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The Value-Added Tax: Its Causes and Consequences

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  • Mr. Ben Lockwood
  • Mr. Michael Keen

Abstract

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.

Suggested Citation

  • Mr. Ben Lockwood & Mr. Michael Keen, 2007. "The Value-Added Tax: Its Causes and Consequences," IMF Working Papers 2007/183, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2007/183
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    References listed on IDEAS

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    More about this item

    Keywords

    WP; VAT dummy; revenue equation; dependent variable; open economy; VAT adoption;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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