ (in turn divided into effects of rate differentiation and exemption) and a ‘compliance’ gap (reflecting imperfect implementation), results pieced together for EU members suggest that the former are in almost all cases far larger than the latter, with rate differentiation and exemptions playing roles that differ quite widely across countries.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/111.

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Length: 28
Date of creation: 16 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/111
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  1. 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.
  2. Keen, Michael & Smith, Stephen, 2006. "VAT Fraud and Evasion: What Do We Know and What Can Be Done?," National Tax Journal, National Tax Association, vol. 59(4), pages 861-87, December.
  3. Dina Pomeranz, 2013. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," NBER Working Papers 19199, National Bureau of Economic Research, Inc.
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